After the topic of “distinguishing needs from desires” in the last post, it looks but a result of natural progression to discuss about debt and its role in the “needs against desires” equation.
We can discuss endlessly about distinguishing needs from desires in order to internalize the saving habit, but mind you, the task is difficult and needs a great deal of will power to implement.
This is even made more difficult by an invention of modern man they call debt or its mirror twin called credit.
There is hardly anything ever invented by humans that induces or reinforces desires more than debt or credit, as best exemplified by a plastic gadget they call credit card.
Don’t get me wrong; I am not against debt per se. In real life, debt is a very useful thing, and it is an indispensable part of modern trade and commerce.
Debt or credit enables businesses to expand and generate more revenues and income than if there is no debt at all.
They call this concept “trading on equity” which simply means “borrowing funds to increase capital investment with the hope that the business will be able to generate returns in excess of the interest charges.”
This is also called “financial leverage” and is the theoretical framework on how debt plays its important and beneficial role in modern business.
The problem, however, is when useful instruments become tools for abuse and the pursuit of inordinate greed.
Thus, now the debt crises in the Euro zone and in the US are matters of legend where discussions never end and anger and passions always run high.
Back to the issue of how debt plays a role in the “needs versus desires equation”, the fact is that debt can serve both needs and desires.
In the service of needs, debt can conveniently serve to provide for expenses while waiting for funds to come from salary or whatever source.
In other words, it serves as bridge so that humans can make both ends meet more easily, or to use a finance jargon, to fill in “temporary gaps in liquidity”.
More importantly, debt also makes it possible and convenient for people to buy or acquire a house or dwelling unit where he has not yet saved amounts big enough to meet the need.
Unfortunately, debt can also serve desires with as much or even more intensity than it serves needs and this is where the problem lies.
In the service of desires, debt becomes a dangerous tool that can cater to every human impulse and makes it practically impossible to implement the saving habit.
A man who is not literate in investment is hostage to his desires; he is captive to the whims and caprices of the consumer market. His hallmark is the inability to save anything substantial from his earnings, however high his salary may be.
Offer him debt or credit liberally and his desires get magnified and he easily succumbs to the debt trap.
Give him that cursed plastic they call credit card with all the perks and he spends like there is no tomorrow.
The card charges pile up and the card issuers love it and gives him even more perks. He sinks deeper and deeper into the trap and becomes a candidate for eventual debt default with dire consequences.
The story sounds familiar and the examples are aplenty.
In some places (as mentioned in previous posts), hundreds, probably thousands, are even serving jail sentences in an unthinkable case of modern day debt slavery.
Thus, debt is a two-edge sword that cuts both ways.
To the investment literate, it can be a useful tool.
But to the uninitiated, it becomes an instrument that easily puts him into a sinkhole and makes it virtually impossible for him to save.