Thursday, 7 July 2011

Never a lender nor a borrower be....... is this good advice?

I would say it is good advice when talking about borrowing from your friends and family. I would even go so far as to say it changes the balance of the relationship, often for the worse.

But then there is comercially agreed debt and that's a different ball game altogether.....

There are plenty of articles on the internet about this subject. Just Google "good debt, bad debt"

Within the realms of personal finance, I would doing myself and everyone else a great dis-service if I trotted out the generally held wisdom: mortgage/ career loan debt good, holiday money/ living expenses loans bad.

The truth is whether debts are good or bad depends on the borrower's personal conditions and the prevailing economic climate.

Take my old man. Back in the early seventies he mortgaged himself upto the hilt with a £5k endowment mortgage. Since he was still a young man and earned very little, people thought dad was the ultimate risk taker. By the time he came to pay his mortgage debt off some 25 years later, his £5k mortgage was almost a joke to him. Of course, he had to endure some comparatively high interest rates but inflation did its work eroded the value of his debt.

Also consider the Queen Mother. Some years ago there was a big hoo-haa in the news about the old lady having an overdraft of £4 million Great British Pounds. The papers went to town on it. The point that was not mentioned in the articles was the old girl had many many other millions stashed away in other non-cash assets. Had she wanted to, I think she would have found it relatively easy to instruct her minions to pop some of the family silver on ebay. (which, I don't think was actually around then....but you take my meaning).

You can make debt as complex as you want but, for me, it comes down to a balance of three things when judging if debt is good or bad:

1) will the thing you are spending the debt on increase the quantity of your income?
2) if the economic condition deteriotated, could you still service the debt?
3) how does the debt fit with the rest of your personal circumstances?

And if you do find yourself having to take on ANY debt, be sure you have a plan to work yourself  out of it lest it becomes a pernicious drain on your life.