Thursday, October 05, 2006

Debt As Negative Money

Recent media reports have highlighted the growing problem of personal debt levels in the UK. According to one, the average household debt is £7,754 excluding mortgages and £48,209 including them. The average owed by each adult in the UK is £25,545.

Part of the problem is how easy it has become for people in the UK to borrow heavily with loans and credit cards. Other countries, such as France, have much stricter rules regarding borrowing/lending money and a culture which is naturally suspicious of banks and their advertising.

Thought of most simply, debt seems bizarre - a form of money that makes you poorer. Imagine eating a food that made you hungrier. Yet borrowing is going up and up - the UK's total debt is rising by a million pounds every 4 minutes.

The effects of this can be devastating, including family breakdown, homelessness and suicide. More, such a culture deemphasises the virtues of thrift and self-control and makes it easier for society to ignore the plight of the most economically vulnerable for whom debt is often the only way they can make ends meet.

I think of debt as 'negative money' - a person with a debt of £10,000 has minus 10,000 pounds. Such a person would probably have to work for a couple of years just to pay off the debt and get back to '0'. Imagine that, working and earning for years just to reach the point where you have a fortune of zero!

The answer is to avoid debt as far as possible. Use a debit card instead of credit and save for things rather than take out loans. Overpay on your mortgage to save thousands in interest long-term. Spend within your means and discover the creativity in thrift. After all, any one can simply spend money but it takes skill and thought to save and use it wisely and carefully.

16 comments:

JC said...

Daniel you are most correct. What has lead to debt being so high in the UK is not only the ease at which debt is available, but also the rampant consumer culture that exists here now. People just want to buy more and more things. It seems as though that is now our purpose as citizens of the UK, to spend money. Everywhere we turn, our senses are assaulted with many different forms of advertising, encouraging us to buy the next latest thing. Advertising is effective, people want the next think out on the shelves; they should really save up for it but by the time they do it will probably be out of date. So why wait when they can just borrow money and have it now!

elaine said...

Wise words, wise words. I've just begun university, my second week, so the great juggling act with money has just begun.

Rehan Qayoom said...

Get Real!

Daniel said...

I have!

Duckism said...

where can I get this "REAL"?

Top of the Otways said...

It is the way it is because it has to be that way for now. Everything in life has to reach a point of awfulness before we change... and change I'm sure is not far. Yes I'm still talking about money.

Ugly said...

I agree with you overall, but debt can sometimes be good. For example, here in the USA you can get a credit card with 0% interest for a year and no fees. You can keep more money in your savings account earning interest while you pay with the credit card.
Also, it can sometimes pay off very well to borrow in order to try to make more money (e.g. starting a business). As an example, YouTube was just sold for $1.65 billion dollars - but the two who started the company collected debt in order to finance the company:
"A year ago, co-founders Chad Hurley and Steve Chen were in between jobs, a pair of twenty-something geeks running up big credit card debts as they tooled around a garage trying to develop an easy way for people to share homemade videos on the web."

Anonymous said...

Here's a scenario: You stay in Town A and work in Town B. You do not have public transport infrastructure since you stay in a 3rd world country. You cannot hitch-hike due to an extremely high crime rate (I live in South Africa). You cannot ask anyone for money to buy some sort of transport purely because they do not have any to give! You don't want to rely on someone else to get you to work - it can potentially cause undesired circumstances at work... so what do you do? Since the only thing that you have to show is the trusty'ol good name and presto! You get R5000 (about 351GBP - which btw is a small fortune if your salary is less) to buy a rusty Volkswagon that uses more oil than petrol and got to work... I can now say, thanks to making that decision 6 years ago, I have an excellent credit record, a villa on a golf estate. Yes, dept is bad, but it can open up doors for the unfortunate.

Anonymous said...

Debt is risky. You have to be able to understand the risk / reward balance of debt. I did not. I made mistakes, and had to claim bankruptcy. At least I have learned. In the USA, credit card companies flood universities with their "offers" for students. Of course, the majority are not prepared for the responsibility. Knowledge is power.

CeeJay.dk said...

Daniel , I've seen the documentary about you and was wondering if you see negative numbers differently from positive numbers.

Does f.x. -7 look differently from 7 to you ?

And I agree that debt can be a real problem. I would go as far as outlawing credit cards and only allow debit cards.
It would save a lot of people from a world of grief.

adam f said...

Daniel, all money is created by private banks through loans. If everyone paid back their bank debts there would be no money left. (Except for notes and coins which are created seperately by the mint.)

See Richard Douthwaite's The Ecology of Money, or Bernard Leitaer's Future of Money, or numerous websites no doubt which explain the workings of the fiat money system.

Of course you're right -- it is a problem when people have more debt than credit, it means someone (large corporations probably) has more credit than debt. But debt itself is not the problem, just the relative distribution of it.

Timothy Takemoto said...

You may be interested in this article about debt in the UK
http://www.woodlands.co.uk/drifting

jackie said...

Fed up with the "modern world" I searched on "self sufficiency" and ended up on your site. Saw the connection with high-ranking autism (which my nephew has - and I'm sure since he's been diagnosed now recognise in myself -aged 47), And then read the comments on debt. I have been going around profoundly depressed thinking that there is something wrong with me and my anti-consumerism - it has been so refreshing to read your comments. It is a simple matter of arithmetics; black and white and organisation. Thank you for letting me know I'm not alone in the world. Jackie

Anonymous said...

Daniel I love yoursimplicity when it comes to having no debt. I am a legal alien living in USA and I am apalled that the USA forces people to get into debt in order to see if they can be responsible and pay it off in a timely manner. If you have no debt in the USA you cannot buy a house or car or get a good job! The system forces you to have debt through credit cards and bank loans in order to aquire a number. This number is your credit score and if you have a low credit score of 500 for example, you pay more intrest on morgages and credit cards and car loans than people with higher credit scores of 800. I hate this system because if a borrower is late paying, their score drops, even if it just 30 days late. All blemishes stay on your credit record for 7 years. I hate 7 now! Just joking about 7 Daniel.

Mike Mian said...

fundamentally debt is not a bad, in fact debt is the basis of the world economy (did you know that sea shells have been used as currency longer than any other token of value).

for example if i borrow 10 million euros at 10% interest, but use the money generate a return of 11% then i have an income of 100,000 euros---good debt!

the problem is when debt is spent on depreciating items, or invested without fully understanding or managining risk (ie an all-eggs-in-one-basket strategy).

debt/money is an amazing invention. it simplfies so much of daily living. imagine trying to barter your book for breakfast everyday! it allows you to exchange labour and resources in a simple elegant way, as well as defer its utility. debt is in fact beautiful mechanism that is both a social glue and lubricant.

Anonymous said...

There are plenty of ppl who are not familiar with the world of debt until they lose their jobs or slip into debt due to lower pay or stagnate pay.

Two years w/o a job for me and now every month of health care insurance and all of the other vital expenses put me further into debt.

The solution proposed where I live is even more education. So that's even more debt for ya!