What is your debt really costing you?
When I first started in mortgage and personal lending in the early 80’s (Which really wasn’t that long ago) rates began at 12-14%. This didn’t seem to be as much of a struggle for people as the lending serviceability requirements (the amount of debt payments vs your income). At that time the serviceability limits were: your mortgage could not be more than 32% of your income and your total debt portfolio (car loans, credit cards, etc.) could not be more than 36% of your income.
By the time the banking industry was crashing the total allowable serviceability was at 60% and interest rates were significantly lower. Why were these changes allowed? Because the cost of housing increased so significantly. It’s no wonder we were in trouble, even before the markets crashed.
Today we are seeing all time low mortgage rates, at least for the moment AND we are experiencing increases in housing costs in ways we have not seen before. A sheet of plywood one year ago was $18 now it is $80 and that’s only if you can find it.
So how do you decide when to go into debt and when to wait?
Just like money is a tool, debt can be as well. However… most debt is not being used as a tool.
What do I mean that debt can be a tool?
When you are in the investing stage of something – whether it be starting up a business or beginning any investment really – you may want to leverage other people’s money to accelerate what you are creating.
What is most important is that you understand the nature of your investment and you know when and how the ROI is going to come back to you.
What I see way too often is investing as a process of doing business without a clear plan for the ROI.
Then one day you look at your debt and wonder what it is going to take to pay it off.
The answer most of us go to is “I’ll just make more money”. The truth is most people don’t ever experience exponential growth in a way that will pay off the debt AND cover all ongoing costs.
Now you have a ship that is moving with all the expenses you are used to and choosing where to make adjustments becomes difficult.
This is why creating a plan for investing with a definite plan for ROI is so important from the beginning. Then when you see you are getting off track you can adjust your spending in the moment and keep your focus on the places where you truly are achieving the ROI you were looking for.
The price of debt can be looked at in many different ways. Sometimes it is lost opportunity, sometimes it is the price of interest. How do you know the costs for you? Pencil it! Create a plan.
It’s never too late to create the plan! If we can be of assistance simply send us an email.