Morgan Housel is currently my favorite financial writer, and we featured his two books (Psychology of Money and Same as Ever) in our most recent newsletter.
He has a brilliant way of weaving historical facts with social and psychological realities to give a more grounded conversation around money.
I read an article he wrote around debt and this line stuck out to me: “As debt increases, you narrow the range of outcomes you can endure in life.”
There is no conversation around good debt vs. bad…debt simply reduces our options in life…full stop. This is a key reason why we advise our clients to be debt free in retirement.
For those who are debt free, I would expand the quote to include “As debt increases and lifestyle expectations increase, you narrow the range of outcomes you can endure in life”.
We live in a society and city where we need high amounts of debt to house ourselves and master marketing techniques are always pushing us to want more. How do we respond to this reality?
I often use the line “cash flow is king”. Controlling debt and lifestyle expenses does matter but we can create optionality in our lives by ensuring that cash inflows exceed outflows by a good margin. No matter where we are at in life, our bank balances should be going up each month.
Over the course of a lifetime, it is practically guaranteed there will be “Wars, recessions, terrorist attacks, pandemics, bad political decisions, family emergencies, unforeseen health crises, career transitions, wayward children” and other unimaginable situations. It is important we position ourselves for these possibilities.
The adage of spend less than you earn reigns true, but I would add the caveat that the gap between spending and earning needs to be of a sufficient size to actually help in challenging circumstances.
Having a financial roadmap is a critical piece of building a margin of safety and that is where we provide real value to our clients. Investing in richer life means planning for excess cashflow to reduce worry and give greater opportunity to get out there and live!
Link to article: https://collabfund.com/blog/how-i-think-about-debt/