debt
Debt can bond or restrict your future.
Photo by Simon Cunningham

There’s a deadly epidemic that hardly anyone talks about. No, it’s not Zika. It’s happening mostly to Indian subsistence farmers (but please read on to see how this relates to you), and the deaths are caused by…. debt. The livelihood of the vast majority of rural Indians depends on subsistence agriculture. Because of this, they are very vulnerable to weather conditions (that affect their crop yield) and also susceptible to market conditions (for the extra amount they produce to sell to the market). When they have misfortunes, moneylenders quickly come to their aid. There are also times when a subsistence farmer is allured by a promise, such as an advertisement of a service or product claiming to improve their standard of living. Whether the promise is real or false, many are tempted to go into debt to try to improve their quality of life. But for them and for many others, debt can spiral out of control and sadly, the only way out that many of them see, is to take their own life

The Reality:
There’s only a few ways for us to improve our quality of life. One is through earning money and being more productive (i.e., trading our skills, goods, and /or time for money); the other is through borrowing money (i.e., going into debt or buying on credit). But borrowing money is in essence paying with future time in order to get immediate benefits from buying goods or services today. Using debt as a means to improve your current and immediate quality of life – whether it’s to buy an item, go on a holiday, fund a wedding, buy a home, or send a child to university – is in a way, bonding your future. Choices that you make today regarding debt limit the choices that you have in the future when that debt comes due. Improving one’s quality of life through working and/or becoming more productive is much harder and slower, as it requires more time and resources today, but the tradeoff is that the future is less restricted.

What We’re Up Against:
There are a few human tendencies which we have to fight against so that we don’t rob from our future self. One is immediate gratification. We want things and we want them now. Our expectations are high and our patience and attention span is low. We can’t wait for “later” and nothing demonstrates this more than the insane queues for the latest and greatest gadgets/restaurant/fad. Another thing we must fight against is something behavioural economists call hyperbolic discounting (also referred to as temporal myopia), which is to sharply reduce the importance of the future and its consequences in our current decision-making. In other words, we are short-sighted when it comes to our decision making, and will tend to ignore, diminish, or undervalue any long-term consequences, even things we know to be bad outcomes.

Another thing we are susceptible to is optimism bias, where we think we are less at risk of experiencing negative consequences than other people. As humans, we all have rose-coloured glasses in which we try to see our future.  We don’t expect or plan for catastrophes or bad outcomes, especially if they have not happened much in our lives up to this point. Our brains simply don’t understand probabilities when it comes to our own lives. Instead, we tend to remember the outliers (e.g., that one stage 4 cancer survivor who beat the odds, or the last winner of the TOTO jackpot). If we currently are doing well, in good health, have a steady means of income, have good relationships, we tend to believe the “status quo” will always remain as such.

Lastly, and perhaps the hardest thing, is that we must fight against the bandwagon effect and the Jones’ effect  (wanting to be/appear “successful” relative to our cohorts). Society’s view of success, financial freedom, and what the “good life” is can be very distorted, and focuses perhaps too much on outward appearances. Today, many people believe that in order to be  happy and to live a fulfilling life, one must have the 5C’s or have a certain amount in assets. And often to achieve this, people are willing and feel it is necessary to go into a certain amount of debt to sustain such a lifestyle.

According to an article in zerohedge, many believe that debt is a necessary part of life. More disturbingly, they equate debt with wealth-building, which is understandable because

the entire system is designed to trap us in debt before we even get out into the ‘real world’ and keep us in debt until we die.”

There was a time in the not-so-distant past when being debt-free was considered a great and aspiring status symbol – having a “mortgage burning party” meant more than having a nice car or taking a nice holiday. Now, such life milestones are nearly non-existent and more outward signs of success are instead celebrated.

Having a lot of debt will bond, limit, and pledge our future. And sadly for some, that pledge is death. Many people fantasise about winning the lottery but I believe many of us have already won the lottery. We were not born into bondage; we were born in a time and place that provided us many opportunities with respect to our education, career, relationships, home ownership, health, and lifestyle. Many of us could never imagine the life of a subsistence farmer, who lives so marginally that any small setback could mean a life of indebtedness. Yet, it is so easy for people who have a wide buffer to eventually end up in a situation no different from the farmer. Let’s instead choose a different path, and let frugality, conservation, and sustainability be our guide. What strategies can you come up with counteract these human tendencies?

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