Upon graduation, many of my friends had big dreams to do good things in this world. They realised how privileged they were and wanted to use their knowledge and skills to help the less privileged. They wanted to help the needy, build homes for the homeless, or provide medical care to the disadvantaged. But after a decade, none of them did this. Why did they not “follow their dreams”, and what forces caused them to drastically alter their life and choices?

After graduation from uni, most people I knew had education loans, some which amounted to more than S$250,000. This meant they had to quickly get a high-paying job to keep up with their loan payments after graduating.

But what happens after they pay off their education loan? Typically, they get “used to” the lifestyle that comes with having a high-paying job. And they get sold on this idea that they can “have it all” or “have the good life” through whatever means necessary. Even if it involves incurring a huge amount of debt.

So they might pay off the education loan, but will take up an even larger home loan. And that larger loan means they’ll need an even higher salary. And higher salaries usually come with more work, more responsibility, more time, and more stress.


Selling the Promises of “Freedom” through Debt

Sometimes, life circumstances (e.g., a health crisis) require that we take on debt, but in developed countries this is rare with adequate insurance. Today, most debt is taken up willingly, as a means to achieve greater things or a more upgraded lifestyle. 

Today, many people consider a decade to be “an eternity” with regards to a single relationship or job. So why is it then easy to convince people to pledge 10, 25, or 30 years of their life to service a debt?

It’s easy to sell the dream of having “the good life”. Everyone wants to believe that achieving this dream should be easy. So it just takes a gentle nudge from someone (e.g., a lender, a friend) to convince you to buy “the good life” by taking out a huge loan.

And the only thing anyone seems to be really concerned about is whether you can afford taking on the debt today. They do not consider whether you can afford it for the entire life of the loan, or what you will do when faced with a tragedy. It’s as if the debt is an outfit that can swapped or discarded.


Reasons Lenders/Friends Give to Convince You To Take On Big Debt

Here are some typical reasons why lenders, your family, and friends all want you to take on debt or to be over-leveraged. Keep in mind that they, like you, only want to see and believe in the most rosy and optimistic life scenarios. And many of them truly believe they are helping you.

  1. Conformity: “Everybody is doing it. This is what you’re supposed to do. It’s the most unmistakable and rational next step in your life.”
  2. Necessity: “It is necessary to take on a loan in order to achieve your dreams (e.g., own a home, have a family, have a degree).”
  3. Security: “This is the only way to have a secure family and future. If you don’t take possession (i.e., buy this home on a loan), how else can you have a sense of security?”
  4. Happiness/ Entitlement: “This is a means of achieving happiness for you and your family. You worked hard to deserve this. Your family deserves this.”
  5. Bigger is Better Mentality: “Buy the maximum that you are qualified for (given the Total Debt Servicing Ratio). It’s better to go big. You can always rent out space if you don’t need it or downgrade later.”
  6. Ever Increasing Income Growth: “You will move up the corporate ladder and so will your salary.”
  7. Ever Increasing Economic Growth: “Property prices will always continue to go up.”
  8. Fear of Missing Out: “If you don’t act now, it will be too late.”
  9. Guilt/Obedience: “Your parent’s/grandparent’s generation sacrificed so much so that you can have this life. So now you must take it.”
  10. Fear of Loss: “Besides, keeping your money in the bank or renting is just throwing your hard-earned money away. You will lose out in the end if you do nothing.”


How the “Externalities” of Debt Affects Your Choices

The burden of  debt isn’t just a question of whether you can or cannot afford the monthly payments at the time you signed the loan documents. There are a lot of “externalities” (i.e., unintended consequences) that come with debt. These include mental, marital, and cognitive effects. There is a high correlation between debt and mental illness, problem drinking, drug dependency, and suicide. As mentioned in a previous article, financial burdens are one of the biggest predictors of marital dysfunction.

Being bogged down by financial burdens can also lower your IQ by up to 13 points! This means debt can impair your cognitive functions so that you are more likely to do dumb things and make dumb decisions.

While everyone’s wealth is often on display (e.g., car, house, travel destinations), their debt burdens are invisible and forgotten. Thus we equate the “trappings of wealth” with real wealth and minimise the role debt has played. Social hierarchies and expectations are based on this illusion.

So if one “appears” wealthy, he/she might be treated better by service staff, which can make him/her feel more important than others. On the other hand, he/she can also be overcharged by service staff.

But the more insidious effect is that debt causes you to make choices that you would not otherwise make. This might mean taking a job that you dislike or feel enslaved by. It might mean moving to a particular area and opting for a longer, more grueling commute. It might mean choosing to defer saving for retirement, neglecting healthy habits, or missing out on raising your children.


An Example:

My friend Elayne (not her real name) has a 5-figure monthly salary. But she is unhappy because she lives in a shoebox apartment, has no children (she says she doesn’t have the time/money for them) and has a job she really dislikes. Why does she live this way? Because despite her high income, her fixed expenses are just as high, leaving her with little cash-flow.

Her emergency savings barely equates to two months of her expenses. This means if she were to lose her job, she would need to quickly get another source of income.

Her fixed expenses include two mortgage payments. The “investment property” that she owns has not had a net positive yield (after accounting for expenses) ever. She tells me she feels trapped. And the only thing she looks forward to is the year-end vacation she takes to visit her in-laws overseas (which she pays for using her 13th-month bonus).


If anyone has ever read Confessions of an Economic Hit Man, they’ll quickly realise that the way to completely control, overturn, or sabotage an entire nation is to laden it with debt, much more debt than it could ever pay.

Debt today is the preferred method of “war” and “imperialism”. And once a nation is caught in a debt spiral, it has to give up a lot of its resources, freedom, and autonomy just to service its debt. And the nation would be forced to remain loyal to its lender, and divert future spending from social services to interest payments. Even today, with access to the world’s collective financial and economic wisdom, nations still succumb to this debt trap.

Households are no different.

The debt, which was “sold” to you as a path to freedom or to an upgraded life, can become the very thing that every decision must be centred around. Instead of debt leading to financial freedom, it can become the invisible shackle that “ties you down”.


How You Should Think About Debt

I’m not saying that all debt is bad. But it’s also too simplistic to say that education or housing debts are “good debt”. Sometimes these can also be forms of “bad debt”. It all depends on these factors:

No matter what the loan is for, you must ask yourself whether you can truly afford servicing it. Not just for today, but throughout the course of the loan. If you have a mortgage, you’ll also need to plan for possible rising interest rates (SIBOR) that will affect your mortgage payments.

You must also factor in the possibility of a future income disruption – job loss, changes in income, changes in household needs, disability, ageing parents, other future uncertainties – that will affect your ability to service your debt.

Lastly, you must account for the “externalities” and unintended consequences of your debt. How will having the debt affect your lifestyle, your relationships, and your choices?

Imagine, for a moment, that you could not borrow money and had to live debt-free. What would you do differently? How would you live? What would you buy or forego? Would your “wants” and “needs” change? How much would you save? And if you are truly debt-free, how would you feel?

Now, returning to the real world, ask yourself – is taking on debt worth it? And if it is, how much debt is enough? How much of your future time and earnings should you pledge?


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