Lifting too much weight (The Financial Athlete #52)

Who walks into a weight room to lift three times his body weight without ever having weight lifted in his life? Even the inexperienced are aware of the danger of lifting too much weight. Unlike heavy weight measured in kilos, the gravitational pull of the weight of debt is not as feared. This kind of weight won’t hurt your back or cause sore muscles for the rest of the day. There are no immediate repercussions with debt. This may be one reason many don’t hesitate to try to lift three times the weight of debt they can bear.

Piling up debt to consume goods and services or speculate on investments with an insurmountable amount is a sure sign of addiction to debt. Every addiction gives a certain high. The high for an addiction to debt is living a richer lifestyle or feeling like you will once your “investment” pays off. But all addictions debilitate. Too much debt eventually leads to a lower standard of living, not higher. While I don’t practice a policy of zero debt, it may be a good idea for someone addicted to debt.

For the rest of us, how should debt be managed? Take a cue from weightlifting, which teaches us to build strength before lifting heavier weight. A weightlifter works out on the same muscles 3-4 times a week and increases weight incrementally over time. So the point is not minimize debt but to only take on a level of debt your income can sustain. The greater your income, the more debt can be leveraged to further increase your income. Recall the question: “Which is the cart and which is the horse?” In this case, income always should be the horse, and debt the cart. A costly mistake is thinking vice versa.

This principle applies not only to personal finance but also to investments. If a company or real estate property has too heavy a debt burden relative to its cash flow, take a pass on that investment opportunity.


Tags: , ,

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: