I love Seth Godin, he always challenges my assumptions.
But, in yesterday’s post, I wonder if he got it wrong when he shared:
Only borrow money to pay for things that increase in value. It’s a short list: your business, your house and your education, mostly. Stocks if you’re smarter than me. That’s pretty much it.
I agree in theory, but not so much in practice.
The problem is, this advice works far better in hindsight than in real time.
What does that mean? That you often don’t know what will increase in value at the time you want to borrow the money to fund it. And, this is equally true for business, housing, education…and stocks:
- Business: Depending on who you ask, between 75 and 95% of all businesses fail within 5 years. So, if you’re playing the odds, the far more likely assumption is that a new business not only won’t increase in value, but it will likely end in failure (yes, I still am a staunch entrepreneur).
- House: Over a period of decades, housing almost always appreciates, but for many with a shorter term horizon, there is a lot of risk in real estate. The millions of people who bought homes in the last 5 years and are losing their shirts are testament to that.
- Education: Seth’s own post in October 2007 revealed the insanity of paying top dollar for an education that was far less determinative of success than intelligence and drive. And, how many of you have been really annoyed after dropping a nice chunk of change on some kind of career educational program, book or dvd only to find them sorely lacking in value?
- Stocks: Two words, En-Ron. Two more, Bear Stearns. Again, over a period of many decades, as a whole, the market appreciates, but individual stocks often don’t follow suit and the broader market may go through swings of many years without appreciation or in decline.
It’s easy, in hindsight, to say it was a good idea to borrow money for these and other things…when they end up being huge successes in hindsight.
But, what about all the money borrowed for these very adventures that goes up in smoke?
I agree completely with Seth’s broader message…be really, really careful what you choose as the justification for indebtedness. Try like crazy to only borrow against assets and adventures that are most likely to appreciate in value or yield increased opportunity.
But, in the end, it’s all still all a big, old guess.
Even the examples given as the sole areas that justify indebtedness don’t pass the real-time sniff test. And, one other thing…
What about passion?
What about impact? What about service? What about the completely irrational, seemingly unjustifiable, odds-defying desire to borrow to set in motion a professional quest you believe in every fiber of your being will solve a pervasive problem or profoundly improve the human condition…and make millions?
How do these figure into the decision to incur debt?
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