Fear of DEBT

[Steve Navra]

Hi All,

I had occassion today to try and ease a client through his abject fear of debt.

Trying as best as I could, at the very thought of owing money the client was breaking into a sweat!

He has held 2 propeties (Unencumbered since inception) for 5 years in Melbourne and they have achieved moderate to good growth.

I demonstrated that had he at that time used leverage (with debt) he could have held 4 properties for the 5 years. (Instead of just 2) Resulting in an extra $400,000 of gain!

Also that at every step of the way, the assets would always have exceeded the amount of debt to the bank.

THE PENNY FINALLY DROPPED WHEN:

I asked him how much tax he had paid last year. ($16,000)

I asked him what would happen if he didn't service his debt with the bank: "They will sell the assets"

I asked him what would happen if he didn't service his debt with the ATO. "I will go to jail"!!

I pointed out that his $16,000 obligation to the tax office collates at 6% to a debt of $266,667 and asked him how he could sleep at night

Food for thought!

Regards,

Steve

 

[Bear924]

Steve,

I thought your link between debt and tax was quite smart, if only I could recieve capital growth from my 'government debt'.

Anyhow everyone else ...

Tonight I was reading

http://www.financialsense.com/series2/perspectives2.htm

From my understanding the author is basically stating that because money (debt) is easy to obtain, people (Americans in this particular article however I'd believe it would also apply to Aussies) are speculating with their investments (from what I've read it was mainly dealing with the share market however property speculating in Aus. could also be looked at here) and therefore that invested money could possibly be quickly lost (inner city unit??)

I imagine that due to the large levels of debt a small change in interest rates would produce amount of hurt therefore reducing the requirement to increase rates further (thus buffering smarter investors??

I'd also imagine that high levels of debt suggest that perhaps the typical Australian is close to being fully debted out (eg unable to take on anymore debt)

If the typical Australian can't take on more debt does this suggest that a more expensive property will be unaffordable and therefore less purchases of property (or shares) will be made and therefore less capital growth??

Apply same logic to corporate growth (eg there will be none), does this suggest that for the next x years everyone will be playing catch up and the economy will basically not grow at all.... and then does this suggest that now is not the best time to be purchasing capital growth items (eg properties)

Sorry this reads so badly, there's probably a single word that sums up my 4 paragraphs.

 

[TheBacon]

The single word might be 'CAUTION'

However we (especially myself) must be careful not to fall into 'analysis paralysis' where we scrutinise everything and convince ourselves out of all deals.

There are oportunities at all times to make money (or so i've heard ), the opportunites just change every now and then...

Good Luck.

TheBacon

 

[always_learning]

I explained it to my wife this way:
A bank actually is in a pile debt, moutains of it, they owe everyone who deposits money the amount plus interest. But the banker goes home at night a sleeps simply because they (or they should) be using the depositor's money to generate even more money than they owe.

Debt is only relative to the purpose it is used for. So we should focus not on debt, but focus on the value we use it for. Some people "see" debt a a big deap black "hole" or a heavy weight on their shoulders. Why not "see" debt as a ladder, or a helping hand lifting you up?

 

[always_learning]

Originally posted by Steve Navra
Hi All,

I had occassion today to try and ease a client through his abject fear of debt.

Trying as best as I could, at the very thought of owing money the client was breaking into a sweat!

....
Regards,

Steve

I was thinking about this issue.

Steve says we the client had a fear that manifested itself as a physically (i.e. sweating). My understanding is that that when we have a physical reaction to something (sweating or stomach tightening etc) is as a result of a long held psychological conditioning (normally as a child). When we see someone react physically to what to us is a logical argument maybe we need to take a step backward. Trying to press the point stacking it up with logic may just get us nowhere, a bit like Star Trek's Mr. Spock most logical course of action being ignored by the very human Capt'n Kirk.

So for my mother who was brought up in as depression child money and job security is so important talking money or job raises a physical response. For my wife's (Japanese) parents throwing away food and fire raises a physical response. As children growing up during war, whilst their parents they had money and jobs, the jobs and money couldnft buy food and couldn't prevent American fire bombs from destroying their childhood homes, hence the fears of hunger and losses from fire.

So maybe during any type critical conversations with people and we sense a physical reaction, we need to back off and ask some general open ending feelings questions to gain a real understanding of the problem. i.e. if Steve had a good relationship with the person (rapport) then what about asking "Have you known anyone who had problems paying back loans?".

Anyway I raise it not as a solution but an idea!

 

[Bill.L]

Hi All

Got to agree with Steve here. Peoples perception changes back to what they remember in the past.

I've just been reading a book published in 1989 about investment, written on questions asked of a newspaper columist. Interesting how property at 17.75% interest was the highlight as well as interest bearing deposits aka Mutual Friendly Society bonds were pushed. One of the highlights to me was the unit in Sydney that cost $1764 a month to service but returned only $720 a month. It was considered a good investment provided the current interest rates were locked in!!! because after the next federal election interest rates were expected to rise.!!! The people who invested in this unit had a combined income of $51000.

MY BELIEF is that today( and the last 6 years) has been the very best time to invest in residential property as the prospects for the future are LOWER interest rates because of lower inflation and corresponding cap growth, or higher inflation, higher interest rates and cap growth. Or I could be wrong

bye