Q: Why do we get into debt?

A: We overspend.

No, really. It’s that simple.  The real question is, ‘why do we overspend?’ And that answer is, perhaps, a bit less simple.

I admit it: I have a crush on Martin Lewis. He’s a British blogger, and self-proclaimed “saving expert,” and his analysis of people’s collapse into the terrifying “debt spiral” (as presented to students, parents, and faculty of the London School of Economics) really resonates with me. Allow me to paraphrase:

Martin says that the debt problem can be traced back to an outdated middle-class ideal that we hold that is embodied in the saying “neither a borrower, nor a lender be.” The underlying message, of course, is that “debt is bad.” If what this did was cause everyone to live below their means, there would be no problem at all — there wouldn’t be billions of dollars owed to credit card companies, marriages and lives would not collapse because of financial stressors, and life would go on just tickety-boo.

Clearly, this is not the result of our great-grandmama’s frowning on borrowing. And, as all hopefully know by now, working from reality is the only place to start a journey toward personal financial resilience and health. Martin knows this, too. In fact, far from saying that “debt is bad,” Martin says that it’s both inevitable, and potentially positive.

It’s inevitable, because for many of us, assets like education and an owned home cannot be purchased without incurring debt. And yet, most would argue that these purchases are investments, and an at least acceptable reason to go into debt.

Basically, Martin is arguing that debt can be leveraged to create assets that can then be leveraged to further improve our economic situation. The conditions are that the debt needs to be as inexpensive as possible, and entered into (wait for it) as intelligently as possible.

Is anyone surprised by these revelations? I didn’t think so.

Inexpensive debt means low interest rates. Intelligent debt means that the net consequence of incurring the debt is positive (or, that you can reasonably assume it will be positive). This is why education, and houses can be good debt — the interest rates are generally among the lowest you’ll find, and the long term appreciation or leverageability of the assets is good. It’s also the reason why a car has the potential to be an asset, despite its chronic depreciation: if the car is financed inexpensively, purchased intelligently (i.e., as a critical consumer), and is leveraged to improve your financial situation (facilitates earning a living in a way or at a level that is not possible without the car), it’s an asset, and a good debt.  A gas-sucking pig of an SUV financed through a(n expensive) finance company, and purchased to make you look cool when you drive 2 blocks to work? Not exactly an asset, nor is it good debt.

[…continued tomorrow…]