Thursday, 9 July 2009

I choose freedom

When you look at long term credit data, you begin to understand the revolution in personal finance that took place in the last thirty or so years.

Back in the early 1960s, private credit was less than 16 percent of GDP. By 2007, it was over 170 percent. It is an historically unprecedented increase in personal indebtedness. GDP measurs our national income, which ultimately determines our capacity to repay debt. So this data tells us that our debt burden, which expressed in terms of income, has increased ten-fold.

To put it mildly, the data sems to suggest that we have become a nation of debt serfs. The vast majority of households, it would appear, are totally beholden to the bankers.

But not me. I proudly declare that I have no debts. The relevant number is zero. You won't find me in that chart. I have no credit card debt and no mortgage. Overdrafts are banned in the Cook household. Everything we have belongs to us. We deal in cash, and not credit.

I don't know about the rest of you but I choose freedom over serfdom.


dearieme said...

We have a tiny mortgage because it's cheaper to let the Building Society look after the deeds than to pay my lawyer to do so.

Anonymous said...

Do you own your own house or are you a rent serf?

Anonymous said...

Unfortunately I'm on that graph. Damn student loan. On the bright side reading sites like this have encouraged me to get my act together. If I get a good run of overtime I should be able to clear my debt in time at all.


Keiko said...

I actually took a little credit card debt on, due to ill health. It's manageable as mum is paying the bill! I'm sitting in gold shares expecting a collapse in the pound, then I'll pay it off.
I'm surprised though that the pound is still worth anything, I really can't see it holding up beyond the end of September.
O/T The Telegraph had an article on the Energy Crunch today. North Sea Oil is forecast to fall to 40% of 1999 production by 2012. So add another 60 billion pound per year structural deficit to your charts.

QG said...

As I understand it, modern finance works as follows:

If you have money deposited with the bank then you are a liability because the bank must give you money in the form of interest payments.

If you owe money to the bank then you are an asset because you should generate revenue for the bank in the form of interest payments.

So if everybody in the UK avoided debt and lived within their means, like Alice, we would be a nation of liabilities. Of course, we can punish the liabilities by slashing interest rates to support the virtuous assets. Perhaps negative rates for savers are the way to go. Crazy, isn't it?

mike said...

I'm like Alice. Never had a loan. Been saving for a long time. I haven't gambled on gold or shares and gradually being convinced that the money I have saved will be worth a lot less in a few years time.

The economy isn't doing very well, but feel other economies around the world are also suffering. So there's no reason for a collapse in the pound or to turn my money into gold.

Mick said...

me too Alice - since splitting up with my ex I've spent five years paying off my newly acquired mortgage rather than doing up the rather rundown house I had to buy. And it's been hard at times.

Now the debts are all gone, the bank balance (Euros) is back, and it turns out I'm just too flaming mean to splurge nine grand on sorting out the kitchen. Solid Yorkshire stock - my gran would've been proud.

And in the meantime I've met a wonderful girl who shares the same values. And her Mum (retired nurse) keeps ledgers of every penny she spends, and has them all the way back to the 50's! Now I wouldn't recommend that, but it was commonplace only a generation or two ago.

How values have changed.

Anonymous said...

I have no debt and no savings. So it is rather curious to be a financial winner in UK terms...!!

Anonymous said...

As a landlord, I am happy people like Alice exist.

Anonymous said...

I once asked a (self made multi) millionaire, what was the best advice he could give. He pulled a £1 coin out of his pocket and said put it in your pound jar.

He laughed when I looked perplexed and put it back in in his pocket.

After he had left in his very expensive car one of his friends explained to me why it was so important to have a pound jar.

Its just a piggy bank but you put all your change in it no matter how small.

Before long you realise how much most people waste. Every day you have choices...

You have a choice takeaway or put the amount you would have spent in your pound jar and make some food at home.

After a short while money takes on a different meaning most people in this country waste so much money. You don't have to be tight you can live so much better but most people are too lazy to even think about what they are wasting.

Look at credit card rates and people don't even pay off the bill or move it to a lower rate.

DaveW said...

I live in Australia and purchased a house 2 years ago. Since owning a house my wife and I are no longer able to go out for dinners, plan holidays, or buy clothes. We pass my entire income to the bank and get by on my wifes part time income.

The notion that housing is an investment is rubbish. Even if house prices rise 10% from this point onwards the value does not cover the interest payments we make.

Where we live a basic house in dilapidated condition, 2 bedrooms will cost you $350,000 which is 7 years of (after tax) income. All that to keep the rain off your head and somewhere to sleep!

Mickanomics said...

I suspect this graph neatly corresponds to the growth of the UK banking sector. The question I'd like answered is: what caused the big change in 1985 or there abouts?

Anonymous said...

The Tory recession of the early '98s taught me all I need to know about debt.

wildgoose said...


You're right about it being commonplace to track every penny just a couple of generations back. I clearly remember my grandfather writing down everything he spent, to the penny, what on and where he bought it.

And like you, I'm solid Yorkshire stock. No mortgage, (actually it is £1 so that the Building Society can look after the deeds), and no other debts.

But the thing to remember is that we are the exception. What really drives it home is when friends and colleagues get divorced, sell the house and divide up their assets. Their nett assets are miniscule - typically no more than a thousand pounds for every year over 20 they are.

It's quite frightening just how much of our apparent prosperity is in reality nothing more than smoke and mirrors.

Keiko said...

@Mike, whilst many other economies aren't doing well, ours is much more precarious. We will soon find out who is correct about gold or sterling.
If the BoE ha, as reported in the Times, stopped buying government debt, then the pound will collapse quickly.
At the least you should diversify your assets a little, as their are too many unknowns. So some sterling, some gold, some Swiss Francs etc. Better to be safe than sorry. I'm 100% in gold, but I'm ill, so I'll either be rich enough to retire or dead.

Acorn said...

Dear Ms Cook

It has come to our notice that your household "deals in cash". Additionally, you purport to "have no debts".

As far as we at the HMRC are concerned this is an extremely unlikely situation. We shall therefore be conducting an audit of your tax affairs.

You will be aware that it is government policy to make every individual beholden to our socialist state. You are clearly attempting to evade the prime directive of our great leader.

What's yours is mine now and forever.

Love and Kisses,

Gruppenf├╝hrer; Kopf der Besteuerung

Jo said...

Some debt is not a bad thing but it depends on how it is organized.

A 25 year mortgage which is just a substitute for rent is fine. Though I am also happy to rent because that frees me from the horrors of gutters and drains. Depends on what I am doing and the structure of the debt and the support around it.

I am increasingly persuaded by Islamic banking. The lender must share the risk.

So to the commenter with the student loan: I think universities should lend students their fees and if the student is unable to pay them back, the university should share the loss. Moreover, if the failure to pay is deemed to be a failure because there is no work available at the required value, the university should pay a fine to the graduate to compensate them for their 3 yrs and loss of earnings over a lifetime. There is not a chance in the world that an 18yr old can make the investment decisions implied by a university loan and I think the people immediately benefiting from the arrangement should be responsible for the outcomes in greater part than the student.

And so on for all other loans.

I see Islamic banking is offered by most establishments in the UK and it would be good to get a debate going on its merits.

Anonymous said...

Well done, Alice. We are like you, have no debts, and no house.
We rent a nice house for 3% yield to the landlord, so he is kindly paying me to live in his house, which is depreciating at 15% in the South East over the last 12 months, according to the FT.
I love the freedom of renting! we will probably rent forever. The only temporary problem is that interest on my money is a ridiculous 2% from National Savings, since I dont trust banks. However, I suspect that GBP will crash, and that will cause interest rates to rise, and my small amount of gold bullion to go stratospheric in GBP. Best wishes. Keep up the good work, Alice!

sobers said...

If Islamic banking works on the principle that the lender must share in the risk of each individual loan (rather than spread the risk over all the loans) then credit would be harder to come by, because lenders would assess their borrowers much more stringently.

Not that that is a bad thing, a good one in my view, but should be taken into consideration.

Nick von Mises said...

I've been 100% in cash since mid 2007. I prefer to get 0.5% on cash than -40% on every other investment.

I don't fear a sterling collapse. Interest rates can't go significantly lower, what would the pound crash against (there's only gold), and the real value of sterling is rocketing compared to asset prices.

As for debt - I have precisely zero and intend to stay that way. A cash cushion is freedom. Freedom to stop work for a while, freedom to take a holiday, freedom to meet sudden expenses, freedom to tell the boss you won't work late.

Every pound I save is a pound I don't need to re-earn. It's a pound I can spend if I need to.

Anonymous said...

Alice, your sentiment is good and your self-discipline excellent. However, you still have to find rental payments and you're attempting to store your wealth in the form of paper tickets (pounds) with very questionable long-term value.

For somebody like you who is expecting inflation this strategy doesn't make sense.