• James Lee

When The Tide Goes Out

Is debt bad?


On a personal level, I carry debt. I'm going to use a couple hypothetical examples to help with this point. I have a mortgage, student loan, and car payment.


  • Mortgage - the interest rate is 3.5% on a 30-year loan.

  • Student Loan - the blended interest rate is approximately 6% on 20-year loan

  • Car Payment - the interest rate is 0.0% on a 6-year loan

For each of the payments above, let me use $1,000 as an example to illustrate this more simply.


  • Mortgage - for every $1,000 borrowed, I'll pay $616.40 of total interest over the life of the loan.

  • Student Loan - for every $1,000 borrowed, I'll pay $718.40 of total interest over the life of the loan.

  • Car Payment - for every $1,000 borrowed, I'll pay $0 of total interest over the life of the loan.

The student loan is the most "expensive" loan, followed by the mortgage, and finally the car payment carries no borrowing cost. So, in terms of a payment strategy, I'm increasing my student loan payments by 2x and my mortgage payment by 1.5x. It doesn't matter to me if the regular monthly payment on the house is "higher" - I'm thinking about the cost of borrowing. Here's the effect on debt when I look at total cost --> interest.


  • Student Loan - I cut my total interest from $718.40 to $233.14. This is a 67.5% reduction in the cost of my loan, and I pay it off in 7.75 years instead of 20.

  • Mortgage - I cut my total interest from $616.40 to $312.02. This is a 49.4% reduction in the cost of my loan, and I pay it off in 16.25 years instead of 30.

Where some people get a little lost on debt is that they look at the monthly payment instead of the whole picture. Can I afford the monthly payment? That's too narrow a look. Debt is - in simple terms - the cost of borrowing money. A better set of questions might be, can I afford the total cost of this loan? and what will I do with my cash that isn't going towards loan payments?



So, going back to the personal debt example above. My "free" cash - the money that I have that isn't going towards paying off debt or make long term improvements to my house - should be going to work for me harder than my debt. If I hadn't borrow money for the house and degree, I would have had to save up my money (not use it for other purposes) and pay for them with cash. Instead, I borrowed some of the money so that I didn't have to use my cash (or couldn't save enough to buy a house outright - few people do). So, now that I HAVE borrowed the money, that cash that I would have saved/spent on the house or degree is "free" to use for other means. (Note: Though somewhat close, this isn't what "free cash flow" means in business terms.) Those other ways I might use my cash are to generate:

  • Higher income - investing my money in myself (i.e. your biggest return) to gain the skills, network, education, experiences, etc. for progressively better jobs or means to generate personal wealth.

  • Greater retirement income - if your annualized returns on a 401(k) or similar retirement account is - say - 10% a year, your money is working harder for you than the cost of your debt (3.5% on the house, 6% on the student loan).

  • Ancillary or passive income - perhaps you spend time and some cash to build a side hustle, a rental property, a monetized blog (this one isn't - yet), or some other way to bring in cash.

There are other non-monetary values for taking a loan on the house or other high-cost asset. The freed up cash could go towards things like:


  • Enjoyment and new experiences of life - I could make a fairly reasonable argument that all work and no play is actually bad for your work.

  • Charitable giving, Freedom of time, Experiences

Alright, so what's the point in all this and what does it have to do with senior living?


Senior Living

This is to help illustrate the point that debt isn't bad for an individual, and it also isn't bad for a company. Borrowing money for a company is pretty similar in concept. Just like a person can use the cost of debt to further their goals like generating higher income, a company can use the cost of debt to further their goals like generating (faster/greater) revenue. I borrow money in my personal life so that I can leverage my resources to achieve my goals. This is what business suits call "Financial Leverage" or just "Leverage" - which means the use of debt to acquire more assets (presumably those assets are used to create greater revenue).


If a person takes on TOO MUCH debt they are relying too much on that leverage. They, like a company who takes on too much debt, are "over-levered". There isn't a threshold or exact number where one would be considered over-levered. But, there is certainly a point where you might think to yourself "I have borrowed way too much money, and the cost of that borrowing is piling up on me." Maybe the rental house isn't doing so well. Maybe people stopped reading your blog. Maybe a global pandemic hits and the extra income you got accustomed to dried up, and now you've got loan repayments you can't make.


Senior living like most businesses relies on two forms of capital (someone else's money used to produce something of value - i.e. more money): Debt and Equity. (I'll write a separate blog on equity.) Debt is a loan - like a mortgage or student loan. You can use it to achieve your goals, but overdone you may experience the downside of RISK should things take a turn for the worse.


At a community level, you may not know your company's strategy on debt and equity. But your day to day direction, and more importantly your pressures to perform and where you're allowed to spend money, may be influenced by the amount of debt they carry. Investors (equity) certainly exert their pressures too in a different way (later post). There is no "perfect" mix of debt and equity. Just like most things in business and in personal finances, you have to weigh the risk and benefit of actions based on your solid understanding of how money works and what you are doing with it towards a specific goal.


THE POINT

Warren Buffett said once to his investors:


"Only when the tide goes out do you discover who's been swimming naked." - Warren Buffett

When times are good - just about anyone can look like a genius. Carrying a whole bunch of debt? In good times, that may work out for you. When the "tide goes out" and companies are tested in times of adversity, we're going to see who was not thoughtful of their "coverage".


You may not be in a role where debt and equity decisions are directly relevant to your responsibilities. That isn't the point here. The point is, wouldn't you want to work for an organization that trusts you to teach you, share with you, and invite you to influence its core strategy? (Here's an applicable situation to insert the often misused word - empowerment.)


If you think about business in terms of your own financial situation and goals, it's easier to connect the dots of whether or not you feel like a true business leader in your own company. If you aren't given these tools - go get them! Your ability to serve seniors, the mission, and achieve your personal goals has to go further than someone telling you once a year "here's the budget for the year. Good luck."

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