Historical article note: This article was originally published on 2019-06-20. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
I recently read a motivational article called 'Borrowing Money Is Nothing, Making Money Is True Skill.' It starts with a story of a gold-digging woman who borrows money to buy luxury goods, leading to a family disaster, and ends with an advertisement for a financial management course. The title is very attractive, but the content doesn't explain why 'being able to borrow money' isn't a skill. Most motivational articles aren't harmful, but the ones that mix motivation with ads are usually toxic: borrowing money to spend has nothing to do with whether you should take a financial management course, and the implication that you can get rich by taking such a course or the suggestion to buy luxury goods is toxic. Reading too many similar motivational articles about borrowing money and debt management can gradually make us lose our understanding of correct, objective rules: borrowing money is indeed a skill—if you don't believe me, try to see if the bank will lend you unlimited amounts; 'making money' isn't the same as managing money—if you haven't earned any money, what do you manage? If you haven’t earned money while awake, there's no way you’ll earn income while asleep, right?
There is a popular personal finance and motivational book that has been best-selling for 90 years, "The Richest Man in Babylon." If you pick it up today, you will find that its content is all familiar and well-worn, and all the secrets seem recognizable. There are only so many correct things to do in financial management, and even today, these hard truths remain the same. Even the freshly presented examples prove ancient principles. The financial skills introduced in this book written 90 years ago are actually based on experiences from 6,000 years ago. The author, George Samuel Clason, was a celebrity of his time, writing a series of books revealing the secrets of wealth in ancient Babylon. His fame was similar to that of Robert Kiyosaki, the author of the modern "Rich Dad" series. I have compared the content of these two sets of books, and the ideas in the "Rich Dad" series can all be found in the "Babylon" series, just with contemporary examples. Financial skills can be summarized into two main categories: 1. Manage debt well; 2. Learn to invest.
01 What are deadly debts
In ancient Babylon, those who failed to repay their debts would be reduced from free people to slaves. It is said that the walls of Babylon were as high as 15 stories, built from the piled-up corpses of various slaves. Slaves who were enslaved due to debt, like those enslaved due to defeat in war, were mostly sent by their owners to build city walls; otherwise, the owners would have to donate money. Compared to donating money, a slave's life was cheaper, so the owners usually chose to send slaves to do labor rather than reluctantly spend money paying taxes. Slaves sent to build the city walls basically never returned. Even with the fatal risk, a large number of people still became slaves because of debt, showing that managing debt has been a skill since ancient times, and not something optional or something that can be replaced by financial tricks, as some toxic advice might suggest.
Another kind of lending that could cost lives is what Buffett said, 'No one goes bankrupt simply because they don't borrow money.' Around 1998, there were cases in Hong Kong where people jumped off buildings due to stock market declines, and the situation was quite serious. At the time, before the 1997 handover, some people firmly believed that the Hong Kong real estate market would be supported by the government, which led to frenzied speculation. During this period, some people leveraged the rising property prices by taking out loans against their real estate to withdraw cash and invested in stocks on margin. When both the stock and property markets fell, some people jumped to their deaths.
Deadly debt has two characteristics: first, those who cannot control their spending should not borrow money, as in the case of the indebted Babylonians who became slaves; second, money should not be borrowed for speculation.
02 Managing debt is a prerequisite for investing.
Both the Babylon series and the Rich Dad series mention one of the most important financial principles: pay yourself first. This means saving before paying bills and spending, and it is compulsory saving, that is, accumulating capital for investment. Save one-tenth of your income every month and invest every six months. The remaining nine-tenths are for consumption and repaying past debts. Regarding debt, whether 6,000 years ago or now, if you cannot repay as agreed, then you will never be able to borrow money again. Babylon was the earliest city in the world to have currency and promissory notes. Lacking natural resources, ancient Babylon created enormous wealth through a credit system established by strict laws, which is very similar to modern Singapore: creating wealth through law and credit. Credit means borrowing money and repaying it, then borrowing again and repaying again in a cycle. After borrowing, if you do not repay as agreed, this credit behavior is immediately terminated. In Babylon, those who did not repay became slaves; in modern society, it would be recorded in your credit report, making it difficult to borrow in the future. Therefore, debt management is a killer; if done poorly, you lose everything.
"The Richest Man in Babylon" advises that if you encounter difficulty in repayment, do not panic or hesitate, but proactively negotiate a debt restructuring plan with the creditor. For example, if you were supposed to repay 1,000 yuan on May 1 but cannot afford it, you can request to pay 500 yuan on May 1 and repay the remaining 500 yuan and interest over the following three months.
The "Rich Dad" series suggests: after having a down payment, you should learn to borrow money for investment. Borrowing for consumption is wrong. For example, taking a loan to buy a home that exceeds your financial capacity is wrong; whereas borrowing for investment is correct, with the loan repaid from investment income.
In short, identifying good debt and bad debt and minimizing bad debt as much as possible is the first step in starting to invest. Bad debt is defined as consumption debt repaid from your own after-tax income, including personal home loans.
03 Borrowing money is usually not the way to solve problems.
Henry Ford expressed in his memoirs the views of entrepreneurs in the industrial era regarding borrowing: if troubles are caused by poor management, solving them through loans only creates another problem. Nowadays, some entrepreneurs and startup founders feel that lack of funds and inability to obtain loans limit their development. Problems that money can solve are not really problems; management issues, product design problems, employee quality problems, and market risk problems cannot be solved with money alone. However, most entrepreneurs do not understand this principle and think that with money, any problem can be solved. They fail to realize that the purpose of a business is to solve problems, meet needs, create wealth, and accomplish what capital alone cannot. Some contemporary highly successful entrepreneurs, like Zong Qinghou, Ren Zhengfei, and Ford, similarly believe they do not need a creditor, that the enterprise itself has the ability to generate resources, and even look down on the capital market. Henry Ford believed that a company should not borrow money when it has problems, but it can borrow money when seeking growth.
The same applies to individuals. Borrowing money for consumption is one thing, but borrowing money for investment is acceptable. Borrowing money in emergencies is a situation many people face out of necessity; for instance, a major surgery falls into the category of passive, forced borrowing, which is not within the scope of our discussion. What we need to discuss is how individuals should manage debt when they have the conditions to borrow money and do so proactively.
Small business owners take loans to develop their own business or company. It is best if the business is a limited company, keeping it separate from personal debts. When you make money, purchase personal assets, including real estate, to create sources of passive income; when you lose money, the debts will not affect your personal life. Some small business owners do this the other way around: when they earn money, they buy houses, and when the business encounters difficulties, they mortgage the house to save the business. The result of this approach is usually that neither the business nor the house can be preserved. Cases like Wu Jing, who mortgaged property to make a film and achieved huge success, are extremely rare.
For salaried workers, taking out a loan to buy a home should be done within one’s means, and it’s best to avoid taking loans to buy consumer goods. The 'Rich Dad' book series describes a typical scenario showing how families in Europe and America can never escape the curse of debt throughout their lives: starting with higher education, parents no longer provide financial support, and student loans plant the seeds for lifelong debt. Student loans cannot be canceled through personal bankruptcy and are a debt that lasts a lifetime. After graduating from college, many young people indulge the desire to consume that has been suppressed for a long time, going on credit card sprees; they take out loans to buy cars; then loans to buy houses, furniture... debt keeps growing. Debt used for consumption should not be borrowed lightly, except in emergencies or for surgery. When buying a wedding ring, jewelry stores may offer installment payments; when buying expensive furniture, sellers may offer installment payments. These installments can be seen in credit records, as they are all consumer loans. In Canada, there is also a type of loan called an investment loan, which is recommended to avoid lightly: you borrow 100,000 from a financial institution while investing 100,000 in the same institution. If you’re lucky, you might make a profit without any investment; if you’re unlucky, you have to pay interest on the debt, repay the principal, and bear the loss. This kind of 'good deal' guarantees profit for the financial institution without risk, ensures a steady commission for the intermediary, and leaves all the risk to those who think they can get lucky and make a profit without investment.
Whether it is a business or an individual, the problem of not making money cannot be solved by borrowing money. Many people think that as long as they have money, any problem can be solved, even if it's borrowed money. A family with an annual income of 30,000 yuan giving all their savings to a financial advisor, hoping the advisor will increase their income, is completely unreliable. If you have no savings and borrow money to let a financial advisor invest, that is utterly absurd. Making money is your own responsibility. The premise of making money with money, of making money work for you, is that you must have financial intelligence yourself; making borrowed money work for you requires an even higher level of financial intelligence, because borrowing money itself is a skill. Being able to repay it and still make money requires long-term learning and practice.
04 How to Improve the Ability to Borrow Money
Borrowing money from a bank is easier than borrowing from friends, especially for a mortgage. Whether you can get a loan depends on whether your income can support the loan application or whether your net assets can support the loan application. A mortgage is a type of loan secured by the target property. It has low interest rates and large amounts, making it the best way for families to obtain loans from banks. The bank's criteria for approving a loan are the borrower's repayment ability: either having an income or high net worth assets, as well as past repayment records, that is, credit history. In Canada, improving your ability to borrow money requires increasing your income, accumulating net assets, and maintaining a good credit record.
Borrowing money in itself is usually not the goal; the goal is to invest through loans to obtain investment returns that generate money from money. If you make money through borrowing, your income increases and your net assets also grow, thereby enhancing your borrowing capacity. Therefore, what the borrowed money is used for and whether it can be profitable becomes the underlying ability of borrowing. Compared with investing after saving, investing with borrowed money requires a deeper understanding of the essence of investment and mastering more investment skills.
Borrowing money to invest carries greater risks because investments may succeed, but they may also fail, while borrowed money must be repaid. As we discussed above, borrowing money for speculation is extremely dangerous and could even lead to jumping off a building. The biggest difference between "speculation" and "investment" is that the former bets on the price definitely rising in the short term and relies solely on selling assets to repay the loan; the latter also expects price increases, but even with price fluctuations, one can hold long-term and not rely solely on selling assets to repay. Debt-financed investing has higher requirements; it is necessary to ensure profit while guaranteeing that the borrowed money can be repaid on schedule. Taking real estate investment as an example, once a mortgage contract is signed, monthly repayments must be ensured as agreed. If the repayment source is rental income, one can consistently ensure timely repayment each month, and even if the rent is interrupted, one should have the ability to maintain repayment according to the agreement until the property is ultimately sold and the entire debt is cleared. Banks require applicants to demonstrate repayment ability and pass a stress test to approve a loan. If you want to borrow money to be repaid by tenants, then you should improve your ability to handle borrowed money.