Getty/Think stock Jeanette Brox, a certified financial planner in Toronto, says having a negative cash flow is a dangerous position on a personal level, but adds that taking on debt for market investments is something she has often advised clients to do.
Taking on debt to create long-term growth is often applauded in the business world. But when it comes to individuals doing the same thing with their own finances, the concept is given short shrift. Much has been written about the record level of Canadian household debt, with many worried observers citing the debt-to disposable-income ratio that reached 163.4% in the second quarter of 2013, although it has been stubbornly high for some time. But that ratio isn’t all it’s cracked up to be.
“It’s a terrible metric,” says Craig Alexander, chief economist at Toronto-Dominion Bank. “You are comparing a stock of debt to an annual flow of income. Say you are a young person with a mortgage, you are not going to pay it off in one year.”
Forgetting the fact the formula mixes more stable long-term debt for assets that have rising values with credit-card debts used for fleeting consumable products, there are good reasons to take on debt in your life. “The lifecycle is very clear: When you are younger and your income is lower, you borrow to support your lifestyle,” Alexander says. “As you age and as your income becomes higher, you eventually get to the point where you are supposed to be paying off your debts and save for retirement.” There are even instances where it makes sense to take on debt if it means having a negative cash-flow situation. Students come to mind. They take on massive debt and have virtually no income during their years in school. The idea is that the cost of that debt will more than pay for itself later in life with a better job that will create more income.
This article appears in the November edition of the Financial Post Magazine.
