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Financial planning tips

July 02, 2014

The do’s and don’ts of debt

Lee Anne Davies has published a book with bankruptcy expert Blair Mantin. Add When Life Bites You in the Wallet to your summer reading list.

the dos and don'ts of debt

I’ve been an admirer of Lee Anne Davies for a number of years. We first met more than a decade ago when she was with the Canadian Securities Institute. She moved to RBC next, where she did work in the retirement planning business that included valuable consumer research. Since then, Davies has earned a PhD in aging, health and wellbeing and has set up her own firm, Agenomics. 

Davies’ new book — coauthored with bankruptcy trustee Blair Mantin — is perfectly timed. When Life Bites You in the Wallet focuses largely on debt management. There’s more to it than that (it features a useful section on financial responsibility, for example). But what impresses me most is the team’s advice on how to think about credit and how to stay in control of it. It’s what sets this book apart from others in the same category.

Davies and I spoke last week about the do’s and don’ts of debt.

  • Don’t cosign that loan. Not even for your kids. Two reasons, according to Davies. First, it limits your access to credit. Second, you’re letting your friend/child off the hook. “Why aren’t you helping them create the habit of saving money? To learn how to earn the credit? To be responsible and maintain credit worthiness,” said Davies. Enough with the helicopter parenting already.
  • Do make choices about who you spend your time with. We’re wired to socialize, which often means going along with a group on spending decisions. There’s nothing wrong with that, if your spending habits (and probably incomes) are in sync. But understand that groups can provide both positive and negative reinforcement. “You’ve got to be so careful about who you’re hanging around with,” said Davies. “Keeping up with the Joneses is not a competitive thing. You don’t even realize that it’s happening.”
  • Don’t get used to luxury. Salaries go up and down over the course of a career. Sometimes, people get into trouble when they make lifestyle adjustments that they can’t maintain long-term. “I’ve never really had a fancy car,” Davies told me. “I don’t want one because if I did, I’d never want to get rid of it.”
  • Do give yourself financial flexibility. Davies is not anti-debt. The key, in her opinion, is that you have sufficient wiggle room to deal with whatever surprises life has in store for you. There’s nothing wrong with a line of credit, as long as you don’t overextend yourself.
  • Don’t make yourself house poor. “There’s no reason to put all of your money into a single asset,” said Davies. “In the long run, even if it does pay off financially, the balance in life has been lost.” The debate about good debt (incurred to purchase something that gains value over time, like a home or an education) vs. bad debt (incurred to purchase something that loses value over time, like a car, furniture, etc.) is beside the point if you’ve taken on so much debt that you can’t sleep at night.
  • Do save for retirement at the same time you’re paying down debt. “You need to put something away for retirement every single year because of the opportunity for growth over time,” said Davies. Don’t base decisions to pay down debt or save for the future based on interest rate forecasts. Do both. “That retirement nest egg growth will amaze you,” she said. “Put it aside, invest it prudently and let it grow.”

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