What is your debt appetite?

marcia griffinBy Marcia Griffin

The whole financial world seems to be in turmoil, but any superficial analysis of the problem seems to come up with one reason for this chaos – bad debt.

Bad debt is not only the sum total of debt but also the type of debt – risky debt, debt that can’t be collected on – and if we dig further it seems that banks and lending institutions have been allowing customers to borrow more than they should have. In turn consumers have become addicted to debt and now the crunch has come.

So the lessons are there – really tough ones, and as consumers and business leaders know there are all sort of ratios that guide debt management. But it has not prevented some major meltdowns.

As consumers there is very little advice available about debt. Is that because it is in the interests of financial institutions and businesses to encourage spending and not to warn about over-exposure to debt?

You could say “buyer beware” – but looking at the level of consumer debt it is apparent that the consumer has not been sufficiently aware and those buy now, pay no interest advertisements continue not only to go to air but also to work.

It seems as a society we are addicted to so many must-have items that we simply continue to live above our means, borrow beyond our means and are beholden to institutions who are doing the same thing!

The adage from Robert Kiyosaki to borrow only for assets and cash flow seems very sound in these times – we just need to be clear about the true value of the assets.

There are some truly sad stories that emerge in such difficult times, and it is so easy to be caught in the debt trap. But I feel as consumers we need to seek better value and, without wanting to sound like a total puritan, put the brakes on unnecessary expenditure.

For business the same principles should apply, but be careful not to cut down in areas that add value to your business. I hear CEOs say “we will need to cut marketing, cut people, cut training”, but I think we need to cut waste and get very clear about what we need to stop spending on and what we should be investing in.

It can be a great mistake for a business to slash its marketing budget; a bit like a consumer cutting down on healthy food.

Many well run businesses can use this time to gain market share as poorly run businesses do not survive tough times!

As consumers and business leaders, we simply need to become more discriminating in our spending, making sure we get value for our dollar and that we only cut back on the high risk areas in business and unnecessary items as consumers.

The world is not about to stop, but these are times for great lessons and clear thinking.