How much debt should I have?
Of course the answer is none. But every individual has a unique situation, and there are no definitive answers that can guarantee financial success for everyone. We can use developed countries’ lending rules to limit the amount of money one can borrow as a rule of thumb for ourselves. In today’s Singapore for instance, banks and other lending financial institutions are required to consider all of the borrower’s outstanding debt obligations, including car loans, credit card loans, etc. They calculate the “total debt servicing ratio,” computed as a percentage of total monthly debt obligations versus total monthly income – all income, including bonus, gifts, rental income, etc. The maximum limit is 60 percent, in other words, if your monthly income is USD1,000, you can borrow USD600.
The concept and practice of debt and lending and borrowing has been around for a long time. Some of the very first written documents that have come to us are Mesopotamian tablets recording credits and debts, rations issued by temples, money owed for rent of temple lands, the value of each precisely specified in grain and silver. In the marketplaces that cropped up in Mesopotamian cities most transactions were based on credit. While debts were calculated in silver, they did not have to be paid in silver. It was perfectly acceptable to show up with goats or furniture. But debt levels remained low when compared with income. The explosion of debt (not just family debt but also government debt) is a modern day occurrence. The increase of debt in households is today most clearly visible in the US. The total mortgage debt outstanding has risen 75 fold in 50 years. Altogether, American owners/occupiers owed a sum equivalent to 100 percent of the US gross domestic product by the end of 2006, compared with less than 40 percent five decades prior. The higher prices go, the higher the debt levels go as first-time buyers can’t get financial assistance from their parents or family.
Financial institutions have become ever less inhibited about lending money to people who want to buy property. “Safe as houses” was a term coined by bankers. The phrase means that there is nothing safer than lending to people with property. Why? Because if they default on the loan the bank can repossess their house. Even if they run away, the house can’t. In contrast, on Sumerian, Babylonian and Assyrian records, we can find general debt amnesties issued by the rulers canceling all outstanding debts. For instance, in Babylon in the spring of 1761 BC, the rulers oversaw the ritual of “breaking the tablets,” which is the debt record, restoring economic balance as part of the calendric renewal of society along with the rest of nature. Perhaps this is something we will see happening in the 21st century.
Bio: Afonso Vieira is an investment manager and financial planner. He is licensed by the Financial Planning Association of Singapore.