Ninety-seven years ago this week, the American stock market began one of the most famous collapses in financial history.
October 24, 1929, became known as Black Thursday. Black Monday and Black Tuesday followed on October 28 and 29. By the summer of 1932, the Dow Jones Industrial Average had lost nearly 89% of its peak value.
There were many causes behind the crash and the Great Depression that followed. But one feature of the speculative boom deserves attention: people were buying stocks with borrowed money.
According to the Federal Reserve’s history of the crash, investors could commonly put down just 10% of the purchase price and borrow the rest.
Think about that.
For every dollar of their own money, they could control ten dollars of stock.
As long as prices kept rising, it seemed like a wonderful arrangement. But a relatively small decline could wipe out their entire investment. And when lenders demanded additional collateral or repayment, investors could be forced to sell into a falling market.
The larger economic collapse cannot be explained by margin borrowing alone. But leverage made speculative losses much more dangerous.
I find myself thinking about that history because I’ve made some expensive mistakes with debt myself.
And after more than twenty-five years of building businesses, I’ve come to believe that the greatest danger of easy credit isn’t always the interest rate.
It’s what having access to borrowed money can do to our judgment.
I bet my future on tomorrow looking like today
When I was young, I failed in my first business and accumulated a substantial amount of unsecured debt.
I eventually enrolled in one of those debt-settlement programs that advised me to stop paying my creditors while they worked toward settlements.
My credit was ruined.
But this was during the era of no-documentation mortgages, when lenders were willing to make loans that would be difficult to obtain under more conservative lending standards.
I wanted to buy the house of my dreams.
Despite my credit problems, I was able to get a 40-year mortgage at 11% interest, along with a second mortgage at 14%.
Those were expensive loans.
I knew they were expensive. But I was young, optimistic, and convinced things would continue going the way they had been.
I already had debt from my previous business failure. Now I was adding an enormous housing obligation on top of it.
Then came 2008.
Within roughly six months, our income fell by 50%.
The mortgage payments didn’t fall by 50%.
Neither did our other obligations.
We discovered substantial problems with the house that would require expensive repairs. We also faced the coming obligation on the second mortgage. Between those expenses, we were looking at more than $100,000 in potential cash requirements over the following couple of years.
Meanwhile, the value of the house was falling.
Eventually, we walked away from the house and surrendered it to the bank.
I believe it later sold after foreclosure for around $70,000.
I had lost the house I wanted, damaged my finances, and spent years dealing with the consequences of decisions I’d made when I thought the future was reasonably predictable.
Looking back, I can summarize my mistake pretty simply.
I bet my future on the economy continuing to behave the way it had been behaving.
That’s what borrowing against future earnings involves. You commit income you haven’t earned yet to obligations that won’t disappear simply because circumstances change.
That doesn’t automatically make borrowing wrong.
But it should make us considerably more careful about the assumptions we make.
The monthly payment isn’t the whole decision
I think one of the largest problems with consumer debt is how people approach the decision in the first place.
They ask:
Can I afford the monthly payment?
That’s often where the analysis begins and ends.
But a monthly payment tells you remarkably little about whether the purchase is prudent.
What is the total cost?
What happens if your income falls?
What other obligations are you carrying?
How much money do you have available if circumstances change?
What are you assuming about your job, your business, the economy, or your future family situation?
And perhaps most importantly:
Why do you need this thing now?
We’ve become accustomed to being able to obtain things before we’ve earned the money to purchase them.
Want a new vehicle? Finance it.
Want new furniture? Finance it.
Want a vacation? Put it on the credit card and pay it off over the next couple of years.
The ability to purchase something gets confused with the wisdom of purchasing it.
And the smaller we can make the payment appear, the easier it becomes to justify the decision.
It’s worth asking whether we would make the same purchase if we had to withdraw the entire amount from our savings account today.
Sometimes the answer would be yes.
But sometimes the answer reveals something about how credit has influenced our thinking.
I stopped borrowing for twelve years
After what happened in 2008, I stopped using debt for twelve years.
I eventually rebuilt my credit and began using credit cards again, but I pay the entire balance off every month. I don’t carry a balance from one month to the next.
I don’t use consumer debt today, and I don’t want business debt either.
I realize this puts me much closer to Dave Ramsey or Larry Burkett than to Robert Kiyosaki.
And I understand Kiyosaki’s position.
I understand why successful investors use leverage. I understand how financing can make acquisitions possible, preserve liquidity, and increase returns. Some businesses and investments require sophisticated capital structures, and there are people who manage those structures successfully.
That doesn’t mean I want to operate that way.
Frankly, I hate debt.
I prefer owning what I own outright. I like knowing that my property belongs to me without a lender having a financial claim against it.
There’s a certain peace that comes with that.
But there’s something else I learned during those twelve years that I consider just as important.
When borrowing isn’t an option, you have to find another way to accomplish what you want.
People told me you couldn’t buy a house without a mortgage.
Well, I did.
I built a business that produced enough money to purchase a house with cash.
That took time. It required learning, creating value, solving problems, and developing the ability to earn more than I had previously earned.
There were plenty of mistakes along the way.
But removing debt as an option forced me to approach problems differently.
Instead of asking how much money a bank would lend me, I had to ask how I could create enough value that people would willingly pay me the money I needed.
Those are two very different starting points.
Easy credit can make a bad decision easier
Years later, I was involved in another business that had access to a line of credit.
We didn’t obtain it because we were desperate for money. It was available in case we wanted to make a business purchase or take advantage of an opportunity.
I had enough money in the bank to pay off what we borrowed.
The line of credit was interest-only, the payments were relatively small, and accessing the money was easy.
That combination was more influential than I expected.
For example, we had an opportunity to purchase materials at what appeared to be an attractive discount.
Using the line of credit made the purchase seem reasonable.
But business slowed. We incurred interest expenses, additional storage costs, and other expenses associated with holding inventory longer than expected.
What looked like a bargain ultimately cost us money.
Here’s the interesting part.
I wouldn’t have used our available cash to make that same purchase.
The money was there.
But if I’d been required to withdraw it from the bank, I would have approached the decision differently.
Somehow, using borrowed money made the purchase easier to justify.
I noticed a similar tendency in how other managers thought about expenses. And although I challenged some decisions, I also allowed myself to be persuaded.
The line of credit changed the way we evaluated opportunities.
An even more consequential example involved operating expenses.
We were heading into a slower season with a cost structure designed for a rapidly expanding business. The original business plan anticipated financial pressure, but some operating expenses had become higher than they needed to be.
The prudent response would have been to make difficult adjustments before the slower season arrived.
Instead, access to credit allowed us to postpone some of those decisions.
We could keep carrying expenses because the line of credit was there to support them.
Now, sometimes borrowing during a slow season is perfectly reasonable. If a business has predictable seasonal demand, healthy margins, and a sound plan for repayment, financing a temporary cash requirement may be a prudent choice.
But that isn’t what concerns me.
What concerns me is when borrowing becomes a substitute for correcting something we already know needs to change.
Debt bought us time. But having that time also made it easier to put off decisions we should have made.
Growth isn’t always worth financing
Suppose a business owner tells me he can borrow $100,000 at 7% interest and invest it in an expansion that should produce a 20% return.
Sounds attractive.
But that’s nowhere near enough information for me to have an opinion.
How experienced is this owner?
Has he operated through a recession?
What industry is he in?
What is the actual size of the opportunity?
How much market share does he have, and how much can he realistically capture?
Who will manage the expansion?
What assumptions are built into that 20% return?
What happens if it takes twice as long as expected?
What are the real carrying costs?
What does inflation do to those assumptions?
How much cash does he have in reserve?
How long can the company survive if the economy turns against him?
What measurable milestones will tell us whether the expansion is working?
And what happens if it doesn’t?
Notice that I haven’t told him not to borrow the money.
I’m trying to understand whether he has actually thought through what he’s proposing.
A loan doesn’t make a business opportunity good. It merely provides money to pursue it.
And the lender’s willingness to provide that money doesn’t establish whether the investment is right for the borrower.
Sometimes financing allows a capable owner to pursue an extraordinary opportunity.
Sometimes it allows an inexperienced owner to make a much larger mistake than he could have afforded to make with his own money.
Debt can accelerate both success and failure. It doesn’t provide the judgment necessary to tell them apart.
For most home-service businesses, I question the assumption that substantial debt is necessary to grow.
It can make growth faster.
But faster isn’t always better.
If the organization hasn’t learned to manage its existing operations, adding more trucks, employees, customers, and locations can magnify those weaknesses.
The business becomes larger before it becomes capable of handling what it has created.
I’ve experienced some version of that myself.
The discipline of having to wait
There’s another part of this conversation that I think financial advice sometimes overlooks.
Saving for a purchase can teach you something beyond how to accumulate money.
It requires patience.
It requires self-control.
It requires you to postpone something you want today for something you’ve decided matters more.
Those are habits worth developing.
And they don’t apply only to money.
Learning to delay gratification, examine your desires, and exercise restraint can influence the way you approach work, family responsibilities, and decisions throughout your life.
Now, I’m not claiming that people who pay cash always make good decisions.
I’ve wasted money myself.
I’ve bought things with cash because I thought the tax deduction made the purchase attractive. Sometimes having plenty of money can lead to its own kind of foolishness.
So cash isn’t some magical protection against bad judgment.
But I do think the process of saving can help develop the habits that make better judgment possible.
And access to easy credit can allow us to bypass some of that discipline.
For certain people, that creates serious problems.
If someone regularly carries unsecured consumer debt, pays credit-card interest, finances vacations, and consistently spends money he hasn’t yet earned, I would question whether borrowing is serving him well at all.
Some people probably need to take debt off the table entirely.
Not because every debt is financially irrational.
Because their own habits make it difficult for them to use debt without harming themselves.
Recognizing that about yourself is not a failure of financial knowledge.
It may be the beginning of better judgment.
The problem is where we begin
When I look back at 1929, I see an example of what happens when speculation, optimism, and borrowed money combine in a way that leaves very little room for things to go wrong.
When I look back at my own life, I see a young man who assumed tomorrow would look like today and borrowed accordingly.
And when I look at some of my later business decisions, I see how having access to credit sometimes made it easier to avoid making difficult choices.
I’m not arguing that nobody should borrow.
I understand perfectly well that debt can be used responsibly and productively. There are investors who have spent decades learning how to manage it, and their experience deserves respect.
But I also know that understanding the arithmetic of a loan is not the same thing as understanding how to use debt prudently.
A person can understand interest rates, amortization schedules, and projected returns while still making very poor financial decisions.
The more difficult work is examining your assumptions, understanding your own habits, knowing what you can survive, and being honest about whether borrowing is actually necessary.
And I think we’ve developed a habit of beginning with the wrong question.
We ask:
How much money can I borrow?
I would rather begin somewhere else.
How much value can I create?
What skills do I need to develop?
What problems can I solve?
What resources do I already have?
What would happen if I waited?
And if borrowing still appears to be the right decision after answering those questions, what evidence supports that conclusion?
I’ve spent more than twenty-five years building businesses, making mistakes, and learning from them. I certainly haven’t learned everything there is to learn about money.
But I’ve learned more about why I make the decisions I make.
Today, I prefer living and building without debt.
Not because I believe everyone must do what I do.
But because I’ve experienced what easy credit can cost, and I’ve also experienced what happens when you have to rely more heavily on your own judgment, creativity, discipline, and ability to produce something valuable.
One path gives you access to money you haven’t earned.
The other asks you to become capable of earning it.
Both may have their place.
But I think far too many people begin with the first without seriously considering the second.