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Jack Falvey's Investor Education Briefs: There is a big difference between sovereign debt and your debt

February 18. 2018 10:29PM

The trillions owed by governments are semi-secured by their citizens’ ability to create wealth. The taxation of that wealth backs sovereign obligations. This is a branch of macroeconomics understood by few. How much government debt is too much debt is a political debating point.

Personal debt is altogether different. We must know everything there is to know about this branch of microeconomics. Our future depends upon this knowledge. Debt free looks good on paper. It is, but lost opportunity costs can be real. When to borrow for what, is the question. The answer turns out to be more of an art form than we would like. Unlike governments that use fuzzy future numbers in their calculations, you must have hard numbers upon which to base your debt calculations or you can suffer severe and real consequences.

Run your income numbers first, and don’t run them very far. Governments routinely go out 10 years. Three years is a personal stretch. Eighteen months is more realistic. Do not commit to debt that cannot be paid back in real time with real cash. Refinancing debt adds cost, if it can be done at all. Refinancing is not something that should be part of an entry strategy.

Being worth more to a creditor alive than dead looks good on paper. Many creditors, however, would rather write off bad debt and take their losses and your collateral assets rather than deal with delinquent payments. They sell bad debt down a level to those less understanding. That is not a place you want to go.

Personal debt has real repercussions and must be approached with real and conservative numbers. Worst case, plan B, and exit strategies are all required in the up-front planning stage. Knowing what you are getting into and why should be addressed before you sign future income away. Pay-back discipline is critical. If you have any doubts about this element, that’s a deal breaker.

“Sovereign debt” means you have a country behind you. “Personal debt” means you are backed only by your financial shadow.

Jack Falvey is a frequent contributor to the Union Leader, Barron’s and The Wall Street Journal. He can be contacted at


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