Big expenses can 
Help snap a financial plan
Into clear focus

Based on my own life experience and the hundreds of conversations about personal finances I have had over the years with people, big expenses are rarely welcomed. No one looks forward to replacing their roof, wandering into the wilderness of college expenses, paying a big medical bill, replacing a car, etc.

Big expenses frequently involve using debt. Most people can’t afford to pay out of pocket for a house, a college or graduate degree, or a car. Even people who could afford to pay all at once may not want to do so due to the immediate loss of liquid capital.

This is where the problem of big expenses intersects our two competing clichés:

Age old cliché #1: Cash is king.

Having more liquid money available in one’s portfolio is widely regarded as preferable to having less. Liquidity gives a person the ability to engage promising opportunities and exit failures at will. Liquidity even allows someone to choose between different levels or categories of taxation for their money.

Using debt allows a person to keep more cash in their portfolio. A person may be able to invest that cash and earn a return of return greater than the rate of debt on their loan. When that happens, a person can pay down their big expense while growing their net worth. They will also have money on hand to deploy towards immediate emergencies.

Age old cliché #2: Debt is slavery

The more debt one has, the more one’s freedom is impinged by the responsibility of repaying that debt. Someone who owes a debt is in a subordinate position relative to a creditor. If the debtor needs some relief from the creditor, they must apply and get approval. If the debtor fails to repay the debt per the terms of the loan contract, the creditor can enforce the contract through punitive, expensive penalties, and even seize property.

So which cliché is right?

For me, this question involves an important financial paradox.

I love paradoxes. A paradox can be surprising, mysterious, and challenge biases.

One financial paradox is the idea that the consistent growth of inflation-adjusted per capita GDP in the West since the early 19th century can be directly attributed to the presence of existential threats to the economy.

The idea is that throughout this 200 year period of prolonged and largely consistent economic growth, there have been a panoply of catastrophes chasing humanity towards innovation like a ravenous tiger chasing a child through the jungle: The Civil War, Spanish Flu, small pox, The Great Depression, World Wars I and II, presidential assassinations, The Cuban Missile Crisis, Stagflation, The Tech Wreck, 9/11, The Great Recession, COVID-19, and onward into who knows what fresh hells await us.

In the process of solving scary problems, people create and refine technology. That technology becomes part of the fabric of capital markets. That new technology may even create its own problems that demand new innovative solutions. The idea is, as long as there are problems – big, scary, serious ones - there will be growth.

Big expenses may fall into this category.

For people who need to use debt, under the “debt is slavery” dogma, they are making a terrible mistake.

Meanwhile, from the “cash is king” perspective, a big expense may be an opportunity.

By using debt and setting up a plan to repay that debt systematically over time, two things may happen.

One, the debtor will need to pay close attention to their finances to make sure he or she has enough money each month to pay the debt down. By paying closer attention to finances, they may find more ways to cut back expenses than expected. Looking for ways to cut back may cause someone to look closely at what they value most and cut away spending that isn’t aligned with those values.

Even if no extra cutbacks occur, eventually the debt will come off the debtor’s books. This leads to the second potentially net positive of taking on debt. Once the debt is paid, the now liberated debtor can maintain their prior lifestyle while directing some or all of the cash flow that had gone towards debt payments to saving and investing.

In professional finance, there is a word used to describe debt: leverage. On the surface this can look like an obnoxious, maybe even offensive euphemism. But it really gets to the heart of what debt actually is: a tool.

How can a person lift an object that far outweighs them? They can use a lever. A lever lets someone produce lifting force at a multiple of energy expensed to produce that force.

What does debt do? It gives someone the ability to take on a large expense while preserving more liquid cash in their portfolio. You can use a relatively small amount of money now to solve a big expense, while distributing the depletion of liquidity over a lengthy time frame.

Having written all of this seemingly pro-debt gobbledygook, I wouldn’t blame you for thinking I am in favor of debt. In fact, like most people, I think It is categorically preferable to have less debt than more debt.

But when your life intersects a big expense, debt by itself is not a problem, it is a constraint. Having debt puts guardrails on spending and forces a certain amount of mindfulness towards money. These are qualities that can be to one’s long term advantage.

Using a diverse and balanced toolset and being selective about picking the best tool for the job should be a top priority within a financial plan. If a big expense is barreling towards you, don’t assume it’s an entirely bad thing. It may give you the opportunity to implement a strategy that results in a net improvement in your financial well-being.

Want to learn more about how to take on a big expense? Do you want a second set of eyes on your plan to see if you are using the best tools for the job? That’s what we’re here for, and we’d love to hear from you.