“Neither a borrower nor a lender be.” This is something we often heard the older folks in our community say when we were growing up. Many of us thought that it was a quote from the Bible; it was many years later before I learnt that it was a line from Shakespeare’s famous play, ‘Hamlet’, which I never read. In the play, a father, Polonius, was warning his son, Laertes, not to become either a lender or a borrower, because both led to bad consequences.
The same advice is probably still true today especially as we see more and more people across the world becoming heavily buried in debt. This is often tied to the culture of consumerism which sees growing middle classes everywhere feeding their appetite for gadgets, cars and luxury items through loans. This is especially true for Western societies but also more and more in places like China, India and elsewhere.
A recent article in the Harvard University alumni magazine observed that, “Consumerism is as American as cherry pie. Plasma TVs, iPods, granite countertops: you name it, we‘ll buy it.” People are buying stuff, more and more of it. The consequence? Higher and higher personal loans, mortgages and credit card debts to pay for this stuff.
Now, don’t get me wrong, economist will tell you that consumer borrowing and spending can at times be good for an economy. The problem is, when people become over-indebted, there are a lot of risks. On Twitter the other day I saw this Tunisian proverb: “He who is covered with other people’s clothes is naked.” I think this could be applied to someone whose car and house and assets are all bought with other people’s money, even where other people is the bank. You are always at risk!
But credit can also be useful, and we need to develop awareness of when and for what purposes people should use credit. African economies are growing, and over the coming decades we will see a larger and larger middle class with the disposable income to spend and to borrow. The challenge for the leaders of these countries is how to promote a savings and investment culture, and how to ensure that their citizens are financially savvy and use credit wisely. African countries should not follow in the footsteps of countries with high consumer indebtedness.
Credit can be a good thing if it allows people to improve their present quality of life by borrowing from their future income. But when credit is used strictly for consumption it is rarely a good idea. If you are borrowing to buy cars, large screen TVs, phones, and such, then you are preparing for problems in the future. In the best case, you will waste money paying interest charges. In the bad case, you will end up using your disposable income to pay off debt rather than investing in other worthwhile things such as education, property investments, and creating long-term income streams. In the worst case, you could find yourself unemployed and unable to pay your bills, leading your family into financial ruin.
I believe we need to teach the value of money at an early age, and ensure that the up and coming consumer class spends and borrows wisely. In the same way that few countries and few businesses can grow without credit/debt it may be hard for many individuals to grow without it. Countries are now trying to use debt wisely – they use IMF and World Bank loans to invest in infrastructure and critical services that promote private sector growth. Companies likewise borrow to develop new products, acquire other companies, grow market share etc.. Individuals should also learn to use credit to work for them, and not to become a noose around their neck.
Sadly, our schools produce workers, not entrepreneurs nor investors. And most of these workers become consumers, not creators of new products and services and not investors. We need our schools to help create a new generation of citizens. Citizens who learn to invest at an early age and for the long term. Children who save 10-20 per cent of their pocket money. Adults who automatically put aside 10-20 per cent of their salary from their very first paycheck. A new generation that understands the habit of wealth creation, and who know that the wealthy do not work for a salary but have assets that work for them. We need the next generation of citizens to save and invest part of their income and borrow to invest in assets – in real estate, index funds, bonds, new businesses, etc..
I want to see more people using credit wisely – use cash to buy a second-hand car rather than take on a big loan to get a new car. Instead take that loan to build or expand a business, or obtain a top quality education.
People say knowledge is power. What knowledge about money are we teaching the next generation?
The writer is owner and managing director of Forrest Jackson Properties, a full-service real estate company in Kigali, Rwanda
The views expressed in this article are of the author.