Get the H**L out of debt

My closest friend attended an event that featured a senior analyst of one of the six chartered banks who presented a long term economic forecast for Canada and the USA. There are at least two banks of the six (that I know of) that are in relative agreement about the future of the economy (the only discrepancy is the time frame of the coming borrowing/cash crunch: 18-30 months verses 24-60 months). The short term projections are bullish on Canadian real estate (18-24 months) while the US slowly increases their interest rates. As interest rates continue to rise (to “cool” the 4%+ growing US GDP), the cost to borrow will become more and more difficult and costly. It should reach critical mass early 2019 to late 2020 at which time credit will become much more difficult. All those who have excessive debt during this time will feel the weight of higher interest rates. Borrowers who have over leveraged their houses in the past will look to sell to release the financial pressure. Most everyone is estimating a serious drop in Canadian real estate prices (or at the very least a strong buyers’ market).

All that being said, what should operators do financially? My answer: Get out of debt! I am not necessarily referring to truck debt (which is generally capped at 5 years). I am mostly referring to consumer debt (credit cards and lines of credit) and partially referring to a home mortgage as well. As rates increase, interest costs will place a non-budgeted burden on your cash flow. As real estate softens, downsizing will most likely cost years of accumulated equity. As credit tightens, your ability to take advantage of future opportunities will diminish.

I am not advocating elimination of debt entirely (which wouldn’t be bad if you can do it) but reducing your interest costs will be critical. The time to do that is NOW! For aggressive, business minded people who wish to protect their assets or even maximize their opportunity in the future, I have been suggesting a goal of reducing their total interest costs to 5% of net income (mortgage included). That means $3,000 per year on $60,000 net income. That would mean a $75,000 mortgage at 4%. If interest rates are going to double that means the future will be 10% of net income (which is still manageable).

The inevitable collapse/crisis of: credit, real estate or even currency will not be pretty but is moderately predictable. Canadian personal debt levels are outrageous. In addition, our governments (at every level: municipal, city, provincial and federal) are borrowing and spending at levels that exceed even our war time history. Eventually it will be stopped; not necessarily by the elected officials but simply by the market itself. Personally I would prefer to hire drunken sailors to manage government financial matters than how it’s being done today. If we cannot stop them today we must protect ourselves from the consequences that will be coming tomorrow. This is why I am advocating serious reductions of personal debt. If you are now paying 10% of your net income in interest, you will most likely be paying a minimum of 20% in fewer than five years. If you can’t sustain that type of payment, you will have to sell and pay down debt however you can… in an environment where everyone else will be selling. It won’t be pretty.

On April 21, 2014 my son received his first credit card. I warned him of its dangers and I made an agreement with him (which he signed). I would pay him $1000 if he proves that he had a credit card for 5 years (April 21, 2019) and never paid $.01 in credit card interest. Last month my son confided in me that he made a mistake. He thought his wife paid it and his wife thought he did. He missed a deadline and it cost him $30. I told him that this kind of thing happens (even to me once every five to ten years) and I was still very proud of his accomplishment to date. Three years without any interest (or even mistakes) is pretty awesome for a millennial. I was so proud that I offered him another deal. Start over again (another five years) and this time I’ll give him $2000 if he shows he went without paying any interest. In my opinion this type of risk/incentive brings great long term rewards for parents.

I want the independent operator industry (truckers) to prosper. In order to make it through this next decade they need to prepare for a very different set of “norms”; higher interest rates.

I’ve written about this before. The saying “the rich get richer and the poor get poorer” usually has truth associated to it. The rich do usually get richer… but not because they’re rich but because they heed good advice. The poor get poorer because they don’t.

Deciding to be an operator is more than just a flip of the coin. I don’t want to imply that people actually make that choice by flipping a coin but in some circumstances, it would have been better to let the coin call the shots.

I was talking to a couple who came to my office late one afternoon. They were in trouble; more trouble than they had ever been in before. They had expected their choice to purchase a tractor and become independent operators to solve their financial problems, because they had heard that operators make much more money than company drivers do. They saw that the only difference between entrepreneurs and ‘employees’ was that entrepreneurs took risks. So, they took a risk and bought a new truck. That was three years ago and now they are having serious financial problems. The maintenance is killing them and all their credit cards are maxed out.

Three years is a short time for a financial crisis on a new truck. I started asking them broad financial questions and found myself being led down rabbit holes that had nothing to do with answering the questions asked. It took me three tries to find all of the details before the story started to make sense.

Here is what happened: Within six months of owning their new truck the couple bought a new car (actually an SUV). About a year after that, they bought a slightly used half ton to drive back and forth from the storage unit that they rented for their truck when he got home from his runs. Their drawings (take home) from their corporation jumped by 45-50% per year and their personal debt level didn’t go down as they had hoped for but instead, increased. After a set of tires and some other non-warranty items, they were having trouble meeting their monthly bills. They began complaining that the assumption that operators make more money was actually a lie. I have learned that the difficulty with counseling people in financial matters is that too often, emotions overrule facts. Then, when facts become irrefutable, people begin blaming others.

The truth was they were making more now than when he was a company driver. In fact I showed them that he actually was making about $9-10,000 a year more and doing slightly less work. The problem was they were spending $16-17,000 more than they were before. They spent their maintenance savings on “necessities” such as down payments for their newer vehicles and on “emergencies” such as new furniture, appliances and vacations.

When I write this story in the words I use it is simple to understand who is to blame. It’s always easy to point the finger at others and say… “Boy were they foolish… they never set aside for the future. They never calculated the cost of their decisions. They probably deserve what they have to go through to get themselves out of trouble”. Those thoughts may be true but they probably shouldn’t be said (at least in that way). The only way to truly help people is to help them to see their own faults and failures in the context of humility.

Though I may not have the problems others do, I can guarantee I probably have problems others don’t. The best way for me to handle my problems is to never abandon an attitude of humility. I find pride and arrogance or even somehow implying I’m better than others to be an emotional trap for me. I may understand numbers, risk/return ratios and financial self-restraint but I can assure you without hesitation… I have my set of devastating vices. More than likely you do too. If I am to keep my vices under some form of restraint, I must first be able to humbly acknowledge them.

I am personally convinced that most of the time my only advantage in remaining humble is my wife… who diligently and gently keeps my mind clear of pride. I also have a close friend who has jointly traveled with me through some very difficult times. We have equally shared life’s lows and highs. We have earned long term mutual respect for each other to the degree that we can directly present the truth to each other so we can face our personal vices. My friend is great, but my wife is the best. May 21st was our 29th anniversary. I would be nowhere near where I am today without her. She is my greatest helper.

About the Author:
Robert D. Scheper is a leading Accountant and Consultant to the Lease/Owner operator industry in Canada. His first book in the Making Your Miles Count series “taxes, taxes, taxes” was released in 2007. His firm exclusively serves Lease/Owner Operators across Canada. His second book “Choosing a Trucking company” is the most in-depth analysis of the operator industry available today. He has a Master degree (MBA) in financial management and has been serving the industry since he and his wife came off the road in 1993. His dedication, commitment and strong opinions can be read and heard in many articles and seminars.

You can find him and his books at www.makingyourmilescount.com or 1-877-987-9787. You can also e-mail him at robert@thrconsulting.ca.