James d. Gwartney

ELEMENT 4.4
Don’t finance anything for longer than its useful life.

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people investing in their education through debt financing may reap dividends in the form of
higher earnings. The educational investment will be a good one if, over the next twenty or
thirty years, the higher earnings are sufficient to pay off the borrowed funds. But there are risks
here: If the additional education does not increase your future earnings, at least not by much, it
may be exceedingly difficult to repay the borrowed funds. (Note: This issue will be considered
in more detail in Part 4, Element 11.)
For most households the implications of this guideline are straightforward: Do not
borrow funds to finance anything other than housing, automobiles, and education. Of course,
depending on the design of health insurance in your particular country, it obviously is a good
idea to borrow for critical medical care if you have not yet had time to build up a sufficient
emergency fund. An appendectomy is a good use of debt. A facelift probably is not (unless you
are a TV star!) Furthermore, make sure that funds borrowed for the purchase of these items
will be repaid well before the expiration of the asset’s useful life. Application of this simple
guideline will go a long way toward keeping you out of financial trouble.
Another debt-mismatch risk is borrowing in a currency other than the currency of your
income. The values of currencies can change relative to each other without warning.
For example, in the early 2000s, homebuyers in countries including Poland, Hungary,
Croatia, and Romania were able to secure very low mortgage interest rates by borrowing in
Swiss francs. Most of their incomes, however, were in their home currencies.
In the 2008 financial crisis, the value of CEE currencies fell relative to the Swiss franc
as the franc’s value rose in comparison to the euro and other currencies. The Swiss tried to
stabilize by pegging their currency to the euro in 2011. Then in 2015, Switzerland unpegged its
currency from the euro and its currency spiked upward further.
Both times, borrowers were shocked to find they owed a lot more money in their own
currencies than they had anticipated. While a business might have been able to lock in its
exchange rate using a forward contract, such contracts are not likely to have been available to
individuals. It is best to match the currency of your spending obligations to that of your
income, in order to avoid unpleasant surprises.

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