Debt can play an essential role in financial planning in several ways, such as financing large purchases, building credit, managing cash flow, and leveraging investments. However, it's important to remember that taking on too much debt can also have negative consequences that could impact your financial future. Therefore, it's vital to carefully consider your options and ensure that any debt you take on is manageable and aligns with your overall financial goals. In this episode, we talk about the essential aspects of debt and the role of debt in financial planning, and we unpack the two major forms of debt. Learn about debt in financial planning, consumption smoothing, the mindset and psychology behind debt, the risk that comes with debt, how credit cards impact how people interact with their money, integrated financial planning, and important aspects of mortgages. We also review a past episode with guest Dan Solin and the book, The Five Most Important Questions, which provides readers with a tool for self-assessment and transformation concerning productivity in the workplace.

Key Points From This Episode:

• The role of debt in financial planning and the distinction between good and bad debt. (0:08:16)

• A brief overview of mortgages, credit cards, and their associated risks. (0:11:31)

• Consequences of borrowing money at a high-interest rate, and how financial literacy impacts effective debt management. (0:13:20) 

• The psychological aspects related to debt and consumer spending. (0:16:10)

• Outlining the psychological interactions of established debt on mental well-being. (0:18:15)

• Credit cards, what they offer, and their psychological effect on paying. (0:22:10)

• Costs associated with not using a credit card. (0:28:45)

• Why mortgage debt is considered good debt for the borrower and the different facets of mortgages to consider. (0:32:48)

• The difference between fixed and adjustable mortgage rates and which is better. (0:37:25)

• Highlights and key takeaways from a past episode with Dan Solin. (0:46:06)

• A review of the book, The Five Most Important Questions and why we recommend it. (0:47:47)

• How the questions from the book relate to household decision-making. (0:51:18)

• A testament to Dan Wheeler and his contribution to the field of finance. (0:52:55)

• Recent interviews with Ben, upcoming guests, other interesting financial content, and our book recommendations. (0:56:33)

• A 23 in 23 book challenge update, feedback on the show, and upcoming meetups. (01:01:35)

Read the Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: Welcome to Episode 243. Ben, I told you on the weekend, I was checking out different podcasts just to kind of see different formats and styles. I kind of once well poke through the podcasts that are ahead of us in the rankings. I would check out the Dave Ramsey show on the weekend. They have different hosts than Dave. I haven't checked out in a long time, but it is one slick production. It's like, wow, like they're very good, voices are very good with the tempo. It's like, wow, we don't put anywhere near as much thought or energy, I guess, into the opening of this podcast. But that was really interesting, good format, interesting format, very refined, polished offering of their services that goes out through the show. Maybe we learned something just from that.

Anyways, coming up today. Speaking of Dave Ramsey, I guess, you're doing a deep dive into the role of debt and financial planning.

Ben Felix: Yes, not really a Dave Ramsey-style deep dive, but just try to talk through debt in general and its role in financial planning. Then we go through some, what I hope, are interesting points on two major types of debt credit cards and mortgages.

Cameron Passmore: I only mentioned Dave Ramsey there because much of the conversations with Cole and guests were about debt and management issues, that's why do that link. Then I'll do a quick review of Episode 17 that we had with Dan Solin, which was a great episode. I'm going to do a review also on the book that Shaun Tomson mentioned earlier this year, the Peter Drucker book called The Five Important Questions. Of course, there's the after-show where we ramble about all sorts of different things. As we mentioned in our past couple of episodes, where it's just you and I, if you are in Canada, and are interested in finding out more about working with our company, PWL Capital and one of our advisors, please visit pwlcapital.com. Anything else, Ben?

Ben Felix: No, that's good. Let's go ahead to the show.

***

Ben Felix: Welcome to Episode 243, of the Rational Reminder Podcast.

Cameron Passmore: All right. So before we kick off, tell me the backstory behind this.

Ben Felix: All the recent topics on the – we've been trying to give these slightly more advanced treatments of basic topics. I've been trying to follow the FP Canada and the IQ PF, who are the two bodies that administer on the one hand for FP Canada CFP, and for the IQ PF, they regulate financial planning in Quebec, here in Canada. They both have frameworks for financial planning, like what is the integrated financial planning process, what are the components that fit into that. I'm trying to build out thinking on all of those major categories. I've gotten past their broad categories in some cases for topics that I want to cover. But anyway, debt fits within that framework of integrated financial planning. That is where it came from.

Cameron Passmore: Cool. So the subject today is debt in financial planning?

Ben Felix: Yes. It's hard to figure out what to cover in a podcast episode because that, of course, is an enormous topic and there are so many different ways that you could talk about it. I've left out, although I give it a brief mention, I've left out a comprehensive coverage of borrowing to invest, because we've covered that before. Maybe we'll cover it again, I don't know. But I mean, even with like Robert Merton, we touched on that a little bit. Anyway, I've left that out of this discussion, so we're focusing on kind of a broad overview of consumption smoothing, which is something that we've alluded to in the past couple of episodes as well.

Then, I want to dive into a little bit of psychology around debt, because it's a whole other interesting component, right? Where – when you're doing financial planning, analysis, and looking at how debt fits in, one of the things that you're looking at, of course, is the cost of debt, you're looking at risk, and you're assessing all these types of things. But there's this big psychology component that wouldn't fit into that type of analytical framework. I want to touch on that briefly. Then I want to – there's a bunch of fascinating research on credit cards, and how they affect the way that people interact with their money, and mortgages.

Cameron Passmore: So you have lots of citations here today. I'm just scrolling through. You have, what? Fifteen, 17 citations? Can you just general talk about how you find all these relevant papers?

Ben Felix: I don't know if it's very exciting, but just using Google Scholar, and same way you do Google search, I don't know. Searching for keywords that are relevant, and then trying to find papers. Then when you see papers that are highly cited, or papers that come up when you search for different variations of keywords for what you're trying to figure out, and the same paper keeps popping up. You kind of start to figure which papers are authoritative. Then, there's also review papers like there's a paper, two papers by guests that we have coming up later this year. One looks at the general advice that comes from personal finance, like gurus, and compares that to economic literature. There's another paper that does a broad overview of household finance as a research area. That's like a 140-page paper. I have those as resources, and then they, of course, cite the most influential papers for the topics that they're discussing. Just reading stuff, basically.

Cameron Passmore: But reading stuff, and connecting dots, and finding the keywords, and kind of recycling through that, and you're kind of always poking around in this sphere anyways, right?

Ben Felix: Yes. But you definitely start to draw connections, and you start to see what the fundamental papers are. That's actually one of the ways that I think of or find future podcast guests too. Is that when you go down some rabbit hole, you start to realize that at the very core of that, there's a whole foundation of research from one or two researchers, or authors, whatever you want to call them. At a certain point, when I've seen enough, or when the research of someone in an area is fundamental enough, it's like, "Okay, we've got to talk to this person."

Cameron Passmore: Do you find to get lost in that research rabbit hole?

Ben Felix: What do you mean?

Cameron Passmore: I ask because in your – and we'll talk about this interview later maybe, in your Twitch interview this week that you did. You talked about how, if you happen to have a day that's clear, but there's one meeting in the middle of that day kind of just breaks up your day, you find it kind of breaks your trajectory of learning for that day. I was just curious, did you find yourself like you're digging into debt, can you get immersed in this topic for an entire day?

Ben Felix: Oh, yes. More than a day. I mean, for the amount of content that will, this discussion is getting kind of podcast meta instead of about debt. But anyway, for the amount of content that we'll talk about here, there are many more hours of reading stuff to try and connect the dots. Because it's one thing to say what an academic paper says, but it's another thing to say it in a way that's hopefully understandable and useful. I find that the third paper that you read, it's talking about the same thing.

The other thing that I really appreciate is when an academic paper references another paper, they'll often explain what the conclusion of that other paper was, in a way that's very concise. I find that's a nice way to start connecting that too.

Cameron Passmore: Oh, that's cool.

Ben Felix: Yes. I easily lost it for days reading stuff like this and the time just melts away. It drives me crazy.

Cameron Passmore: This is what I find interesting. You've boiled this down to whatever, half a dozen pages of notes here, and it becoming 30 minutes or so. But there are hours, like many, many hours of work that go into this, but of solid, deep work that we've talked about a lot, which in our field, in a typical financial planning investment advisory role, there are so many things to do. It's hard to get blocks of time that you're able to dig in like that. So really, it's quite an interesting output from the interest and the commitment to doing this.

Ben Felix: Yes. Anyway, we should get into the topic, we tried to make our introduction shorter, so we just did a long preamble instead.

Cameron Passmore: It's fair game after the intro.

Ben Felix: Okay. In general, the role of debt in financial planning, I think that debt gets a bad reputation, and there are a lot of good reasons for that, which we will talk about. But it's definitely not always bad, by any means. I think that – and this is kind of something that you see casually mentioned. It's a very personal finance thing to say. But I think that it's true that there is a distinction between good debt and bad debt. I think that's true, both economically and psychologically, which is, I think pretty interesting.

People borrow money for all sorts of reasons. Funding education is a big one like student loans are a big thing. Buying a house is another big one, and we'll talk about mortgage debt as I mentioned. Improving or repairing a home is another big one. People often have a line of credit on their house that they'll use for home maintenance and repairs. Buying a vehicle, whether that's through a lease agreement or a vehicle loan. People finance vacations, and people borrow to invest. Those are some uses of debt, but not a comprehensive list at all.

I think that in broad terms, the useful role that it plays is smoothing consumption and investment over time. This is the thing that we've talked about a few times in the last few episodes is that debt lets you move future economic value to the present backward through time. We know an economic theory and the lifecycle hypothesis. Households allocate resources over their lifetimes with the aim of avoiding sharp changes in their standard of living. To avoid sharp swings in consumption, people borrow when their income is lower and save when it's higher. We've kind of been through all this already, and then they eventually consume their savings when they're retired.

Some research suggests that taking on debt to invest when you're young, this is the one we've talked about investing with leverage in the past. It actually increases utility. I wrote satisfaction because I was trying to make it sound more understandable. But utility really – increases utility in the long run, by allowing investors to diversify their investment experience across time and allowing them to reach their lifetime optimal asset allocation sooner. That's where – we're not going to go any deeper on that, but it is a legitimate use of debt. Again, that's something that we talked with Robert Merton about briefly when he was on deck and also smooth. This is kind of the emergency fund discussion that we had a couple of episodes ago. Debt can smooth consumption in the loss of a job, or another inability to earn income. Not a cost of moving economic value backward through time. Using debt is interest. It's like the price of renting money, kind of.

Cameron Passmore: It's interesting, each side needs each other, like the borrowers need the capital to buy their houses, but the people with the capital need productive uses for that capital. So everybody needs each other.

Ben Felix: Yes, definitely. Financial institutions charge interest on loans, of course. Then, we talked about discount rates a few episodes ago. Well, I'm sure we've talked about discount rates many times. But it's that same relationship between risk and expected return that exists when financial institutions are making loans. They'll charge higher rates on a riskier loan. Now, to touch on mortgages, briefly for a second. Mortgages to the bank are relatively safe because the loan is secured by a gerbil asset. If you default on your mortgage, the bank can sell your house, I think they prefer not to do that. But ultimately, they have that security. Credit cards and unsecured lines of credit, on the other hand, are a lot riskier to the bank, because there's no collateral if you don't pay your loan back. That's why the rates are higher.

Credit cards are super easy to get, which again, I think speaks to why the interest rates are so high, like financial institutions will give pretty much anybody a credit card. But it's because they're charging rates so high that they're able to absorb that risk.

Cameron Passmore: And it reflects the risk because they'll have more loan losses.

Ben Felix: That's exactly right. A line of credit, even, though there's a much more thorough underwriting process than a credit card, at least in my experience applying for credit products. Now, to understand the cost of debt in each individual's situation, you have to look at the after-tax cost of debt. So there's the pre-tax cost of debt, which reflects the risk that the lender is taking. But to the investor or to the individual, in some cases, loan interest can be tax deductible. Like in Canada, when you're taking a loan for the purpose of investing with the intention of earning income, or in an attempt to earn income, the interest is deductible against your income.

When we talk about the analytical side of debt, and actually I excluded that whole discussion from this, like the decision to borrow or to pay off debt versus invest. I had that in separate notes, but there's just too much content to include in here too. But that's part of that calculus, is what is your after-tax cost of borrowing and how does that compare to your other expected rates of return?

Okay. Borrowing at a high-interest rate, like on a credit card. I mentioned credit cards having high-interest rates. They can easily be around 20%. That would not be uncommon. When you're borrowing at that type of interest rate, the debt grows quickly. Like at a 20% interest rate, the debt doubles in 3.8 years, assuming no payments, which if you're making minimum payments, maybe that's not so different. Well, it may be theoretically optimal for households to smooth their consumption over time. We kind of talked about this, when we talked about exponential growth bias. A lot of people do get into trouble with debt, so I think this is why it does get a bad reputation. Like you mentioned, the Dave Ramsey Show, there are a lot of people calling into the Dave Ramsey Show, talking about the problems that they're having with debt.

Cameron Passmore: That exponential growth bias is such a big – it's such a learning for me, but it's really been a reinforcement over the past month or so. I thought about this concept a lot. I think back to my conversation a month or so ago, we talked about when I had that aha moment when I was like 10 years old about compound growth. I had a number of people reach out to me saying they had a similar and as impactful as that episode in their own lives. They were older albeit, but they comment that it takes that genesis moment of, "I get it." It's such a powerful notion. If you don't get it, you will discount it. I would say, especially – it's true, though, but especially on the debt side, right? Because so many things can tempt you to take on debt at the moment. They're going to ask, no big deal.

Ben Felix: Oh, yes. We'll talk about that with credit cards and how they relate to spending. One thing that I think is interesting to think about is – just on the idea of debt being viewed as bad or viewed negatively. Is that when you look at corporations, the theoretical, optimal, capital structure for our company has debt in it, in most cases, at least. It's just interesting that in so many cases, individual households view debt as irresponsible or as a negative thing. Whereas when you take the human out of it, or at least make it a group of humans, or a corporation, whatever that is, a nonhuman entity. Then debt becomes a responsible instead of irresponsible, but I think that probably ties back to the humaneness of it, where people make errors and that can lead to debt becoming a problem.

I think financial literacy, and they kind of relate to the exponential growth bias stuff, but just financial literacy in general. People are not debt literate, they don't understand. Forget about exponential growth bias, they don't understand the basics of interesting compounding. We know empirically that people with low financial literacy, they tend to have high transaction costs, they tend to incur higher fees, they tend to use higher costs, borrowing, all that kind of stuff, and they have higher debt loads too. People with less financial knowledge have higher debt loads.

That again probably relates to why debt is often viewed as irresponsible. On the psychology of debt. we know consumers make mistakes. That's an empirical fact. Which kind of effects, I mean, it definitely affects in a lot of cases, the theoretically optimal use of debt. It probably interacts with something about how – I think the choice architecture stuff that we're talking about with Eric Johnson. It kind of ties back to what Robert Merton was talking about with the financial product design, all that kind of stuff, like the way choices are presented to people probably doesn't interact with debt in a very positive way.

Cameron Passmore: like the buy now, pay later.

Ben Felix: I have a note on that. There's a paper from actually Marco Di Maggio, who we've had on the podcast a while ago. It looks at that, and they find that the buy now, pay later significantly increases spending, and consumer spending. We talked about financial literacy, and how that can interact with debt. A lot of households just have different attitudes toward debt, for reasons related to family's specific preferences or cultural influences. In those cases, they just don't want to have debt. You can talk about consumption, and smoothing all you want, but some people just don't want to have debt.

Then on the Robert Frank stuff, I found the expenditure cascades thing that we talked about him to be fascinating, that people adjust their spending based on changes in the income of people around them, as opposed to just their own income. That can cause problems when we have income inequality and the top earners are driving the spending of lower earners. That again, to the extent that that is a problem that can play a pretty ugly role. Then I've already mentioned exponential growth bias, I won't go back into that. But base of all, it's worth maybe reiterating. If someone looks at a purchase based on a sticker price, and a financing rate, it's very easy to misunderstand how much you're actually paying for that thing.

Cameron Passmore: Even more, if you get it down to a monthly payment. Some people are payment focused.

Ben Felix: Yes, definitely. Then having debt – so that’s the kind of ways that psychology can interact with debt becoming a problem. But then once you actually have debt, there are other interesting or concerning psychological interactions. Debt can have a negative impact on subjective well-being, especially when the debt is perceived as a debt. That's an interesting point and that actually comes from a paper by Cassie Holmes. It's kind of fun, you know. You get to a point where it's hard to research a topic without finding research from people that we've had on the podcast.

Cassie had a paper that looked at, whether people view different types of debt as debt and how that interacts with their subjective well-being. The big ones were, people seem to be less likely to mentally label their mortgages as debt. I made the comment earlier that in some ways, mortgage debt is good debt, both economically, and psychologically. That's what I was referring to. But they're more likely to assign debt, the debt label to their student loans. People with student loans have a negative impact on subjective well-being, and people with mortgages don't. In another paper, not from Cassie, mortgages and vehicle loans are associated with increased life satisfaction, increased.

Cameron Passmore: Even the vehicle one, because we know your studies on vehicle ownership.

Ben Felix: Yes. That's luxury vehicles. I think – I haven't looked for research on this, but I would guess that owning a vehicle probably doesn't hurt your well-being too much. Being able to get around and stuff, I don't know. I haven't looked into research on that, though. Mortgages and vehicle loans are associated with increased life satisfaction, and credit card debt, and student loans negatively impact life satisfaction. That kind of lines up with Cassie's research too.

Then, being in debt is also associated with, and these are correlational relationships. But there's a bunch of research on this. High levels of anxiety and depression. Now, again, correlational. We don't know which way the causal relationship is going. High levels of anxiety and depression, reduced marital satisfaction and reduced job satisfaction. Those are all related to higher levels of debt. Then one other one that's just interesting is that, both empirically, there's empirical research that has been done on this and anecdotally. My anecdotal evidence is actually like Dave Ramsey's blog posts, basically. People are more inclined to pay down their smallest debt first. I think that's called the snowball method. Even if those don't have the highest interest cost.

Cameron Passmore: It's like a completion benefit that somebody gets by getting it paid off.

Ben Felix: So you're paying way more interest overall by focusing on the smallest debt, instead of the high – or you may be paying more interest. I mentioned the cultural thing, the family-specific thing where some people might have just a strong aversion to debt. For some low-income households, evidence suggests that reducing debt improves cognitive function reduces anxiety and reduces present bias.

Cameron Passmore: Wow.

Cameron Passmore: Yes. Anyway, I just think it's important to point out that theoretically, people optimize their lifetime consumption. Theoretically, in the traditional basic life cycle model, people will rationally optimize their lifetime consumption and asset allocation using debt. But in reality, some combination of low levels of financial literacy, and common biases, maybe we can call it sub-optimal behaviour, but maybe not, maybe there are behaviours that are optimal, we're just not using the right function to model optimal behaviour. But either way, when you start saying stuff like. "People with debt are miserable." That's probably not optimal behaviour. I think we could probably agree on that.

I think it's important to understand that debt is not bad, but it can get bad, and it can cause real problems for people. But it's also a very useful tool. Okay. That's the broad overview. I want to touch on credit cards. Any comments before we jump into that?

Cameron Passmore: No. Fire away. Looking forward to this part.

Ben Felix: Okay. Credit cards are, of course, I mean, I think everybody's familiar with them. They're a payments technology, but they also offer easy access to high-cost, debt financing. They're commonly used. I mean, I didn't look for statistics on that, but I would guess that a huge majority of people use credit.

Cameron Passmore: When was the last time you carried cash?

Ben Felix: Very, very rarely.

Cameron Passmore: I've carried cash twice since the pandemic started, and that's both times I'm selling little things from the house on Kijiji, but not made a cash purchase. It's incredible.

Ben Felix: Yes. Sometimes there's a farmers' market where I live in the summer, and so I bring cash there because farmer market folk tend to like cash sometimes. Yeah, I agree, in general. When we had the big – there was a big storm, we lost power for a few days, cash was a necessity then.

Cameron Passmore: Well, that's a good argument to keep a little bit of cash at home, which I don't do, but it's a valid point.

Ben Felix: Credit cards are ridiculously convenient, for a lot of reasons and their ease of use. But then they also have other features along with spending, like you get rewards, and you get some levels of insurance, and fraud liability protection, all that kind of stuff. But the big thing, from a consumer psychology perspective, is that they reduce the pain of paying. It's like it's painful to pay for something in cash and the credit card makes that go away. That in turn, empirically seems to influence increased consumer spending. In some studies, people paying with credit cards show a dramatic increase in their willingness to pay relative to a consumer using cash.

People who exhibit present bias, which is the inconsistent preference for smaller rewards now, rather than larger rewards in the future, are more likely to have credit card debt and to have significantly higher amounts of credit card debt, controlling for disposable income, and other socio-demographics, and credit constraints. In addition to spending in general, paying with a credit card has also been shown to increase unhealthy food purchases.

Cameron Passmore: Yes. This is the one that got me looking at your notes. Like, why would the link be there?

Ben Felix: I think it's like it reduces your inhibitions. It makes you more willing to engage in behaviours that you maybe know you shouldn't do.

Cameron Passmore: Yes. It's funny you would spend more money on that, and not spend more money on healthy, perhaps more expensive items.

Ben Felix: I think it's like self-control. It's a self-control thing. You may know you shouldn't be spending more money, but you do anyway and it's the same kind of thing. That's why they tested this. They were testing self-control.

Cameron Passmore: You mentioned that. I saw on the news, a tenant inflation story the other night, interviewing people. Almost all people come out to the grocery store, you look inside their bags, and there are chips on top of their grocery bag. Which, if you looked at the price of chips lately, we don't buy them, but it's unbelievably expensive. I remember hearing how much margin comes from chips and that's why they're always near the checkout counter, right? I would be willing to bet there's a very material part of the margin in grocery stores, but they're super expensive.

Ben Felix: Interesting. I wonder how much of the grocery basket inflation is coming from chips.

Cameron Passmore: You can dig into that next week.

Ben Felix: To compound the psychological problems that credit cards seem to introduce for spending and impulse control. They also tend to have, as I mentioned, extremely high-interest rates when a balance is carried on them. When you make a purchase on a credit card, as a payments tool, there's a 21 day in Canada, a 21-day interest-free grace period. So you make a purchase, there's 21 day grace period before you start paying interest. Yeah.

Cameron Passmore: Yes. Canada started, I think, last October – businesses here can start charging an additional fee at the point of sale if you wish to use a credit card. I don't believe that's allowed in Quebec.

Ben Felix: But have you seen that anywhere?

Cameron Passmore: I have not seen it anywhere. But you think about it from a societal standpoint if that will help reduce people's spending in general.

Ben Felix: Well, I mean, I touch on this later. But the credit card processing fees should theoretically and do seem to empirically drive up the price of consumer goods to account for the fees because the sellers aren't going to eat the fee. They passed on to consumers. Then the whole interesting question is who ends up paying for that.

Cameron Passmore: But it becomes this game for rewards, which cars get the best reward. So if you don't have a card with a reward, you're missing out.

Ben Felix: The distributional effects of credit card fees end up pushing the costs onto the lower-income households who can't get the best reward cards. It's not the right kind of distributional effect. Poorer households end up subsidizing the credit card processing fees for wealthier households who have fancy credit cards.

Cameron Passmore: But I've not seen a single store or restaurant charge that fee. That's been my experience.

Ben Felix: Yes. That would potentially solve the problem, but I don't think it'll be fully integrated. I don't think every store is going to start doing that. I doubt that they would lower their prices either to account for it. I don't know how helpful it's going to be. Okay. So you've got the grace period after you make a purchase. If a balance is carried beyond the grace period, then you start getting charged interest, and that can be very, very high, depending on the card. But as I said earlier, around 20% is not crazy at all. As the interest compounds over time, the total cost of a purchase paid with a credit card can be pretty extreme. Credit cards have a minimum payment. So you've got to repay a minimum amount each billing period, but super low.

In Canada, the minimum payment is either a flat dollar amount, usually $10, plus any interest and fees, or the higher of $1 amount, typically $10, and a percentage of your outstanding balance, typically 3%. Not significant. You've got to pay the minimum because you can have penalties and negative impacts on your credit score if you don't pay the minimum. But if you only pay the minimum, your purchases will end up being a whole lot more expensive. If you have a $2,000 balance, and an 18% interest rate, and make minimum payments, it will take 13 years and 10 months to pay off the full balance. The total cost of paying off your $2,000 initial loan will be $3,800, almost double the initial balance. Not ideal, not an ideal form of financing.

That may all sound bad, like okay, maybe we shouldn't use credit cards, because they tempt us to spend more, and they have really unfavourable financing terms. But as we kind of just went off on a tangent talking about, there's a cost to not using credit cards, because of the rewards situation. There are processing fees that merchants pay and pass on to consumers through prices. If you're not earning rewards, you're paying, you're subsidizing, you're paying through higher cost of goods, higher retail prices. You're the one subsidizing the credit card processing fees.

As I said earlier, a huge portion of, I don't know what – I don't have data on it, but I am not uncomfortable saying that a large portion of purchases is made through credit cards. If you're using cash or a debit card, you're subsidizing the people earning credit card rewards, which is kind of crazy. As I mentioned before, the distributional effects of that are really not ideal. The other thing is, credit card companies want you to use their products, so they do other stuff in addition to rewards. You can get purchase protection depending on the card. You can get travel insurance, you get fraud and liability protection. They make the whole process of consumption very nice. They really do.

They're great products in a lot of ways, but they can be abused and they are abused. One of the economic puzzles related to that abuse is something called a co-holding puzzle where credit card holders maintain a credit card balance, paying 20% interest or whatever. Or I think it's like 15% on average, although that might be an American number. They pay that high-interest rate while also holding cash or other low-expected-return assets. There are a few potential explanations for that. I'm not going to try and go through all of the potential explanations. But when you go through personal finance books, they often recommend co-holding for reasons like having emergency savings built up to avoid going back into debt. It's like, yes, you want to pay down your debt, but you should also build up emergency savings so that you don't have to go back into debt. Very economically inefficient, because you're paying 20% on one hand and earning 1% on the other, or maybe 5% today.

Then the other common personal finance book argument is that you need to remain motivated by building up savings while also paying down debt. I think and I think most economists would agree that if you end up with credit card debt, paying it off, it's like, where else can you get a guaranteed 20% return? You can't. You can't get it anywhere. I think it definitely makes sense if you end up in the position of having a revolving balance on your credit card. Paying it off is like personal finance steps. Number one, pay off your highest-interest debt.

Cameron Passmore: That's 20% after tax.

Ben Felix: Yeah, it's no joke. Okay. To kind of summarize, credit cards are super convenient to the point where they can make it too easy to spend, by removing the pain of paying as it's called. They often come with unique rewards and benefits, which by not getting, you're subsidizing people who are getting them. But they also have these punishingly high-interest rates, if you carry a balance on them.

If you can manage to avoid the temptation of overspending and carrying a balance on a credit card, I think that you should use them. Because you don't want to be the one subsidizing people who are getting cash back and all that kind of stuff. But they absolutely need to be used responsibly. That's the unfortunate thing, is like, they get abused. They get abused by people with poor financial literacy, and people who exhibit a lot of the biases that we've been talking about. I already mentioned this earlier, because you've brought it up.

Buy now, pay later, there's a paper that looks at that and the same general idea. Buy now, pay later lets you break up the cost of your purchase into a few smaller payments. It has similar effects on increasing spending. As we talked about with Erica Alini last week, you can have a real psychological problem for people with overspending. Mortgage debt gets the reputation or gets to be called, in many cases, good debt. I think that's probably a fine name for it. It's good debt because it's secured against a real estate asset, which drives down the cost of borrowing, which is good for the borrower. But it also, because you're securing against an asset that you've purchased, you own an asset, so you're not taking out a loan to consume, or to go on a trip, or whatever. Although you could argue that has other benefits because you're buying an experience in that case. But you're buying an asset that, at least historically, has appreciated at a modest rate, and has been relatively stable. Although individual homes can be a lot more volatile than real estate indexes. Anyway, we'll allow it to be called good debt.

Access to large amounts of borrowed money is often put forward as one of the advantages of buying as opposed to renting. But of course, leverage, borrowing a whole bunch of money to buy an asset can work for or against you. I don't know how strong that argument actually is, especially when you're buying an individual home. In Canada, mortgage interest rates are compounded semi-annually, so the effective rate that you're paying is a little bit higher than the posted rate that you see. Owned homes make up a pretty significant portion of a lot of households' net worth. Typically, people finance their homes with a mortgage. Not a whole lot of people are buying homes with cash.

A mortgage that tends to peak empirically – this is based on international data – tends to peak around middle age and decline towards zero as people get older. Empirically, mortgage borrowing is consistent with the general concept of lifecycle consumption smoothing. I think it does make sense. It's like, the intuition is people don't have the cash to buy a house when they're young. So again, they move economic value backward through time, by borrowing money. They buy a house and then they pay that loan off over the life cycle as their human capital converts into financial capital.

Now, mortgages are complex contracts. It's like trying to dig into this topic, there are so many different directions that you could take and so many different contract features that you can dig into. With Erica Alini, we talked about shopping for the lowest-rate mortgage. Just that is interesting. Just mortgage penalties are an interesting area to explore because a lot of people break their mortgages before the end of the term and end up paying penalties. Given that risk, should you seek the lowest-rate mortgage or should you look for other features like fair penalties, for example?

Now, the typical contract is going to include an amortization schedule. Your 25-year mortgage, so the schedule of repayment, including principal and interest, a contract term, which is the period after which the contract will be renegotiated. Those are two different things. Your amortization might be 25 years. In Canada, typically, mortgage contract terms are five years. In the US, they're typically 30 years. In the UK, they're typically not more than five years.

Cameron Passmore: I didn't know that a 30-year was that typical in the US. That is interesting.

Ben Felix: Yes. That's the most common mortgage term in the US.

Cameron Passmore: Most people, I'm guessing when they sell and move up, which is a tax-free event, I believe in the US. They would port that mortgage with them as that mortgage goes with you.

Ben Felix: I did not look into those details in the US mortgage market.

Cameron Passmore: Interesting, because that's a long-term commitment, 30 years.

Ben Felix: Yes. Well, I think that they typically have built-in, you can pay a little bit more in that long-term contract to be able to break the contract. I think most long-term mortgages in the US have that feature built into them. It's not like in Canada, where if you had a 30-year fixed mortgage, and rates changed, and you tried to break your contract, you'd be liable for hundreds of 1000s of dollars. I don't think it's set up that way in the States. I mean, there's got to be some kind of difference in the markets. Anyway, I'm definitely not an expert on that.

All else equal, a longer amortization will mean lower payments, a longer time needed to pay down the debt, and more overall interest throughout the life of the contract. One of the most important choices that mortgage borrowers are required to make, and this is the one that I decided to dig into, even though there are so many different features you could scrutinize is the choice between fixed and adjustable-rate mortgages. This is the one that everybody when they are buying a house, they always want to know, "Should I go fixed or adjustable?" That's always an interesting discussion. There's been a lot of really good research on this, so that's why I decided to talk about it.

An adjustable rate will vary through the mortgage, and the amount of interest that you're paying will vary through the mortgage term. Well, a fixed rate remains constant in nominal terms. Fixed rates are typically going to be higher than adjustable rates at the beginning of the term because fixed rates are more related to – if it's a five-year contract, your rates are more related to that portion of the fixed-income market. Whereas if you're variable, you're going to behave more like short-term fixed income.

As I mentioned before, in Canada, most mortgages have a contract term of five years or less. Longer-term contracts are available. Actually, I started getting curious and I was looking around. You can get 10-year mortgages from a lot of lenders in Canada. You can even get from one lender, a 25-year mortgage in Canada, although it's a lot more expensive in terms of the interest cost.

We talked about the US, which has 30 years, as the most common term. I think a lot of the research on this, on mortgage choice, is based in the US. I think that if you look at the Canadian mortgage market, most of the mortgages that we would talk about as fixed look a whole lot more variable. Variable is the wrong word. Adjustable. Variables are distinct from adjustable. I'm going to talk about that later. Because at the end of five years, if you choose a five-year fixed mortgage in Canada, after five years, your rate is going to update based on the market. That looks more like a variable rate than a 30-year fixed variable. I said variable again. Adjustable. Maybe people are getting curious about the difference between adjustable and variable.

Cameron Passmore: Oh, I'm sure they're just all at Twitter waiting for this one.

Ben Felix: Common personal finance advice suggests that fixed-rate mortgages are safer than adjustable-rate mortgages because adjustable-rate mortgages have the potential for fluctuating payments. Which of course, everybody listening today, at this moment in history, many people would be living through. I was lucky enough to choose a fixed-rate mortgage when bought our house, which I'm happy about now.

Cameron Passmore: Probably pretty close to the bottom too.

Ben Felix: Would have been tough to get a whole lot lower than we ended up getting, which is consistent with the advice that we'll talk about based on the research here. Okay, sorry. I keep getting distracted. Common personal finance advice suggests that fixed-rate mortgages are safer than adjustable-rate mortgages due to the potential for fluctuating payments with adjustable rates. But that ignores the effects that inflation can have on fixed-rate mortgages. Fixed-rate mortgages are risky in terms of their effect on real wealth over the mortgage term. That's, of course, wealth adjusted for inflation, because the real value of the payments throughout the contract term is highly sensitive to changes in inflation. When inflation is unexpectedly high, fixed-rate borrowers are better off that's a windfall. But when it's unexpectedly low, they're worse off and potentially a lot worse off.

If you lock in a mortgage today, and inflation decreases over the mortgage contract, you will have paid a lot more in real terms than you initially planned nominal payments. If inflation falls and interest rates follow, fixed-rate borrowers can refinance. We talked about Erica Alini's point about not just shopping for the lowest rate, you can face costs and penalties. Even in the absence of those frictions, in a lot of borrowers, and this is an empirical fact, it's quite interesting. Even in the complete absence of penalties and frictions, a lot of borrowers simply fail to refinance when it would be beneficial to do so. A whole bunch of empirical research on that. Yes, pretty interesting.

Adjustable mortgages are safer with respect to real wealth because the payments will adjust if expected inflation and nominal interest rates change, but they're risky in terms of income. So there are two different risks. The fixed mortgages are risky in terms of real wealth. Adjustable mortgages are risky in terms of income because the payments will adjust for inflation. The real payments can fluctuate in the short term due to inflation volatility, which can make budgeting a problem and can cause cashflow issues for people. But it's not fair to say that one is risky and the other isn't. They're risky in different ways and they expose households to different types of risk.

Adjustable mortgages are also exposed to the risk of real interest rates increasing over the contract term. But fixed rates protected against that risk. That's not quite as compelling in Canada, because we don't have super long terms. But if real interest rates increase, and you're a variable borrower, in that case, you can't have a negative impact on wealth over the contract term, which you would have been able to hedge against if you've gotten fixed. Adjustable mortgages will tend to have lower interest rates than fixed mortgages because adjustable mortgages are related to short-term interest rates. While fixed-rate mortgages are related to longer-term rates.

In Canada, so this is the variable versus adjustable thing. In Canada, we have both adjustable and variable mortgages, which are distinct, though often confused and used interchangeably. A variable mortgage has a constant nominal payment through its term, but the interest portion of the payment fluctuates with rates. The result, if rates are going up, it can be negative amortization, where the time needed to repay the loan increases. In more extreme cases of rising rates, you can hit a trigger rate, which is another term that a lot of people have unfortunately gotten familiar with in the current times, which is the rate at which your payments are only covering the interest. If rates go above the trigger rate, you may have to increase your payments. That meant, which can of course be a big expense shock, especially for a household that had been planning for fixed payments, through a variable interest rate.

Now, if you look at the structure of most mortgage debt in Canada when I looked at this, it was data as of the end of 2021, I think. The most reasonable I could find from the Bank of Canada, it's mostly fixed-rate debt. Then within adjustable-rate debt, it's mostly variable, the ones with fixed payments. In general, this is based on two papers from John Campbell, who's an upcoming guest and I will absolutely be asking him about all of this. I mentioned earlier that there are some people on certain topics that you find to just be foundational to all other research, John Campbell is that to the mortgage choice literature.

It's hard to find a paper on mortgage choice that his 2003 paper is not referenced in. In that paper, and then in a follow-up 2015 paper, they find that in general households should prefer adjustable rates over fixed rates and less interest rates are low. Households with large mortgages relative to their income, households with risky labour income, households with higher risk aversion, and households with a low probability of moving will generally find fixed-rate mortgages more attractive. If a household plans to move soon or if they're currently constrained in the amount that they can borrow, the lowest rate mortgage will tend to be more appropriate, which is going to tend to be an adjustable rate.

When the difference in rates between adjustable and fixed-rate mortgages is unusually high, more people will take adjustable rates. When the difference is unusually low, more people will take fixed rates. That's when I said that my mortgage choice was probably rational, given these parameters, like those two points. Households should prefer adjustable rates over fixed rates and less interest rates are low, check. Then the other one is when the spread is unusually low, more people will take fixed rates. When we took our mortgage, I think it was actually – I think the spread was negative. Fixed rates were cheaper than variable at that moment in time, which is not a common occurrence. That's it for –

Cameron Passmore: Good for you. That's awesome. Good summary.

Ben Felix: Hope so. Keeping it interesting.

Cameron Passmore: Good to move on?

Ben Felix: Yes.

Cameron Passmore: All right, let's do a quick review of a past episode. I'm not sure we'll do it in 60 seconds. I don't think I've done one in 60 seconds, but we'll see. So Episode 17 as you remember. Well, Ben, back in 2018, we welcomed Dan Solin, who is a very interesting character. Dan's a former SDNY trial lawyer who represented investors who were harmed by brokers, so this inspired him to jump into our industry to try to help more people. He did this by both being an advisor, but also, he wrote a number of really excellent investment books. That's how I discovered Dan almost 20 years ago. Since then, he's become a very good friend of both you, Ben, and myself, and also our whole team here at PWL.

The interesting thing about Dan's career when you look at it is evidence. Trial lawyer, advisor, author, and now he's a marketing advisor. He's always followed the evidence, and always with a pretty fair dose of skepticism, which probably explains why we get along so well. He's also a really thoughtful and very rational person. Anyways, in the episode, he shared his thoughts on active management with us and the role of the media. We also talked about his famous episode with Jim Cramer, where he absolutely enraged Jim Cramer in an interview, if you remember. That interview was no longer available publicly, which is so sad because it was quite something to see.

Anyways, his career then led them to study the selling process and the link to happiness. The short answer there is so I don't get caught by you again, Ben. That selling is about asking lots of questions, which can lead to a very pleasurable experience for both parties. Anyways, a very wide-ranging insightful conversation, Episode 17, Dan Solin. I encourage you to check it out. Dan's a great guy.

Ben Felix: He is. He is.

Cameron Passmore: All right. We got a book review this week, Ben, which I think ties into so many things. It's going to be a short one this week. The book is Peter Drucker's Five Most Important Questions by Peter Drucker, Frances Hesselbein, and Joan Snyder Kuhl. This links back to our conversation with Shaun Tomson, the former champion surfer and author of the book, Surfer and the Sage. That was episode 235 which kicked off this year. You asked Shaun, the question, Ben, that he said he'd never been asked before, which I thought was interesting. I went back and re-listened to that part of the interview.

You asked him about how having a purpose or a code as he called it can help with financial decision-making. I thought Shaun gave a very thoughtful answer about how people need to be clear about what they want out of life, and how most people just want to get better, to be better, and to help others be better. He put forth that people with purpose are more productive and more motivated. Then he referenced this week's book, Peter Drucker's Five Most Important Questions. Many listeners have heard of Peter Drucker. He is an absolute management legend.

I think Shaun referred to him as the god of management theory. Although Peter Drucker passed away 18 years ago, he has 39 books that live on and are wildly popular, I think it's safe to say. Anyways, this book is very interesting to read. We've had two recent interviews that talk about goal setting, linking to values. I just find it interesting how it kind of – it all links together with Shaun, and these two interviews, and then this book. It all does tie into the importance of understanding what your values and your purpose are to help you make decisions.

Anyways, the five most important questions is short 96 pages, very easy to read. It's about a process for organizations to assess what they are doing, why they're doing it, and what must be done to improve things. I think that while it's about organizations to link back to what Shaun said, it really does apply to individuals as well. Here are the five essential questions to ask. What is our mission? Who is our customer? What does the customer value? What are our results? What is our plan? Drucker says, "It takes courage to look within yourself and your organization to identify strengths and challenges, embrace change, foster innovation, accept customer feedback and look beyond the organization for trends and opportunities, encourage planned abandonment, and demand measurable results.”

The ultimate boundaries of this process, this very simple process are that people and customers will be touched by the organization. That is exactly what Shaun talked about. That's why I think this does relate to individuals. Because if you do have a purpose, and you apply all these things, you can apply these five questions to individuals, households, and to organizations, I think it does fit very well. Here's a quote from the book, "What matters is commitment to the mission, commitment to the customer, commitment to the future, and commitment to innovation."

Here's a cool question that Peter Drucker often asked those whom he works with. What do you want to be remembered for? Shaun framed it as why are you here? Drucker wrote, "You must have overarching goals that add up to a vision for the future, and the immediate question that faces the organization is what to do today to achieve those results.”

Ben Felix: Okay. Can you talk about how the five questions related to household decision-making?

Cameron Passmore: Well, you could think about your household, right? What is our mission as a household? Who's our customer? You become a customer of your household's mission, right?

Ben Felix: The residents of the household are the customers?

Cameron Passmore: That's the way I think about it, right? Your kids could be customers of the mission of the household. What did the six of you value? Did we accomplish it? What are our results? Did we accomplish what we wanted to sell?

Ben Felix: I was having trouble seeing it, but I see it now. I'm glad I asked.

Cameron Passmore: You see it now. You see, you got to work with me. Cool. He then highlights that planning is not an event but rather a continuous process of strengthening what works and abandoning what doesn't work. Talks about systematic feedback, appraising performance, and making ongoing adjustments as conditions change. Here's another quote, "All the first-rate decision-makers I've observed have one very simple rule. If you have a quick consensus on an important matter, don't make the decision. Acclimation means nobody has done the homework.” We've talked about this in the past. All we seek is dissension. Dissension makes better decisions.

I'm going to wrap this up. The only way to have a high degree of satisfaction with life at work and at home is to engage in activities that simultaneously produce happiness and meaning. We've talked about that a ton, right? Drucker's five questions continue to serve as an invaluable resource for helping, create clarity, and perspective while inspiring motivation and action. As Shaun said, they're just beautifully simple. What is our mission? Who is our customer? What does the customer value? What are our results? What is our plan? Really good book, 96 pages, easy read. It's one of those books where you could pull it out every year and reread it.

I wanted to do a quick testament to someone who recently passed away, Dan Wheeler, we've talked a fair amount about regret. I got a bit of regret around Dan. We never got a chance to welcome him to the podcast. But I always thought about having him on because he has such a profound impact on me, and I would argue, on our industry, Dan Wheeler. Very sadly, Dan passed away a couple of weeks ago.

When I first met Dan 21 years ago, I believe, in our offices in Montreal, and also countless training seminars with him over the next decade until he retired. At the time I met him, he was leading a team at Dimensional Fund Advisors that supports advisors. While, today, that sounds totally normal and traditional. I can tell you, his vision for the industry was completely profound. In the 1980s, and I've told you the story, Ben. In the mid-eighties, Dan was an independent advisor who realized he wanted to leave. You could call it the dark side of the commission-based, active picking advice for the market. He wanted to bring what we take for granted today, these academic principles to clients in a fee-based relationship. Totally normal today. Back in the eighties, it was unheard of.

He was using the Vanguard 500 Fund, and then he discovered some of the ideas that the people and the thought leadership that's behind Dimensional, and he found this quite appealing. He actually discovered Dimensional in 1988, reached out to the founders, and convinced them to let him have access to what was then only available to institutions to bring those products to his clients. That turned out to be reasonably successful, and he then convinced Dimensional to let him bring Dimensional retail. Again, we take it for granted today. This was not part of their business plan.

He ended up being wildly successful for Dimensional, building up that part of the business for them. Such that today, the retail advisory side is much bigger than the institutional side of the business, which is kind of cool. I can remember Dan's presentations like they were yesterday, like the energy he would bring was unreal, and the vision he had was unreal. He just believes so much in the power of these ideas combined in a fee-based fiduciary-type environment, and really was redefining investment advice. Normal now. It was not normal 30 years ago. I always had tons of energy, and the thing I appreciate the most, and I can remember these meetings where you would see people like Fama and French present, and you'd be in awe. But it's like, okay, how do you apply that as a mere mortal advisor, right? Dan was that energy and that bridge to say, "We're all just people, you can bring these ideas to your clients." He's had these lines he would say. One I remember, "You can learn this from me, from us, or you can learn in the markets" Or another one, he would say, and I think I've said it on the podcast before. "Investing in factories for example, is like going to a hockey game. You can't leave the game to go get your hotdog, because you could miss when the goals happen. That can happen so quickly.”

Ben Felix: We've used it before for sure.

Cameron Passmore: It's classic, Dan Wheeler. Anyways, Dan was a cohort to a whole pile of advisors through the nineties and 2000s. So much so that Robin Wigglesworth has five pages in his book, Trillions talking about Dan Wheeler, and Robin wrote an incredible eulogy in the Financial Times last week. One of his quotes was, "If you want to see the human face of passive investing revolution, then Dan Wheeler is a good candidate." Anyways, I wanted to give a shout-out. Thank you to Dan. He made a huge difference to me and to our practice.

Ben Felix: Very nice and worthwhile to go through that.

Cameron Passmore: Yes. After show. You were on with TD last week. Is that available?

Ben Felix: Yes. We posted the link in the Rational Reminder community, but only the – so we did a while ago, we recorded an hour of content, talking about factor investing and stuff. They edited that down to a 30-minute webinar. Then, the way that the thing that I did with TD work is that they –I was there on like a webinar call thing. They played the pre-recorded edited, 30-minute thing, and then there was like almost an hour of Q&A with a live audience afterward. Most of the thing was the live Q&A, but the only thing that's been saved, and this is their plan. This is how they do it. The part that gets saved is the 30-minute webinar. So that part's available, but there's a lot of good discussions, I wish that I had recorded and I regretted that afterward because I could have recorded that and then we could have published me answering the questions. A lot of good stuff in there.

Cameron Passmore: Speaking of you answering questions, like you were on with Mr. RIP.

Ben Felix: Retire in progress.

Cameron Passmore: Progress. That was a phenomenal conversation you had with him, a two-hour conversation on Twitch. Twitch world is new to me.

Ben Felix: Me too.

Cameron Passmore: That was an incredible conversation. I thought his style was phenomenal. I thought your questions were phenomenal. So people should go get Twitch on their phones. If you don't have it, then just googled Ben Felix and it pops up right away. Just such a great two-hour conversation.

Ben Felix: I think that'll go up on his YouTube channel too.

Cameron Passmore: Oh, excellent.

Ben Felix: I think it's just called Retire and – what a second let me find it here.

Cameron Passmore: You gave some answers there that I had not heard before that were really good. But it's just the environment, that live environment, and he's got kind of a funky background. It was just so casual. He was he's a very, very good interviewer. I thought that was a really fun conversation.

Ben Felix: His YouTube channel is Mr. RIP, but it's not up yet. Most of his videos are in Italian. Most of our listeners might not go over there and find a bunch of relatable content. But hopefully, that will get posted up there soon.

Cameron Passmore: I want to highlight next week as our conversation with the legendary Charley Ellis, such a great conversation. I wanted to just give highlights and recent content. So have you checked out this Freakonomics podcast content lately on the airline industry? They're doing a series on airlines. It is wild, absolutely wild when you dig into it. I think they're inspired by the disaster that happened with the weather over Christmas and Southwest Airlines. The first episode in this series, it talked about how people adapt to technology. You've got this, virtually a miracle of flight and air travel. I interview all these people, all the complaints. We all hear about, "Oh, the food's terrible, service terrible, the delays" and all these things, right? Well, you're flying, and you're saving enormous amounts of time. This is a miracle. There's a massive metal tube flying through the sky. It talked about that. Then today, they just talked about the technology of how much information goes into flying and how much training the pilots have. There are virtually no commercial airline disasters anymore.

You think about all the variables from the people to the weather, to the physics, to the engineering, all the opportunities for things to go wrong. It is unbelievable. They talk about how you've had this societal decision to come together to make this, was turned out to be this near-perfect experience. They even talk about, I wonder if pilots make better drivers. They looked into – if there's any science around if that's true or not. They talk about how pilots are trained to anticipate things. If we had that better training for automobile drivers, would that improve things or no?

Two other things I want to give a very, very quick shout-out on. I started reading the book, Money Changes Everything by Professor William Goetzmann, who's an upcoming guest. Wow. I'm only like 10% of the way in, it is beautifully brilliant about money.

Ben Felix: Yes. Incredible, incredible book.

Cameron Passmore: He's an incredible writer. It's an incredible subject. You talk about, just like expanding your mind about this. They talked about one thing here. Finance develop knowledge. We learned about the boundaries of the world through merchant voids requiring money and time, underwritten by investors, hopeful for future profit. It was money that enabled that to happen, it's wild.

Another book I highly recommend people check out is Strangers in Paradise by James Grubman. I think we're going to have him on in the fall as a guest. This book, I could not put it down, and it's simply about many people who have this objective of having lots of money and this – they think it's going to be this idyllic paradise. But for the people that are lucky enough to get there, it is not exactly all that you think it is necessarily. It's how do you raise kids in that environment, because you may have come from a modest background, but now your kids are growing up in wealth. Well, your background and their background is now very different. So just a phenomenal book recommended to us by Ben. Thanks to Ben for that.

Also, don't forget our 23 and 23 Book Challenge. Not too late to join. We have a tab on the rationalreminder.ca site. I just finished book number 10 of the year and I don't share that to brag or anything. I just read a little bit every day, and when you do a little bit every day, the books melt away. I was looking through my friends on Beanstack and there are people just cranking out books. Out of my 373 friends, 25 people have read more than four books in February. Some people show up like Amanda S, Zack B, Andrew K, like these people are reading like 13, 12, and eight books in the past 30 days as Andy S. I don't get it. How do you read 13 books? I scroll through the books they're reading and they're no jokes.

Okay. Do you want to read through some recent reviews?

Ben Felix: Yes.

Cameron Passmore: Fire away.

Ben Felix: Olivier from Gatineau, Quebec says, "The podcast is a must-listen. Great podcast. The content is extremely relevant. The information is based on empirical studies and not on opinions and anecdotes. I studied finance at university and work in the field, yet I learned a lot of information to change my vision of finance and influence my personal portfolio management. The topics also influence my personal view of finance and helped me in my decision-making. This is a podcast to listen for anyone looking for quality content." Very nice. Thank you, Olivier.

Cameron Passmore: Yes. Luke from Australia. Apparently, this is his favourite podcast, brought focus on investing and happiness, to put my personal thoughts and decisions in the appropriate context. Academic bases, variety of guests, provide depth, and rigour to the discussion" and he's very appreciative of what we're doing.

Ben Felix: Nervy Gervy from Canada says, "Excellent podcast, grateful for the amount of practical information that is discussed on the show. Best resource like this in Canada.”

Cameron Passmore: Afaniya from Canada, "Surprisingly easy to listen with a really technical content." They've been a long-time listener. I enjoy all the research and data, financial insights of the show with guests I've never heard of, that glad I've been introduced to,” which is the super fun part for us, actually, “even with the contents over my head, the host have great voices, who knew, and an easy style." I guess it's all the mics, Ben. Appreciates the variety like the crypto series and back-to-basics mixed in.

Ben Felix: "Behavioral finance at its finest" from Tyler 1555 from the US. "I listen to the show almost every week. The best part I think is the blend of behavioral finance, academic papers, and chit-chat. Anyone can create Excel sheets and run numbers but the secret to financial success is not letting our emotions and biases trip up a good financial plan." That's a lot of what we talked about today with the debt stuff. "Beyond finances, the host talks about everyday life and creating a happy life. Excellent podcast." Thank you, Tyler.

Cameron Passmore: We're at 975 ratings on Apple podcast. Let's get to a thousand. There must be 25 people listening. Just go ahead and put in a number.

Ben Felix: I thought there were only three people listening at this point.

Cameron Passmore: Maybe that's true. You're right. I should have put this at the top. Recent contacts on LinkedIn, which I love hearing from people. Abhishek in Chicago, Sven Toosgart, Sean and Scott in Ottawa, Jacob in Vancouver, Mandria in Ottawa. Mark the pilot and planner from Lake Tahoe, Rob in London, Anthony in Dubai, Bill in LA, and Gil in Victoria.

Ben Felix: Are these people connected with you or they send you messages?

Cameron Passmore: Both connect, and send messages. Yes. I love hearing from people. It's a small world. If you go on LinkedIn, you'll see how often – there's some connection, you see the common connections on LinkedIn. Do you want to talk about the voluntary contributions in the community? Any update on that?

Ben Felix: Well, since we rolled it out, I think nine or 10 people have – maybe I'll back up. In the Rational Reminder community, which is a very robust place for discussion of topics related to what we discussed in the podcast and many other things, we rolled out a feature where people can make contributions to the costs of hosting the software. Because as the use of the platform increases, as it has been, the cost of hosting goes up. It got to a point where we were kind of like, "Oh, this is getting expensive." We made it possible for people to financially support the community. Since we rolled that out, nine or 10 people have signed up to do that for varying amounts from $3 to $10 a month, which we appreciate. So if anybody listening enjoys spending time in the Rational Reminder community, we definitely appreciate contributions to the hosting costs.

Cameron Passmore: I want to highlight again, the meetups are coming up quickly. So we're having a Rational Reminder meetup in Ottawa on March 21, be like five o'clock. March 28, in Montreal, and then we're going to be in Toronto in September. You can email us info at rationalreminder.ca If you're interested in coming with a ton of orders in the store last month for our free promo. Lots of merch left.

Ben Felix: That's a beanie for our American listeners.

Cameron Passmore: We had a lot of orders come in. There are a lot of people who actually post it on Twitter, I'm like, "Man, do we give away a lot of stuff." The hat, which is free, the cozy was free, pair of socks are free along with a mug or a t-shirt. I was like, "Man!" And we give free shipping in North America. So like this great giveaway. That's okay.

Ben Felix: Just equipping people with Rational Reminder – subsidized Rational Reminder –

Cameron Passmore: Exactly. It's just to get the brand out there, I guess. Anyways, we're both on Twitter. I love connecting on LinkedIn. Ben, any closing thoughts?

Ben Felix: Always appreciate feedback on the episodes. We get maybe 10 or 15 comments on YouTube, and maybe roughly the same – well, depends on the episode. Sometimes they're like hundreds of comments if it's a thing people want to discuss, or if it's controversial in some way. But on average, we get whatever, 20 comments from people giving us their thoughts on the episode. We always appreciate hearing what people think. It's nice to have that feedback loop and to hear if what we're talking about is interesting, and relevant, and if it resonated, and all that kind of stuff.

So if you like, we appreciate hearing any feedback on the episode, especially since we've been kind of exploring topics that are somewhat different from what we had been. I think this is the first time we've talked about debt like this in any level of detail. We usually talk about more investing-related stuff. We tried to talk about financial planning-related stuff for a while, but never got really good momentum on that. Investing is just so much more fun to talk about. Anyway, we appreciate any feedback.

Cameron Passmore: Yes. We got a great lineup of guests. I think we only have – what do we say? Seven or eight spots left to fill this year? Maybe not even that many.

Ben Felix: The guest preparation for the next three months is going to be – it's going to be very heavy. It's going to be long –

Cameron Passmore: This book is no joke.

Ben Felix: Yes, and that's just this book.

Cameron Passmore: Oh, I know.

Ben Felix: He has a tremendous body of academic research as well. So it's, yeah, and that's not even – I don't even know. I don't know if that's going to be the heaviest preparation because John Campbell's work is very dense and quantitative. I don't know. His book is a literal Ph.D. textbook. It's just different.

Cameron Passmore: Yes. Yes, So we're getting back into the heavy-duty stuff again soon.

Ben Felix: Yes.

Cameron Passmore: Charley Ellis next week. Daniel Pink's in two weeks, I think. Cool. All right. Wrap It Up.

Ben Felix: Wrap It Up.

Cameron Passmore: All right. Thanks, everybody for listening and have a great week.

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Extra References:

The role of debt

'Life Cycle, Individual Thrift, and the Wealth of Nations' — https://www.jstor.org/stable/1813352

'Diversification Across Time' — https://jpm.pm-research.com/content/39/2/73

'Debt literacy, financial experiences, and over indebtedness' — https://www.researchgate.net/publication/282436829_Debt_Literacy_Financial_Experiences_and_Over_Indebtedness

'Restoring Rational Choice: The Challenge of Consumer Financial Regulation' — https://scholar.harvard.edu/files/campbell/files/elylecturejan182016.pdf

'Attitudes towards Debt and Debt Behavior' — https://onlinelibrary.wiley.com/doi/abs/10.1111/sjoe.12419

'Expenditure Cascades' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1690612

'Consumer debt and satisfaction in life' — https://www.researchgate.net/publication/341564180_Consumer_debt_and_satisfaction_in_life

'Good credit, bad credit: The differential role of the sources of debt in life satisfaction' — https://onlinelibrary.wiley.com/doi/full/10.1111/joca.12388

'Debt and Overindebtedness: Psychological Evidence and its Policy Implications' — https://spssi.onlinelibrary.wiley.com/doi/full/10.1111/sipr.12074

'Winning the Battle but Losing the War: The Psychology of Debt Management' — https://www.researchgate.net/publication/249644425_Winning_the_Battle_But_Losing_the_War_The_Psychology_of_Debt_Management

'Reducing debt improves psychological functioning and changes decision-making in the poor' —https://www.researchgate.net/publication/332472709_Reducing_debt_improves_psychological_functioning_and_changes_decision-making_in_the_poor

Credit cards

'The Effect of Payment Transparency on Consumption: Quasi-Experiments from the Field' — https://www.jstor.org/stable/40216497

'Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay' — https://www.researchgate.net/publication/233496571_Always_Leave_Home_Without_It_A_Further_Investigation_of_the_Credit-Card_Effect_on_Willingness_to_Pay

'Present-Biased Preferences and Credit Card Borrowing' — https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/3531/AEJ_Meier_Sprenger.pdf

'How Credit Card Payments Increase Unhealthy Food Purchases: Visceral Regulation of Vices' — https://www.jstor.org/stable/10.1086/657331

'Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada' — https://www.bankofcanada.ca/2021/02/staff-working-paper-2021-8/

'Popular Personal Financial Advice versus the Professors' — https://www.nber.org/papers/w30395

'Buy Now, Pay Later Credit: User Characteristics and Effects on Spending Patterns' — https://www.nber.org/papers/w30508

Mortgages

'Report of the Household Finance Committee' — https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/HFCRA28D0415E2144A009112DD314ECF5C07.PDF

'Household Risk Management and Optimal Mortgage Choice' —https://www.jstor.org/stable/25053944

'Failure to refinance' — https://www.nber.org/papers/w20401

'A Model of Mortgage Default' — https://scholar.harvard.edu/files/campbell/files/mortdefault13022014.pdf