How do you view debt?

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Elsebet
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Re: How do you view debt?

Post by Elsebet »

I'm ok with debt that is backed by cash collateral pr something tangible. I include cars and a home in that category. A car gets me to work and I live in the house. I could sell both/either if a bad enough situation arose, at the risk that I'd lose money. I have a 30k HELOC that is backed by 30k in cash in case I had to pay it off immediately (only 8k used currently for a new well).

I had to take out student loans to pay for my tuition, it would have been hard to afford otherwise. I did work part or full-time all the way through, but most of that paid for my necessities without much extra. I don't understand how kids paid for college now, it was a struggle for me from 1996-2001 and I ended up with only 30k in debt. I was VERY lucky to have loans, grants, work/study, and when I got a full-time job while still in college I had a small amount of tuition reimbursement from my employer otherwise it would have been worse. Still that pales in comparison to some college bills today.

The kind of debt I'm not okay with is for optional things like travel and stuff I don't really need. If I can't pay for that stuff with cash then I don't buy it.
"...the man who adapts himself to his slender means and makes himself wealthy on a little sum, is the truly rich man..." ~Seneca
stoptothink
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Re: How do you view debt?

Post by stoptothink »

Elsebet wrote: I don't understand how kids paid for college now, it was a struggle for me from 1996-2001 and I ended up with only 30k in debt. I was VERY lucky to have loans, grants, work/study, and when I got a full-time job while still in college I had a small amount of tuition reimbursement from my employer otherwise it would have been worse.
Like I did...slowly. I have an admittedly irrational fear of debt and refused to take out loans for school. It made me pursue scholarships and grants that much more seriously and also greatly consider the costs of different options. I worked full-time through 8yrs of grad school and finished in '12, after having most of my undergrad covered by scholarships. When I finished school I was 31, but I did have a very established work history which put me a notch above other newly minted PhD's, and of course no debt (and already sizable retirement).

FWIW, my younger (step)sister will complete her undergrad this winter at 23, having never taking out a loan as well. She's worked hard in various jobs and saved, and she chose one of the cheapest (but still pretty highly regarded) schools in the country. My wife is also going back to school to complete her undergrad; she'll do it while working full-time, being a mother to two, and we'll pay out of pocket. No doubt it is difficult, but a lot of people do it even today.
Engineer250
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Re: How do you view debt?

Post by Engineer250 »

stoptothink wrote:
Elsebet wrote: I don't understand how kids paid for college now, it was a struggle for me from 1996-2001 and I ended up with only 30k in debt. I was VERY lucky to have loans, grants, work/study, and when I got a full-time job while still in college I had a small amount of tuition reimbursement from my employer otherwise it would have been worse.
Like I did...slowly. I have an admittedly irrational fear of debt and refused to take out loans for school. It made me pursue scholarships and grants that much more seriously and also greatly consider the costs of different options. I worked full-time through 8yrs of grad school and finished in '12, after having most of my undergrad covered by scholarships. When I finished school I was 31, but I did have a very established work history which put me a notch above other newly minted PhD's, and of course no debt (and already sizable retirement).

FWIW, my younger (step)sister will complete her undergrad this winter at 23, having never taking out a loan as well. She's worked hard in various jobs and saved, and she chose one of the cheapest (but still pretty highly regarded) schools in the country. My wife is also going back to school to complete her undergrad; she'll do it while working full-time, being a mother to two, and we'll pay out of pocket. No doubt it is difficult, but a lot of people do it even today.
Hopefully you aren't judging those who don't have other options. I lived at home for my first degree and worked part time. I remember doing my taxes and I made about $10k a year at most. That would have just barely been enough to cover tuition, but maybe not gas and books as well, and cost of living on campus was at least another $10k. If I didn't have my parents helping with the tuition and their home to live in rent free I'd have had to take on student loans. My 2nd degree I was working full time and had tuition assistance from my employer as well as a spouse who made more than me so we were able to cover the 2/3rds of my part time tuition that my employer didn't cover. My university only lets a student go part time for medical reasons, or if they work more than 30 hours a week, an option not available to many. At the time I was in school for degree #2 we were well underway for the Great Recession and many millenials were in school precisely because they couldn't get jobs.

I have to take out student loans for my spouse now. FAFSA seems to think I can cover expenses up to 33% of my income. If only. Tuition at my local public university has gone up 214% in the last 20 years. It has gone up 83% alone in the last 10 years. Budget cuts make things worse for students. Those with decent parental income or spousal income are unlikely to get aid these days. I strongly dislike having to take out student loans. I am extremely thankful my parents made me stay at home and managed to chip in enough I didn't have loans from my first degree, and that I had a stable enough job for my 2nd I didn't accrue any more then. But the idea that the average person now can get a degree without loans is a dream of only the poorest or the upper classes. The middle class simply can't keep up with this kind of tuition inflation.
Where the tides of fortune take us, no man can know.
mptfan
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Re: How do you view debt?

Post by mptfan »

Engineer250 wrote:The middle class simply can't keep up with this kind of tuition inflation.
I guess that depends on how you define "middle class."
stoptothink
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Re: How do you view debt?

Post by stoptothink »

Engineer250 wrote:
stoptothink wrote:
Elsebet wrote: I don't understand how kids paid for college now, it was a struggle for me from 1996-2001 and I ended up with only 30k in debt. I was VERY lucky to have loans, grants, work/study, and when I got a full-time job while still in college I had a small amount of tuition reimbursement from my employer otherwise it would have been worse.
Like I did...slowly. I have an admittedly irrational fear of debt and refused to take out loans for school. It made me pursue scholarships and grants that much more seriously and also greatly consider the costs of different options. I worked full-time through 8yrs of grad school and finished in '12, after having most of my undergrad covered by scholarships. When I finished school I was 31, but I did have a very established work history which put me a notch above other newly minted PhD's, and of course no debt (and already sizable retirement).

FWIW, my younger (step)sister will complete her undergrad this winter at 23, having never taking out a loan as well. She's worked hard in various jobs and saved, and she chose one of the cheapest (but still pretty highly regarded) schools in the country. My wife is also going back to school to complete her undergrad; she'll do it while working full-time, being a mother to two, and we'll pay out of pocket. No doubt it is difficult, but a lot of people do it even today.
Hopefully you aren't judging those who don't have other options. I lived at home for my first degree and worked part time. I remember doing my taxes and I made about $10k a year at most. That would have just barely been enough to cover tuition, but maybe not gas and books as well, and cost of living on campus was at least another $10k. If I didn't have my parents helping with the tuition and their home to live in rent free I'd have had to take on student loans. My 2nd degree I was working full time and had tuition assistance from my employer as well as a spouse who made more than me so we were able to cover the 2/3rds of my part time tuition that my employer didn't cover. My university only lets a student go part time for medical reasons, or if they work more than 30 hours a week, an option not available to many. At the time I was in school for degree #2 we were well underway for the Great Recession and many millenials were in school precisely because they couldn't get jobs.

I have to take out student loans for my spouse now. FAFSA seems to think I can cover expenses up to 33% of my income. If only. Tuition at my local public university has gone up 214% in the last 20 years. It has gone up 83% alone in the last 10 years. Budget cuts make things worse for students. Those with decent parental income or spousal income are unlikely to get aid these days. I strongly dislike having to take out student loans. I am extremely thankful my parents made me stay at home and managed to chip in enough I didn't have loans from my first degree, and that I had a stable enough job for my 2nd I didn't accrue any more then. But the idea that the average person now can get a degree without loans is a dream of only the poorest or the upper classes. The middle class simply can't keep up with this kind of tuition inflation.
Not judging anybody, there are a million ways to skin a cat. I don't look down upon those who take out school loans, that would be ridiculous, especially considering it probably is the best way for a lot (if not most) people. I simply chose a different route, primarily because I have an irrational debt phobia. I have no way of knowing if I made the right decision, but things have ultimately worked out.

My only point is that I often hear that it is impossible today to complete your education without debt unless you get the parental scholarship. I am one of several examples within my own family that that isn't necessarily true. There are ways to do it debt free, you just may not like that way (ie. I went to Houston over Cornell for my MS because it offered a much better financial situation, and I worked and saved for 4yrs between undergrad and starting my MS) or it may simply not be the best way for you personally.
Engineer250
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Re: How do you view debt?

Post by Engineer250 »

mptfan wrote:
Engineer250 wrote:The middle class simply can't keep up with this kind of tuition inflation.
I guess that depends on how you define "middle class."
Valid point. I'm pretty squarely in the 15% tax bracket. My state must consider my middle class since we do qualify for the "middle class scholarship" that on a sliding scale covers between 10 and 40% of fees. Looks like we got 27% of total tuition this year. Just think if my spouse and I were not married and they were just shacking up with me instead. They are old enough to qualify as independent adult and wouldn't have my income to bog them down on financial aid. Not to mention I have to report our pathetic emergency fund every year. Penalized for doing all the things responsible adults are supposed to do. I'm just pointing out in-state tuition at our local public university has gone up 200+% in the last 20 years and 80+% in the last 10 years. No one's salary is going up that fast.
Where the tides of fortune take us, no man can know.
691175002
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Re: How do you view debt?

Post by 691175002 »

I have no problem with personal debt as long as it can be fully covered by marketable (and preferably liquid) assets.

This kind of situation could occur if your investments have large capital gains, so you would rather finance a large purchase instead of selling assets. Say 15k of debt (at good interest rates) when you have 200k+ of savings is no risk.

I would never be comfortable with a negative net worth, or even a net worth that is insufficient to cover at least a year of living expenses.
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Toons
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Re: How do you view debt?

Post by Toons »

A Corrosive Ball And Chain,,,,,
That for some reason seems to get heavier,,
As you Drag It Through Life.
Cut.,,the chain.
Liberate Yourself
:mrgreen: :mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
pennywise
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Re: How do you view debt?

Post by pennywise »

Like I said in my post, my position on debt is irrational and psychological. For most facets of life, I tend to be very rational (engineer).

On the other hand, I just felt uneasy/had worries sleeping at night when I had a mortgage. Felt much better and calmer when I paid it off. Must be something in my childhood or culture/family/subconscious that I don't understand.
For us (husband and me) and perhaps others who feel as above, the unease is probably related to a sense of control. A mortgage places control of one of the most primal and basic human needs/wants-safe shelter-into someone else's hands in the sense that it can be taken away by the entity who is holding the loan.

Once a mortgage is gone and there is full ownership ie control, no longer is there a risk that 'someone else' will take one's home away. No matter what happens there will be a roof over one's head and a safe place in the world that can't be taken by others. It is perhaps less than coldly rational viewed on a balance sheet/investment/leverage sense. But it's deeply human and understandable I think.

And perhaps even more understandable when factoring in an engineer's mind. My spouse is a systems analyst and anecdotally I've found that analytical, quantitative minded people often don't handle lack of autonomy/control too well :wink:
protagonist
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Re: How do you view debt?

Post by protagonist »

In addition to all the financial disadvantages of debt outlined above, there are the psychological ones, which I don't think have been addressed.

The purpose of life (for me) is much more to be happy than to be rich, and the two don't always move in tandem.

And debt is anxiety-provoking....besides which, who wants to have to write another check each month?

Do you recall that exhilarating feeling you had whenever you paid off debt, regardless of whether it was a student loan, a car loan or a mortgage? It just FEELS GOOD to not owe anything and to actually own what you have.

This is hard to put a numerical value on....it is priceless.

So combined with the fact that debt almost always involves losing money cf. inflation (ok, there is that rare 1% car loan that you can get while you stash your money in a CD at 2% but those are few and far between).....there is the risk factor (like when your Florida property value dropped 70% in the last real estate bubble pop), the hassle factor (dealing with banks, writing checks, etc), and, perhaps most significant, the postponement of joy factor when you finally pay it off and feel great about being free.

The latter is no small potatoes. Life is about more than just dollars and cents.
SUgwoz
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Re: How do you view debt?

Post by SUgwoz »

Debt should be feared but also utilized. Growing up in a lower income household we tended to be risk adverse, but also knew when situations arise you have to utilize debt for your benefit. I will gladly slowly payoff my student loan at it's 1.6% rate, because more often not I can find ways to earn more on that money as well as deduct the small amount on my taxes. Also take advantage of market conditions, acquired my first mortgaged after the housing bust. A mortgage payment that is less than a rent payment for an average size apartment is worth it, nevermind the eventual upswing in housing that occurred. Also take full advantage of CC rewards, pay full each month and collect the cash back.

That being said I draw the line on depreciating assets, will only borrow if the rate is 0%. I still prefer the notion of purchasing a cheaper used car with cash vs. purchasing a new car with low interest like 0.9%.
dsmil
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Re: How do you view debt?

Post by dsmil »

Early in my accumulation phase, my thought is that I'd rather have $50k in the bank and $50k in loans, than $0 of both. It makes me feel more secure in the case of an emergency. I've generally tried to save 10% of my income in a Roth before making extra student loan payments. This is especially nice if the emergency fund isn't completely built up, because the Roth contributions are there if needed.
mptfan
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Re: How do you view debt?

Post by mptfan »

SUgwoz wrote: That being said I draw the line on depreciating assets, will only borrow if the rate is 0%. I still prefer the notion of purchasing a cheaper used car with cash vs. purchasing a new car with low interest like 0.9%.
Sometimes I hear people justify a new car loan because the interest rate was 0% or some very low number. While it may be true that the loan may not cost anything or almost nothing in terms of interest, there is a more pernicious factor at work that many people ignore... many people spend more on a new car than they otherwise would if they were not able to get that 0% loan and they had to pay for the car without borrowing money and they had to write a check for the full amount with actual money, and by doing so, then end up with more debt.
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Earl Lemongrab
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Re: How do you view debt?

Post by Earl Lemongrab »

pennywise wrote:For us (husband and me) and perhaps others who feel as above, the unease is probably related to a sense of control. A mortgage places control of one of the most primal and basic human needs/wants-safe shelter-into someone else's hands in the sense that it can be taken away by the entity who is holding the loan.

Once a mortgage is gone and there is full ownership ie control, no longer is there a risk that 'someone else' will take one's home away. No matter what happens there will be a roof over one's head and a safe place in the world that can't be taken by others. It is perhaps less than coldly rational viewed on a balance sheet/investment/leverage sense. But it's deeply human and understandable I think.
Yet people rent their living space, which is even less control. I have done both, and in neither case did I have any sense of unease. Ownership with mortgage has the advantage that as long as you make that payment (and taxes) you're basically safe. If you're renting, they can send you a letter saying, "We will not be renewing your lease, please vacate by XXXX." Not a thing you can do. And I had that happen.

You can always find something to fret about if you're the type that frets. I'm not, so my home loan bothers me not in the slightest.

Earl
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Earl Lemongrab
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Re: How do you view debt?

Post by Earl Lemongrab »

mptfan wrote:Sometimes I hear people justify a new car loan because the interest rate was 0% or some very low number. While it may be true that the loan may not cost anything or almost nothing in terms of interest, there is a more pernicious factor at work that many people ignore... many people spend more on a new car than they otherwise would if they were not able to get that 0% loan and they had to pay for the car without borrowing money and they had to write a check for the full amount with actual money, and by doing so, then end up with more debt.
I don't spend a lot of time worrying about what other people do. I can only control what I do. Credit or loans has no effect on what I spend. If I were in the market for a new vehicle (I generally only buy used) I would first make the choice based on what I wanted to spend, negotiate the best deal I could, then ask about financing. Or look into financing from a credit union or similar. That wouldn't affect the first part of the process.

Earl
mptfan
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Re: How do you view debt?

Post by mptfan »

Earl Lemongrab wrote: I don't spend a lot of time worrying about what other people do.
Neither do I.
hudson
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Re: How do you view debt?

Post by hudson »

nisiprius wrote:Image
Agree!
I used to believe that debt was OK. I believed that debt was necessary for the purchase of a vehicle or a house...or to help pay for a college education....or to remodel a house. At some point around age 50, I decided to clear my debts and have no more....unless absolutely necessary. Now if I want to get a big ticket item, I insist on having the money in the bank first.

I would love to visit Dogtown, Massachusetts and tour the Babson Boulders.
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HomerJ
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Re: How do you view debt?

Post by HomerJ »

Texanbybirth wrote:like the plague
This. Paid off the house a few years back. This allowed my wife to quit a job she hated without worry, because my salary alone could then cash-flow our expenses.
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Elsebet
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Re: How do you view debt?

Post by Elsebet »

pennywise wrote: Once a mortgage is gone and there is full ownership ie control, no longer is there a risk that 'someone else' will take one's home away. No matter what happens there will be a roof over one's head and a safe place in the world that can't be taken by others. It is perhaps less than coldly rational viewed on a balance sheet/investment/leverage sense. But it's deeply human and understandable I think.
I'm nitpicking, but you'd still have to pay property taxes or risk foreclosure even without a mortgage. Technically I'd also include maintenance, since if you can't pay for a failing roof it won't be much of a shelter for long. :)
"...the man who adapts himself to his slender means and makes himself wealthy on a little sum, is the truly rich man..." ~Seneca
NotWhoYouThink
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Re: How do you view debt?

Post by NotWhoYouThink »

Kind of like electricity. It's useful, but you pay for it and it can be dangerous if not handled correctly.
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HomerJ
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Re: How do you view debt?

Post by HomerJ »

never mind
Last edited by HomerJ on Wed Aug 24, 2016 2:53 pm, edited 1 time in total.
harikaried
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Re: How do you view debt?

Post by harikaried »

AlohaJoe wrote:The hospital was built with a bond.
A quick search shows this is the only mention of bonds. I wonder how people view bonds ("an instrument of indebtedness of the bond issuer to the holders")?
ks289
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Re: How do you view debt?

Post by ks289 »

I appreciate the risk aspect of debt, but I also value the potential financial benefits of leverage (namely mortgage and student loan debt). My family has benefitted greatly from taking more risk by not paying off debt aggressively to this point. No guarantees for the future of course.

Not paying off my mortgage over the last 5 years in favor of investing in a taxable account has yielded returns which outpace my mortgage interest rate (with deduction less than 2%).

A large portion of my wife's student loans were forgiven for working in an underserved area, and other such programs exist which WCI can talk about.
PandaBear
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Re: How do you view debt?

Post by PandaBear »

You know how in Dante's Inferno he describes the various circles of hell and the deeper you go the worse it gets to the point where at the end it's Brutus and Gaius Cassius with Judas Iscariot in the middle all being chewed by a monster for all eternity? I think that's a pretty good description of debt in my mind.
protagonist
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Re: How do you view debt?

Post by protagonist »

Earl Lemongrab wrote: Yet people rent their living space, which is even less control. I have done both, and in neither case did I have any sense of unease. Ownership with mortgage has the advantage that as long as you make that payment (and taxes) you're basically safe.

Earl
I inherited a home in Florida in 2005 that was appraised at $260,000. It was, fortunately, paid off in full.

When the bubble popped the value of the home (based on similar ones selling in the area) dropped to , tops, $80K, and maybe as little as 60-70K. Remember, sale also involves 6% commission and other costs.

Now, many years later, the market has bounced back and it is probably worth 100-150K if I sold it today (but there were all those years of carrying costs).

Imagine my situation had I bought the home for $260K with 20% down and mortgaged the rest at 2005 mortgage rates. Anything a landlord would have done to me instead would be small change by comparison.
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Earl Lemongrab
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Re: How do you view debt?

Post by Earl Lemongrab »

protagonist wrote:I inherited a home in Florida in 2005 that was appraised at $260,000. It was, fortunately, paid off in full.

When the bubble popped the value of the home (based on similar ones selling in the area) dropped to , tops, $80K, and maybe as little as 60-70K. Remember, sale also involves 6% commission and other costs.

Now, many years later, the market has bounced back and it is probably worth 100-150K if I sold it today (but there were all those years of carrying costs).

Imagine my situation had I bought the home for $260K with 20% down and mortgaged the rest at 2005 mortgage rates. Anything a landlord would have done to me instead would be small change by comparison.
Why, what would your situation have been? The mortgage payment didn't change because the value of the house went down. It's true that had you needed to sell for some reason, you'd have lost money, but that would be true whether you paid cash or took a loan. The only thing different would be when you paid the money you lost.

Earl
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SmileyFace
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Re: How do you view debt?

Post by SmileyFace »

Church Lady wrote:Never finance a depreciating asset
Unless you have a guaranteed rate of return higher than the debt. I was about to buy my last car with cash when the dealer encouraged me to finance it through them with 0% financing. I simply stuck the cash I was going to use in a high-yield savings account which makes the monthly payment.

Debt provides great leverage when used properly. For almost every kind of debt you can talk about the right-amount versus going too far. Examples:
1) student loans: Might be necessary to increase earnings potential. Without them I never would have gotten a decent salary in life. Of course a lot of folks go too far here - students don't realize what they are doing and oftentimes choose a "dream school" over a school which provides better value putting them into much more debt than is necessary to get a good salary. A friend's son chose a "dream school" at $70K per year versus a school that would provide a merit scholarship with out of pocket being $20K a year. The boy is taking out unsubsidized loans. Crazy....
2) Primary home mortgage: Can save you from paying the mortgage and contributing to the equity of a landlord. I bought a home ASAP when I ran the numbers and realized how quickly I could build home-equity versus investing in someone else's equity through rent payments. Of course lots of folks go too far here taking on more debt than they should - whatever mortgage they tell you that you can afford - cut the number in half and that's a better number of what you should really take out and then pay it down as quickly as possible.
3) New Car Loans at 0% offer a great value. If you are being a car with low depreciation and plan on keeping it for 10 years this provides a great deal. Of course many folks will pay too much to finance cars they can't really afford unaware of how they are throwing money away.
4) For credit card debt - I can't think of any good cases where this can be a good thing. Always a bad thing.
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Earl Lemongrab
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Re: How do you view debt?

Post by Earl Lemongrab »

I'm not sure what "depreciating asset" has to do with whether you finance it or not. Money is money.

Earl
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SmileyFace
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Re: How do you view debt?

Post by SmileyFace »

Earl Lemongrab wrote:I'm not sure what "depreciating asset" has to do with whether you finance it or not. Money is money.

Earl
You probably know this but this statement has been contested in many places. If you google "finance depreciating asset" you can see where various blogs/finance-sites sit on this.

I personally don't like the generalization (most generalizations I don't like for that matter as folks follow them when the circumstances don't dictate). This one of the many Ramsey generalization that don't always apply.
Here's a good rebuttal:
https://www.biggerpockets.com/forums/62 ... iabilities
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HomerJ
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Re: How do you view debt?

Post by HomerJ »

Earl Lemongrab wrote:that had you needed to sell for some reason
FYI

A wide-spread housing crash is often correlated with job losses, AND stock losses. Funny how that works.

House value could drop in half, stocks could drop in half, and you could lose your job. At the same time.

But you'd still owe the same amount as before.

I don't like debt.
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Earl Lemongrab
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Re: How do you view debt?

Post by Earl Lemongrab »

HomerJ wrote:
Earl Lemongrab wrote:that had you needed to sell for some reason
FYI

A wide-spread housing crash is often correlated with job losses, AND stock losses. Funny how that works.

House value could drop in half, stocks could drop in half, and you could lose your job. At the same time.

But you'd still owe the same amount as before.
Yes, but so what? You only need enough cash flow to cover your monthly payment. There's no margin call on your house because the value dropped. Now, if you took out the mortgage and blew the money on spending instead of investing, then you might have some trouble.

Earl
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whodidntante
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Re: How do you view debt?

Post by whodidntante »

Some people feel secure when they have no debt. I feel secure when I have liquidity. I don't like expensive, hard to get debt. But I like this easy money environment.

I monitor my finances daily, and I have decided to take the debt I have. I should call Dave Ramsey just to hear him roar. :sharebeer
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HomerJ
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Re: How do you view debt?

Post by HomerJ »

Earl Lemongrab wrote:
HomerJ wrote:
Earl Lemongrab wrote:that had you needed to sell for some reason
FYI

A wide-spread housing crash is often correlated with job losses, AND stock losses. Funny how that works.

House value could drop in half, stocks could drop in half, and you could lose your job. At the same time.

But you'd still owe the same amount as before.
Yes, but so what? You only need enough cash flow to cover your monthly payment. There's no margin call on your house because the value dropped. Now, if you took out the mortgage and blew the money on spending instead of investing, then you might have some trouble.

Earl
Job = cash flow
No job = no cash flow.

(once the emergency fund runs out)

Pulling from investments is indeed a solution, but like I said before, stock market can crash at the same time housing crashes at the same time you lose your job... Like... it JUST happened to many people. And you better not be counting on the market recovering so fast next time either.

It might, but you better not be counting on a fast recovery for your plan to work.
Last edited by HomerJ on Wed Aug 24, 2016 5:42 pm, edited 2 times in total.
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HomerJ
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Re: How do you view debt?

Post by HomerJ »

Look, it's good that you are fine paying 3% interest to a bank, while your investments are making 6%.

But nothing is guaranteed in life, and that may not happen going forward. It probably will, but it isn't guaranteed.

And if you have any money at all in bonds, that's money that's doing nothing, since you are paying 3% on your mortgage while making 3% on your bonds (with a chance to lose money if interest rates go up).
carofe
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Re: How do you view debt?

Post by carofe »

There is no way you can live without debt in the USA all your life. Basic needs like transportation (car purchases, repairs bills), and medical expenses are so high that they can get you in debt fairly easy. Especially when you are just starting your life with no savings and low paying jobs.

People tend to blame the consumerism of those that get in credit card debts, but I wonder if most of the credit card debts in America are because of Hospital bills and Car repairs that happened before you weren't able to save enough, or because you couldn't afford to buy a good health insurance so you got stuck with a bad one.

It is like a race, unexpected expenses frequency vs rainy day funding speed. You always hope you will win the race one day, probably when you are like 40?

And regarding mortgage, there was a time when only people with inheritance and somehow a lot of money were able to buy properties, so the city real estate was controlled by a few families fixing up whatever rental price they wanted to set. Nowadays we have the mortgages so the middle class families can buy their own homes. I think I would rather have the problems we have now than the problems we used to have many years ago. Remember the game Monopoly? That's what it used to happen when the middle class wasn't able to buy houses.
US Total Stock Market + Intermediate Term Bond. That's it.
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JDaniels
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Re: How do you view debt?

Post by JDaniels »

As a four letter word.
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LetItRide
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Re: How do you view debt?

Post by LetItRide »

Hector wrote:I think
- taking student debt is not bad if expected return is better than opportunity cost.
- taking mortgage is not bad if buying is better than renting.
- taking routine credit card debt and paying every month is not bad.
- credit card debt is not bad it if is taken at 0% with no fees.
- borrowing is not bad to make investment or do business if you are certain of making higher return than interest on borrowing.
Agree with Hector - Be responsible (oh wait - that is no fun, why would I want to do that?)
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Earl Lemongrab
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Re: How do you view debt?

Post by Earl Lemongrab »

HomerJ wrote:Job = cash flow
No job = no cash flow.

(once the emergency fund runs out)

Pulling from investments is indeed a solution, but like I said before, stock market can crash at the same time housing crashes at the same time you lose your job... Like... it JUST happened to many people. And you better not be counting on the market recovering so fast next time either.
Right, but you don't need all of it, or even a lot of it all at once. If you financed that house with a 208k mortgage at say 3.75% over 30 years, you'd owe a shade under $1000 per month. So, with a job loss, after a reasonable emergency fund runs dry, you still only need to tap the investments by that much. You would also, of course, be reducing other spending to help there. And that assumes you can't find any sort of job that can go into helping.

If you used a moderate 70/30 allocation, those investments are really only down about 35%. You can draw the mortgage payments out of the 60k bond portion for quite a while without having to sell depressed stocks.

We're also assuming that there's nothing else, that the choice was between a 260k paid-off house with $0, or a mortgage and 200k in investments. If there are other investments, say in a company plan, then the fixed-income amount will be even larger.

Finally, if you were in that much danger, you probably shouldn't be buying a house that costs that much.

Earl
malabargold
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Re: How do you view debt?

Post by malabargold »

Debt is a great financial tool, but it
should be used judiciously and only
by those who absolutely do NOT NEED
to use it
fblade007
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Re: How do you view debt?

Post by fblade007 »

I think debt is only needed on 2 occasions in life.

1) When buying a house. Even when having the money to pay cash you could/should leverage debt as it keeps your cash buffer/flow intact. When can still deide to pay off early or when the interest rates move against you but int he meanwhile you have opportunities you can take advantage off with ready available cash.

2) A car when it means you need it for a job. If not just pay cash.
ks289
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Re: How do you view debt?

Post by ks289 »

HomerJ wrote:Look, it's good that you are fine paying 3% interest to a bank, while your investments are making 6%.

But nothing is guaranteed in life, and that may not happen going forward. It probably will, but it isn't guaranteed.

And if you have any money at all in bonds, that's money that's doing nothing, since you are paying 3% on your mortgage while making 3% on your bonds (with a chance to lose money if interest rates go up).
I agree that going forward who knows what will happen which is why it involves risk.

I think the numbers have been much better than that for borrowing at low rates (1.8% after deduction) while investing including bonds (namely municipal bonds)-which is absolutely pure luck in the short term. As livesoft has pointed out though, the borrower is not tied to the strategy and can decide later they've had enough gains (or losses) and go ahead and pay off the debt. Doing this by switching cash flow to the debt instead of taxable accounts can avoid paying capital gains taxes.
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munemaker
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Re: How do you view debt?

Post by munemaker »

Regarding debt, I would rather be on the side of owning debt rather than owing debt.

When you owe debts, you are increasing your personal risk. If you lose your job or become ill, you are really exposed.
pennywise
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Re: How do you view debt?

Post by pennywise »

Elsebet wrote: I'm nitpicking, but you'd still have to pay property taxes or risk foreclosure even without a mortgage. Technically I'd also include maintenance, since if you can't pay for a failing roof it won't be much of a shelter for long. :)
Not the same at all; paying property taxes is a cost of living in an organized society akin to paying one's income tax, it is not being 'in debt'.

As for maintenance owning a home requires upkeep of course. However the money spent is not paying a debt, it is tending an investment in real property that has a residual value to the owner, a value that usually in fact increases over time. Again, a completely different concept than repaying funds borrowed from an individual or entity.
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ruralavalon
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Re: How do you view debt?

Post by ruralavalon »

DaftInvestor wrote: . . . . .
3) New Car Loans at 0% offer a great value. If you are being a car with low depreciation and plan on keeping it for 10 years this provides a great deal. Of course many folks will pay too much to finance cars they can't really afford unaware of how they are throwing money away.
. . . . .
I have to confess that I just don't understand the zero percent car loan.

It seems obvious to me that the dealer/lender must charge the buyer/borrower in some way for the cost of the money loaned, perhaps by requiring a higher price for the car sold.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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SmileyFace
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Re: How do you view debt?

Post by SmileyFace »

ruralavalon wrote:
DaftInvestor wrote: . . . . .
3) New Car Loans at 0% offer a great value. If you are being a car with low depreciation and plan on keeping it for 10 years this provides a great deal. Of course many folks will pay too much to finance cars they can't really afford unaware of how they are throwing money away.
. . . . .
I have to confess that I just don't understand the zero percent car loan.

It seems obvious to me that the dealer/lender must charge the buyer/borrower in some way for the cost of the money loaned, perhaps by requiring a higher price for the car sold.
These incentives are done at a much higher level than the dealership. All of Subaru has 0% financing right now through end of August for example. This is through Chase - perhaps Chase gives them a certain number of 0% loans provided they use Chase for financing throughout the rest of the year - I don't know - but in any case - the dealer really doesn't seem to care whether you pay cash or finance and in some cases - seems to prefer you take the financing. I've also never discussed financing until AFTER I got a final price on the car so there is no additional price the dealer is charging for financing the car. (And if you ask for additional discounting by paying cash they just look at you funny).
It seems like these 0% deals are offered more often during the summer (Subaru has been doing it every summer for several years, and I believe Nissan or someone else I looked at is doing it for the summer also). Perhaps this is when car sales slow down a bit (?) - don't know.

Maybe someone else has better insight here but I've certainly taken advantage of these offers (in one case I didn't even know one was going on until I was about to pay).
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ruralavalon
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Re: How do you view debt?

Post by ruralavalon »

DaftInvestor wrote:
ruralavalon wrote:
DaftInvestor wrote: . . . . .
3) New Car Loans at 0% offer a great value. If you are being a car with low depreciation and plan on keeping it for 10 years this provides a great deal. Of course many folks will pay too much to finance cars they can't really afford unaware of how they are throwing money away.
. . . . .
I have to confess that I just don't understand the zero percent car loan.

It seems obvious to me that the dealer/lender must charge the buyer/borrower in some way for the cost of the money loaned, perhaps by requiring a higher price for the car sold.
These incentives are done at a much higher level than the dealership. All of Subaru has 0% financing right now through end of August for example. This is through Chase - perhaps Chase gives them a certain number of 0% loans provided they use Chase for financing throughout the rest of the year - I don't know - but in any case - the dealer really doesn't seem to care whether you pay cash or finance and in some cases - seems to prefer you take the financing. I've also never discussed financing until AFTER I got a final price on the car so there is no additional price the dealer is charging for financing the car. (And if you ask for additional discounting by paying cash they just look at you funny).
It seems like these 0% deals are offered more often during the summer (Subaru has been doing it every summer for several years, and I believe Nissan or someone else I looked at is doing it for the summer also). Perhaps this is when car sales slow down a bit (?) - don't know.

Maybe someone else has better insight here but I've certainly taken advantage of these offers (in one case I didn't even know one was going on until I was about to pay).
I'm still completely in the dark on how the cost of the money lent is covered and by whom.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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SmileyFace
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Re: How do you view debt?

Post by SmileyFace »

ruralavalon wrote:
DaftInvestor wrote:
ruralavalon wrote:
DaftInvestor wrote: . . . . .
3) New Car Loans at 0% offer a great value. If you are being a car with low depreciation and plan on keeping it for 10 years this provides a great deal. Of course many folks will pay too much to finance cars they can't really afford unaware of how they are throwing money away.
. . . . .
I have to confess that I just don't understand the zero percent car loan.

It seems obvious to me that the dealer/lender must charge the buyer/borrower in some way for the cost of the money loaned, perhaps by requiring a higher price for the car sold.
These incentives are done at a much higher level than the dealership. All of Subaru has 0% financing right now through end of August for example. This is through Chase - perhaps Chase gives them a certain number of 0% loans provided they use Chase for financing throughout the rest of the year - I don't know - but in any case - the dealer really doesn't seem to care whether you pay cash or finance and in some cases - seems to prefer you take the financing. I've also never discussed financing until AFTER I got a final price on the car so there is no additional price the dealer is charging for financing the car. (And if you ask for additional discounting by paying cash they just look at you funny).
It seems like these 0% deals are offered more often during the summer (Subaru has been doing it every summer for several years, and I believe Nissan or someone else I looked at is doing it for the summer also). Perhaps this is when car sales slow down a bit (?) - don't know.

Maybe someone else has better insight here but I've certainly taken advantage of these offers (in one case I didn't even know one was going on until I was about to pay).
I'm still completely in the dark on how the cost of the money lent is covered and by whom.
Same here - my best guess is it is covered by the folks that are taking loans the other 10 or 11 months of the year that the dealership isn't giving out 0% loans (e.g. Bank agrees to finance 1-month worth of X-number of 0% loans provided the dealership or Car manufacturer agrees to use the Bank for financing for so many other months and so many other loans throughout the year at a higher rate).
Engineer250
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Re: How do you view debt?

Post by Engineer250 »

ruralavalon wrote:
DaftInvestor wrote: . . . . .
3) New Car Loans at 0% offer a great value. If you are being a car with low depreciation and plan on keeping it for 10 years this provides a great deal. Of course many folks will pay too much to finance cars they can't really afford unaware of how they are throwing money away.
. . . . .
I have to confess that I just don't understand the zero percent car loan.

It seems obvious to me that the dealer/lender must charge the buyer/borrower in some way for the cost of the money loaned, perhaps by requiring a higher price for the car sold.
My uneducated guess is - because they want more people buying their cars. Apple has some silly installment program for their iPhones now. It basically comes down to if you paid off an iPhone over 2 years at 0% interest. Why would they do that? Because they want more people buying iPhones.

My additional guess - it's somewhat of a lure. A lot of people won't have the good credit to get 0%, so those people get lured in and end up paying a higher percentage. Other people might not buy a car until they see 0%. Ford/GM/Toyota etc. all just want to sell you expensive cars. If they can make $20k off of you that's great. If they have to forgo a couple thousand to make the sale, no big deal. So the car manufacturers are probably eating the cost of financing, which isn't too pricey right now anyways.
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Admiral
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Re: How do you view debt?

Post by Admiral »

I don't like debt except for, as many have posted, appreciating assets (education, housing). I have a mortgage, that is my only debt. It is at 2.25% before deductions. I could pay it off, while significantly reducing my liquidity, but...why would I?

There is a huge opportunity cost by sinking so much money into an illiquid asset (even one that appreciates). Unless one has a high interest rate, I don't see any reason to not have mortgage debt, particularly when the govt is happy to subsidize it for you. (If you have oodles of money or are retired on a fixed income, that's another story, I'm speaking of those in the accumulation phase of investing, not those who have won the game/stopped playing.)

And, as others have noted in other threads, even when one has no mortgage, one still has costs: taxes and insurance. And let's not forget that a mortgage is a big inflation hedge: when renters in my neighborhood are paying double what they are now, I won't be. Assuming there ever is real inflation again :D
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SeeMoe
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Re: How do you view debt?

Post by SeeMoe »

We are fortunate in that everything we buy is with cash. Been retired 20+ years too! New Acura MDX Advance cash every 3 years. Plus we are still investing excess pension funds in a 45/55 folio. Of course we made our "fortune "by being frugal and investing during our working years, still taking big vacations and occasional new cars now and then though. No dining out, brown bag to work too. No movies, no casino, no cable TV Back when either! Good pensions were/are the key, we must admit, and a commonsense plan.

SeeMoe..
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}
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