What's wrong with debt?

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harikaried
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What's wrong with debt?

Post by harikaried » Mon Oct 21, 2013 3:57 pm

People have different reasons for not wanting/keeping debt. What are the different reasons, and what's bad about each of them?


One aspect is paying interest on the debt. This means you're working hard to make money and someone is profiting from your hard work. For many loans backed by large national banks, this means money is flowing from your employer to you to the big bank, which is probably located outside of your community. Some people might be against debt for this reason of money flowing out of your community to a big corporation.

But some loans such as 401k loans have interest payments that go back to yourself (into your retirement account). Paying yourself interest isn't as "bad" as paying someone else interest as you get to keep it. Is this debt still bad?

How about loans that have 0% interest perhaps a temporary promotional rate? Are these bad?


Another aspect of debt is the required payments. This means you have guaranteed expenses for the month/year that you can't use for whatever else you want. This could result in less flexibility as the remaining amount of money for non-debt payments is reduced. Some people might be against debt for this lack of freedom/liberty of doing whatever you want with your money.

But how about loans that don't have regular repayment scheduled? Perhaps those with a one time repayment? Or a temporary no-payment period?


I suppose another debt-related issue is that easy access to debt makes people more likely to spend more than what they would have spent. This is why Auto manufacturers offer 0% rates because they end up getting you to buy something or something more. But does this effectively boil down to ending up with required debt payments?


Are there other aspects of debt and various nuances that make debt more/less desirable?

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Re: What's wrong with debt?

Post by BW1985 » Mon Oct 21, 2013 4:07 pm

It's the psychology and principal for me above all else. I don't like to owe anyone anything. The one exception I may end up making is a mortgage.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

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leonidas
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Re: What's wrong with debt?

Post by leonidas » Mon Oct 21, 2013 4:13 pm

I like to differentiate between productive debt and non productive debt. Think borrowing money to start a busniess or further your education which can further your career. Now think of the person who spends money they don't have eating out every night or on vacations or granite counter tops. One creates a future stream of income to pay it off and the other consumes future income plus interest payments.

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Re: What's wrong with debt?

Post by Mike Scott » Mon Oct 21, 2013 4:36 pm

debt payment obligates ordinary cash flow, reduces potential investment dollars and increases exposure/risk during financial emergencies

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Re: What's wrong with debt?

Post by Mike Scott » Mon Oct 21, 2013 4:36 pm

debt payment obligates ordinary cash flow, reduces potential investment dollars and increases exposure/risk during financial emergencies

leonard
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Re: What's wrong with debt?

Post by leonard » Mon Oct 21, 2013 4:43 pm

harikaried wrote:People have different reasons for not wanting/keeping debt. What are the different reasons, and what's bad about each of them?


One aspect is paying interest on the debt. This means you're working hard to make money and someone is profiting from your hard work. For many loans backed by large national banks, this means money is flowing from your employer to you to the big bank, which is probably located outside of your community. Some people might be against debt for this reason of money flowing out of your community to a big corporation.

But some loans such as 401k loans have interest payments that go back to yourself (into your retirement account). Paying yourself interest isn't as "bad" as paying someone else interest as you get to keep it. Is this debt still bad?

How about loans that have 0% interest perhaps a temporary promotional rate? Are these bad?


Another aspect of debt is the required payments. This means you have guaranteed expenses for the month/year that you can't use for whatever else you want. This could result in less flexibility as the remaining amount of money for non-debt payments is reduced. Some people might be against debt for this lack of freedom/liberty of doing whatever you want with your money.

But how about loans that don't have regular repayment scheduled? Perhaps those with a one time repayment? Or a temporary no-payment period?


I suppose another debt-related issue is that easy access to debt makes people more likely to spend more than what they would have spent. This is why Auto manufacturers offer 0% rates because they end up getting you to buy something or something more. But does this effectively boil down to ending up with required debt payments?


Are there other aspects of debt and various nuances that make debt more/less desirable?
You have to spend money and mind share paying for it, monitoring it, and making sure it's service. Life's much easier not doing any of that. btw - this is a serious response, not meant to be flippant.
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Abe
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Re: What's wrong with debt?

Post by Abe » Mon Oct 21, 2013 4:44 pm

I don't see anything wrong with it necessarily. A lot of people have made fortunes using other peoples money. Of course, there is more risk using OPM. You can make a lot using leverage or you can lose a lot. It works both ways. If you are going to borrow money, I would say don't borrow money to buy things you will use up (consumer items), only borrow money to buy things that make money. Some people take out home equity loans and buy consumer goods, and they are making payments on pots and pans for 20 years. Don't do that.
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Phineas J. Whoopee
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Re: What's wrong with debt?

Post by Phineas J. Whoopee » Mon Oct 21, 2013 4:52 pm

Debt increases risk. Properly applied, debt also increases opportunity. Whether the cost of funds is worth it depends on one's evaluation of risk vs. potential gain. I agree education and housing often make sense. But I have a bone to pick with the restaurants and granite examples cited above:

I couldn't stand my old formica countertops so I ate out all the time. Now with granite I love to cook. The more luxurious and expensive the ingredients I use, the shorter the granite countertop vs. equivalent restaurant meals break-even period. Why save five dollars on a hamburger when I could save fifty dollars on a steak? Has anybody seen my truffle oil? :greedy

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Re: What's wrong with debt?

Post by MnD » Mon Oct 21, 2013 4:55 pm

Some people will pay for things with debt that they wouldn't dream of buying buy with cash they had.
During the housing/mortgage bubble, middle class workers were "paying" 20 times annual earnings for houses.
Do you think if they had $800K in the bank that they would have traded it for some slapped together "pressboard palace" 30 miles from their jobs in the middle of no-where?
A lot of "buyers" could not have made their house payments even if the interest rate was dropped to 0%.

The $120K (per child) State U undergraduate degree is another thing that middle class students and their parents are purchasing with loans that probably would be a non-starter for many if they had to come up with that cash from current cash flow and savings.

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Re: What's wrong with debt?

Post by technovelist » Mon Oct 21, 2013 4:58 pm

MnD wrote:Some people will pay for things with debt that they wouldn't dream of buying buy with cash they had.
During the housing/mortgage bubble, middle class workers were "paying" 20 times annual earnings for houses.
Do you think if they had $800K in the bank that they would have traded it for some slapped together "pressboard palace" 30 miles from their jobs in the middle of no-where?
A lot of "buyers" could not have made their house payments even if the interest rate was dropped to 0%.

The $120K (per child) State U undergraduate degree is another thing that middle class students and their parents are purchasing with loans that probably would be a non-starter for many if they had to come up with that cash from current cash flow and savings.
True, but it's even worse than that. There is no way in the world that those goods and services could ever have cost that much without the ready availability of credit.
In theory, theory and practice are identical. In practice, they often differ.

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Abe
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Re: What's wrong with debt?

Post by Abe » Mon Oct 21, 2013 5:10 pm

MnD wrote:Some people will pay for things with debt that they wouldn't dream of buying buy with cash they had.
During the housing/mortgage bubble, middle class workers were "paying" 20 times annual earnings for houses.
Do you think if they had $800K in the bank that they would have traded it for some slapped together "pressboard palace" 30 miles from their jobs in the middle of no-where?
A lot of "buyers" could not have made their house payments even if the interest rate was dropped to 0%.

The $120K (per child) State U undergraduate degree is another thing that middle class students and their parents are purchasing with loans that probably would be a non-starter for many if they had to come up with that cash from current cash flow and savings.
A few years ago, I remember driving through neighborhoods that had big new homes with at least two new cars parked in the garage and a speed boat. Just as soon as they got a raise, they would "move up" to a bigger house. I remember asking my wife, "how do these people afford all this". In 2008 we found out that they couldn't afford it. I don't know why but a lot of people think that just because they get a raise, they have to go out and buy something. Not only do they buy things, they buy it on credit. If they would just quit trying to keep up with the Joneses, they might get ahead.
Slow and steady wins the race.

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Phineas J. Whoopee
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Re: What's wrong with debt?

Post by Phineas J. Whoopee » Mon Oct 21, 2013 5:10 pm

technovelist wrote:...
True, but it's even worse than that. There is no way in the world that those goods and services could ever have cost that much without the ready availability of credit.
Hi technovelist,

It seems to me as if there's an unstated assumption behind what you've written: that "those goods and services" would have been available in the first place, at least in today's quantities, "without the ready availability of credit." Some might be only for the truly wealthy; and others unobtainable at any price. It isn't as if quality education would suddenly become cheap if only we had to pay ready cash for it; nor as if it would suddenly become better if only a very few, chosen on the basis of wealth rather than merit, could access it.

We pay a price for our modern, highly-differentiated economy based on the division of labor and mutually-beneficial trade, but I'd rather be where I am than mucking around manually tending turnips. Present gardeners excepted, of course.

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Re: What's wrong with debt?

Post by tigermilk » Mon Oct 21, 2013 5:15 pm

No debt = freedom and significant reduction in worrying

As an example, I was furloughed during the shutdown. I have a fair amount in savings that goes even farther because I have no debt (no mortgage, no loans, only food, utilities, taxes, etc). I could have lasted months without concern. If I had a mortgage, even with plenty of savings, I'd start to get nervous. No one out there to repo my car or foreclose on me.

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Re: What's wrong with debt?

Post by pointyhead » Mon Oct 21, 2013 5:43 pm

A few years ago, I remember driving through neighborhoods that had big new homes with at least two new cars parked in the garage and a speed boat. Just as soon as they got a raise, they would "move up" to a bigger house. I remember asking my wife, "how do these people afford all this". In 2008 we found out that they couldn't afford it. I don't know why but a lot of people think that just because they get a raise, they have to go out and buy something. Not only do they buy things, they buy it on credit. If they would just quit trying to keep up with the Joneses, they might get ahead.
I had the same thoughts, "How can they afford it all?" but I also wondered what am I doing wrong? Why can't I afford the big house, fancy car etc. As you said, we found out they couldn't afford it. Turns out I'm probably not doing anything seriously wrong after all! In recent years I have had conversations with many people who earn much more than I do and due to their bragging about investments/bank accounts etc I realize that I have actually saved much more than they have. I just smile and nod and go back to my simple townhome in my average car and plan my move to a smaller place that requires even less maintainence. Unfortunately, I still have debt :annoyed

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Re: What's wrong with debt?

Post by sport » Mon Oct 21, 2013 5:55 pm

Some time ago, in a discussion about whether or not to prepay a mortgage, I made the statement that debt did not matter if you had the money to pay it off any time you chose to. I was surprised at the strong responses I received that said that debt is terrible, and it should be paid off as soon as possible. "If you owe money, you are not your own master" etc. Apparently, there are those with a strong psychological aversion to debt under any circumstances if they can avoid it. Whether it makes economic sense or not, these people want to be rid of debt. They do not want to consider any alternatives.
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Re: What's wrong with debt?

Post by Murdoch » Mon Oct 21, 2013 5:59 pm

Personally it is for the joy of not oweing money to anyone that I avoid debt.

I also agree that something that looks attractive when you are able to borrow to buy, does not look quite so worth it all those months or years later when you have saved for it in entirety.

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Re: What's wrong with debt?

Post by Ged » Mon Oct 21, 2013 6:17 pm

What's wrong with it depends on your life style. Some people are grasshoppers and some are ants.

The ants (Bogleheads are ants) see debt as a tool and use it to achieve their long term goals.

The grasshoppers are concerned about using debt to enable consumption. They are not concerned about long term goals.

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Re: What's wrong with debt?

Post by gwrvmd » Mon Oct 21, 2013 6:20 pm

Never borrow to buy a depreciating asset i.e. car, vacation, wedding, countertops, boat

Some debt is good i.e. education, home

For the average person a 20 - 30yr mortgage with 5%-10% down and a mortgage rate of 5% or lower is the greatest leveraged hedge against inflation ever invented......plus you can live in it.....Gordon
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john94549
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Re: What's wrong with debt?

Post by john94549 » Mon Oct 21, 2013 7:27 pm

If I can borrow from you (or have borrowed from you) at a rate less than what I can obtain loaning the proceeds to another, assuming a risk-free loan (a CD or the like), that is very, very good debt. A good example might be a 3.4%, 30-year re-fi mortgage loan (fairly common until rates crept up) with the imputed proceeds plopped a few months later into a 30-year Treasury at 3.6%, held to maturity. While that particular example yields a paltry initial "delta", it illustrates the concept.
Last edited by john94549 on Mon Oct 21, 2013 7:40 pm, edited 1 time in total.

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Phineas J. Whoopee
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Re: What's wrong with debt?

Post by Phineas J. Whoopee » Mon Oct 21, 2013 7:38 pm

john94549 wrote:If I can borrow from you (or have borrowed from you) at a rate less than what I can obtain loaning the proceeds to another, assuming a risk-free loan (a CD or the like), that is very, very good debt.
It's the basis of the banking system. Except they borrow short and lend long. Riskless opportunities are few and far between, except when they're many and frequent but exceptionally tiny.
If there's an arbitrage opportunity, take it!
If it's reverse arbitrage, short it!

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Re: What's wrong with debt?

Post by Geist » Mon Oct 21, 2013 8:27 pm

Debt is enslavement.

I know, that's a bit extreme, and I don't truly believe that (to such a great extent). But debt most definitely is limiting/restricting in life. It reduces your investable cash-flow, increases your monthly fixed expenses, costs you the added expense of interest payments, and most significantly (IMO): debt teaches you how to NOT live within your means. Taking a look at our own society very clearly demonstrates how dangerous that is.

There are certainly some instances in which debt is reasonable or necessary... Buying a reasonable & truly affordable home, paying for a suitable education (not necessarily top tier, and definitely not for a wasted degree in a low-income field), or to invest responsibly in a personal business. But saddling yourself with debt for new luxury cars, unnecessary expenditures, travel, "life upgrades", and so much more is simply irresponsible and totally irrational. I readily admit that I've made mistakes with debt. But get rid of it ASAP, learn from errors, and build your wealth...don't borrow against an unknown future.

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Re: What's wrong with debt?

Post by Toons » Mon Oct 21, 2013 8:31 pm

Listen to what Warren Buffet says about debt. It starts around 7:15 into his 1999 speech to students. The entire speech is about 1hr in length ,very insightful and enjoyable,timeless common sense :happy

https://www.youtube.com/watch?v=IvveZr0 ... ata_player
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Re: What's wrong with debt?

Post by Kosmo » Mon Oct 21, 2013 10:06 pm

There is absolutely nothing wrong with debt. The general consensus here is that debt is only acceptable for certain things like houses and education. While I don't disagree, that's not all there is to it. What about a small business loan for a company you're starting on the side? Or a mortgage on a duplex you can rent out? Or maybe you really really really can't live without that new Cadillac (ok, this might be a stretch).

Anyways, the point is: debt is a tool, just like a hammer. When used properly it can be incredibly useful/profitable and allow you to do things you wouldn't be able to do otherwise. When used improperly, you could be in a world of hurt.

Personally, with "cheap" money available right now, I think now is the time to be accumulating debt.

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Re: What's wrong with debt?

Post by Index Fan » Mon Oct 21, 2013 10:09 pm

Lack of debt is freedom. If you don't care about freedom, then best of luck to you.
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Re: What's wrong with debt?

Post by Jack » Tue Oct 22, 2013 1:01 am

How could debt be considered wrong? Most folks around here say you should invest one-third to one-half of your entire portfolio in debt.

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Re: What's wrong with debt?

Post by IlliniDave » Tue Oct 22, 2013 4:58 am

Like many I started off using debt to "accelerate" life. I managed it okay, but after a while it got tedious. I decided I was tired of owing people money all the time so stopped borrowing and paid all my monetary debts. I'm happier being debt-free, and that's the biggest thing for me. It comes with substantial peace of mind. There's a reason, I guess, people complain about working long and hard just to keep up with the bills.

I understand the OPM thing. While I'm sure success stories exist, I don't personally know anyone who has attributed their financial success to use of personal debt. I do know several who can blame debt for at minimum serving as a multiplier in serious financial problems. The people I know who have been most successful with their personal finances generally stay away from debt (with the exception maybe of a responsible-sized home mortgage). Not with Ramsey-like fervor necessarily, but they overwhelmingly pay as they go. My grandfather, and to some degree my parents, are the most concrete influences there. And those influences and the observations among my contemporaries are a second "rationale".

That's really about all I can say, just an explanation of why I do what I do. Debt certainly can be "justified" in any number of ways. So nothing I can say will influence the impatient person who's eager to buy now and pay later. I was such a person as a young man. It didn't ruin me but it didn't really help much either, with the possible exception of having taken a home mortgage. I won't make any significant profit when I go to sell my house, but I believe it provided intangible quality of life benefits commensurate with the costs.
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Re: What's wrong with debt?

Post by l2ridehd » Tue Oct 22, 2013 6:06 am

There is good debt and bad debt. Credit cards are almost always bad debt. They are used to buy consumables and carry high interest. Real Estate loans are usually good debt. Provides a place to live, a good substitute for rent, and is tax deductible.

I bought a house, fixed up an apartment in the lower level, rented it to cover 80% of my mortgage, fixed up my unit, rented for enough to allow me to buy another home and cover 80% of that mortgage. Did that three times and was living with zero mortgage outlay each month with just the issues of managing 4 rentals. I think that was good debt. I have now downsized to just two rentals with very small mortgages left that provide positive cash flow in retirement. They will soon be paid off and can be used as cash flow or sold for the equity. So all in all that was good debt.

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Re: What's wrong with debt?

Post by Abe » Tue Oct 22, 2013 8:40 am

pointyhead wrote:
A few years ago, I remember driving through neighborhoods that had big new homes with at least two new cars parked in the garage and a speed boat. Just as soon as they got a raise, they would "move up" to a bigger house. I remember asking my wife, "how do these people afford all this". In 2008 we found out that they couldn't afford it. I don't know why but a lot of people think that just because they get a raise, they have to go out and buy something. Not only do they buy things, they buy it on credit. If they would just quit trying to keep up with the Joneses, they might get ahead.
I had the same thoughts, "How can they afford it all?" but I also wondered what am I doing wrong? Why can't I afford the big house, fancy car etc. As you said, we found out they couldn't afford it. Turns out I'm probably not doing anything seriously wrong after all! In recent years I have had conversations with many people who earn much more than I do and due to their bragging about investments/bank accounts etc I realize that I have actually saved much more than they have. I just smile and nod and go back to my simple townhome in my average car and plan my move to a smaller place that requires even less maintainence. Unfortunately, I still have debt :annoyed
Yes, you are feeling the pressure to keep up, but you are doing the right thing by ignoring it. The thing is, it's not important what everyone else does. It's what you do that counts.
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Re: What's wrong with debt?

Post by midareff » Tue Oct 22, 2013 9:09 am

Intelligent debt is a useful tool in life. It has allowed me (along the way) to buy my residences and cars. Now, at 65 and retired, a recent re-fi on my apartment @ 3.0% has allowed me to achieve a 13.08% return on that money in 2012 and > 11% so far this year. As inflation makes the dollar less valuable I pay them with progressively less valuable dollars each month/year. I derive a tax benefit from the interest paid. As equities appreciate they are rebalanced to bonds. I say mostly the same for a car recently financed @ 1.49% for 5 years. The VG IT Muni Fund is currently yielding near 3.3%, tax exempt. If the stock market dropped 50% tomorrow there is no impact to my ability to make these payments.

Selling an asset paying 3.3% tax-ex to pay these debts off now and early does not strike me as an intelligent money management decision, short or long term. On the other hand, AMEX Blue Cash Preferred pays 6% back on groceries, PenFed 5% on gas, FIDO Amex 2% on everything else and for the folks that won't take Amex there is the FIDO Visa 1.5% cash back card. All set on auto-pay in full each month. I have not paid a credit card company a penny in interest in two decades and there is never a balance that carries interest, yet at any given moment all will show a balance.

For toys... international travel, cameras, computers, stereo goodies, etc., ... if the cash isn't at Ally to pay the cc bill (and get the discount) there is no purchase.

Car and apartment insurance.. paid up front in full for the discount. Property tax, paid at the month of greatest discount (4%). Self escrow the mortgage at an Ally MM paying .84% presently, used to pay more.

I repeat, Intelligent debt is a useful tool in life, as is careful money management.
Last edited by midareff on Tue Oct 22, 2013 9:34 am, edited 2 times in total.

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Re: What's wrong with debt?

Post by The Wizard » Tue Oct 22, 2013 9:20 am

Odd that nobody's yet mentioned debt vs long-term savings.
My last few years of employment, I could easily have saved enough to buy the Mustang for cash and probably paid off my small remaining mortgage balance as well.
But no, I chose to max out my (optional) $22,000 403b as well as my $6000 Roth IRA for several years, thus reducing free cash available for debt service.
Looks like it worked out OK since my investments are generally doing better than the 3.2% interest rate on my HELOC...
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Re: What's wrong with debt?

Post by FafnerMorell » Tue Oct 22, 2013 10:08 am

The quote from Francis Bacon about "Money makes a good servant but a bad master" applies even more so for debt. If the money borrowed enables you to earn greater sums than is spent paying it back (with interest), keeping in mind that "risk" means that things may not go as one initially hopes, then debt is a powerful servant. But when fortune turns, it is very quick to seize the advantage and make you the slave.

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Re: What's wrong with debt?

Post by prudent » Tue Oct 22, 2013 10:15 am

I understand logically that there can be "good debt" but on an emotional level I cannot embrace that philosophy. I do not want to owe anyone.

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Re: What's wrong with debt?

Post by The Wizard » Tue Oct 22, 2013 10:17 am

Also, using somewhat circular logic, debt allows one to have a high Credit Score.
No debt-history = Low Credit Score...
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Re: What's wrong with debt?

Post by Phineas J. Whoopee » Tue Oct 22, 2013 11:02 am

The Wizard wrote:Also, using somewhat circular logic, debt allows one to have a high Credit Score.
No debt-history = Low Credit Score...
Just charge $25 per month on a no-annual-fee credit card and pay it when the bill comes in. Technically debt? Yes. Enough to make any difference? No.
PJW

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Re: What's wrong with debt?

Post by bungalow10 » Tue Oct 22, 2013 11:06 am

Mike Scott wrote:debt payment obligates ordinary cash flow, reduces potential investment dollars and increases exposure/risk during financial emergencies
+1 This is exactly why I don't like debt. Having fewer monthly payments helps me sleep at night. It also means I need a smaller emergency fund and I have more money to invest.

I also think that buying a car with cash and buying a car with financing changes the logical and emotional aspects of the entire process. When I have to transfer the money out of my savings account to request a cashiers check it hurts more than if I have to sign on a dotted line that says I'll pay $500/month for 60 months.
An elephant for a dime is only a good deal if you need an elephant and have a dime.

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Re: What's wrong with debt?

Post by bungalow10 » Tue Oct 22, 2013 11:09 am

Phineas J. Whoopee wrote:
The Wizard wrote:Also, using somewhat circular logic, debt allows one to have a high Credit Score.
No debt-history = Low Credit Score...
Just charge $25 per month on a no-annual-fee credit card and pay it when the bill comes in. Technically debt? Yes. Enough to make any difference? No.
PJW
That won't make your credit score very high. We use credit cards but have no revolving loans and don't carry a balance. No late payments ever. Have a very affordable mortgage. Credit score = meh.

When we used to carry very high ($100,000+ in credit card debt for each of us) to earn interest in banks paying 5-6% we had credit scores of 100 points higher. Big Debt = Big Credit Score
An elephant for a dime is only a good deal if you need an elephant and have a dime.

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Phineas J. Whoopee
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Re: What's wrong with debt?

Post by Phineas J. Whoopee » Tue Oct 22, 2013 11:14 am

bungalow10 wrote:
Phineas J. Whoopee wrote:
The Wizard wrote:Also, using somewhat circular logic, debt allows one to have a high Credit Score.
No debt-history = Low Credit Score...
Just charge $25 per month on a no-annual-fee credit card and pay it when the bill comes in. Technically debt? Yes. Enough to make any difference? No.
PJW
That won't make your credit score very high. We use credit cards but have no revolving loans and don't carry a balance. No late payments ever. Have a very affordable mortgage. Credit score = meh.

When we used to carry very high ($100,000+ in credit card debt for each of us) to earn interest in banks paying 5-6% we had credit scores of 100 points higher. Big Debt = Big Credit Score
I don't disbelieve you. Presumably you had several hundred thousand dollars of available credit on the revolving accounts, because utilization is an important part of the FICO formula, although a smaller one than making payments on time.

Wizard was commenting about having no credit credit history vs. having some. I was pointing out how trivial some can be to acquire.

Congratulations on your exploitation of an arbitrage opportunity while it existed. :beer

PJW

jon-nyc
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Re: What's wrong with debt?

Post by jon-nyc » Tue Oct 22, 2013 11:15 am

I have nothing against debt. I own a lot of It, including a seven figure position in treasuries. :happy

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SpecialK22
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Re: What's wrong with debt?

Post by SpecialK22 » Tue Oct 22, 2013 11:19 am

I don't think debt is inherently wrong, but it can be very dangerous. A cliched analogy would be comparing debt to fire; it has both productive and destructive properties. Additionally, I suspect most of the general population has very little knowledge on managing debt. Even properly understanding basic concepts like principal and interest is only known by a smaller segment of the population. This is where the dangers of debt become amplified.

bungalow10
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Re: What's wrong with debt?

Post by bungalow10 » Tue Oct 22, 2013 11:34 am

Phineas J. Whoopee wrote: I don't disbelieve you. Presumably you had several hundred thousand dollars of available credit on the revolving accounts, because utilization is an important part of the FICO formula, although a smaller one than making payments on time.
Not to derail the thread too much, but we stayed at 90-99% of utilization. When I started, I tried to keep it at 75%, but as I experimented, I fount that it really didn't matter - even having 99% utilization on one card didn't keep me from getting approved for a 50,000 credit line with another card company. I paid the minimums on the cards until the promo rate expired and then I paid it off in one fell swoop. Even with extremely high utilization, our credit score was great. We refinanced our home and apartment building several times while doing this.

My take away was that utilization really didn't matter as much as they want you to think. I'm sure if we were late on even a single payment it would have played a role. FICO is also blind to income, so the amount of debt (high/low) doesn't matter because there is no context for it. We had credit card debt several times our household income.
An elephant for a dime is only a good deal if you need an elephant and have a dime.

placeholder
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Re: What's wrong with debt?

Post by placeholder » Tue Oct 22, 2013 11:37 am

gwrvmd wrote:Never borrow to buy a depreciating asset i.e. car, vacation, wedding, countertops, boat
Why?

The Wizard
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Re: What's wrong with debt?

Post by The Wizard » Tue Oct 22, 2013 12:08 pm

Another important point no one has mentioned concerns RATIOS.
The ratio of your debt to your income or to your investment portfolio.
Alternately, the ratio of your required monthly debt-service payments to your monthly income.

If your gross monthly income is $8000 a month and your debt-service min payments are $800 a month or less, it's hard to call that "enslavement".
But if your monthly debt service is way much higher, then yes, enslavement starts to become apt terminology...
Attempted new signature...

The Wizard
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Re: What's wrong with debt?

Post by The Wizard » Tue Oct 22, 2013 12:09 pm

placeholder wrote:
gwrvmd wrote:Never borrow to buy a depreciating asset i.e. car, vacation, wedding, countertops, boat
Why?
I'm not sure if rules like that are intended to be questioned...
:twisted:
Attempted new signature...

Twins Fan
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Re: What's wrong with debt?

Post by Twins Fan » Tue Oct 22, 2013 12:17 pm

harikaried wrote:One aspect is paying interest on the debt. This means you're working hard to make money and someone is profiting from your hard work. For many loans backed by large national banks, this means money is flowing from your employer to you to the big bank, which is probably located outside of your community. Some people might be against debt for this reason of money flowing out of your community to a big corporation.
Paying interest is a biggie for me not liking debt! I mean that's what banks do and how they make money, so can't fault them there. Not so much money going out of the community to somewhere else... never really thought about that actually. But, the thing about interest that hurts my brain is that by the end of the payments you have paid more, sometimes much more, for the item than you agreed to pay for it. That pains me... just my way of thinking there though. I know, inflated dollars later on and all. I'd rather pay what I agree to pay for the item up front, not have payments, and have more of those inflated dollars in my pocket later on. Not always possible though... I do realize that also.
harikaried wrote:But some loans such as 401k loans have interest payments that go back to yourself (into your retirement account). Paying yourself interest isn't as "bad" as paying someone else interest as you get to keep it. Is this debt still bad?
I wouldn't technically consider that a debt, since you don't owe someone else the money. But, it is a loan that you have to pay back, so kinda tricky there. If someone dips into the 401k though, they are taking out pre-tax money to then be paid back with after tax money and after tax interest. Definitely not optimal, but things come up and maybe someone needs to do that. Probably not as "evil" as some other ways out there in the loan world.
harikaried wrote:How about loans that have 0% interest perhaps a temporary promotional rate? Are these bad?
Not bad in that you pay 0% interest. But, bad in that they most likely jacked up the amount of the loan (purchase price) in some way, so you pay back more at 0% (I'm thinking vehicle here). Nothing is free. :D

The promotional rate, like 0% for 12 months, is fine if you pay it off in 12 months (I'm thinking furniture here). Most folks in here probably would take advantage of that and pay it off not having paid interest, or most in here would have just paid cash for the furniture. But,.... most folks that aren't bogleheads jump on those deal with full intenetion of paying it off in 12 months, don't do so, take on a couple more promotional debt deals, and then pay 16% or something interest on their furniture.
harikaried wrote:Another aspect of debt is the required payments. This means you have guaranteed expenses for the month/year that you can't use for whatever else you want. This could result in less flexibility as the remaining amount of money for non-debt payments is reduced. Some people might be against debt for this lack of freedom/liberty of doing whatever you want with your money.
That is another biggie for me... I'd rather not have a monthly payment. But, that's the American way nowdays. :D ... Not for all. But, like one of the first questions the car salesman will ask, "what payment are you looking for"... or what can you afford per month. Like others talked aobut in here, keeping up with the Joneses... How much stuff can I have, but not own within the max limit of my monthly pay? Or, even over the monthly pay if they live off credit cards.
harikaried wrote:Are there other aspects of debt and various nuances that make debt more/less desirable?
I'm debt averse, so... all of them. :D

Cash is king... just wish I had some. :D

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Phineas J. Whoopee
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Re: What's wrong with debt?

Post by Phineas J. Whoopee » Tue Oct 22, 2013 12:27 pm

bungalow10 wrote:...Even with extremely high utilization, our credit score was great. We refinanced our home and apartment building several times while doing this.
...
Do you know what your credit score was then and is now? Or are you using your successful attempts at borrowing as a proxy? For somebody borrowing as much as you did, lenders will take a careful look at the big picture. A credit score is only one piece.

If you say utilization was not a factor for you then I believe you, but Fair Isaac Corp says it's part of the 30% factor of amounts owed.

If I may reiterate, lenders make their own decisions. For a new in-store card at Macy's they probably just retrieve the number and don't look more carefully. For your $50,000 new credit card and all your refinances on your home and investment property I suspect they did, and took all sorts of non-FICO factors into account. They may even have used your income and your six figure 5 - 6% interest rate bank balances which offset your credit card debt. Credit scores are something, but they aren't everything.

PJW

bungalow10
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Re: What's wrong with debt?

Post by bungalow10 » Tue Oct 22, 2013 12:40 pm

Phineas J. Whoopee wrote:
bungalow10 wrote:...Even with extremely high utilization, our credit score was great. We refinanced our home and apartment building several times while doing this.
...
Do you know what your credit score was then and is now? Or are you using your successful attempts at borrowing as a proxy? For somebody borrowing as much as you did, lenders will take a careful look at the big picture. A credit score is only one piece.

If you say utilization was not a factor for you then I believe you, but Fair Isaac Corp says it's part of the 30% factor of amounts owed.

If I may reiterate, lenders make their own decisions. For a new in-store card at Macy's they probably just retrieve the number and don't look more carefully. For your $50,000 new credit card and all your refinances on your home and investment property I suspect they did, and took all sorts of non-FICO factors into account. They may even have used your income and your six figure 5 - 6% interest rate bank balances which offset your credit card debt. Credit scores are something, but they aren't everything.

PJW
If you read that page you linked carefully, it doesn't say that utilization is always a negative on your score, just that it factors in.

We danced with 800 while we had high utilization - I don't think we hit it though. Now I think I'm right above 700, which seems really low to me considering we have a higher income and little debt. In full disclosure, I've never used the myFICO service that appears to break your score down for you. I'm not worried about my score because we tend to do business with credit unions and other companies that do full underwriting (like Penfed). Credit score is not much of an issue for them.
An elephant for a dime is only a good deal if you need an elephant and have a dime.

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Re: What's wrong with debt?

Post by placeholder » Tue Oct 22, 2013 12:43 pm

The Wizard wrote:
placeholder wrote:
gwrvmd wrote:Never borrow to buy a depreciating asset i.e. car, vacation, wedding, countertops, boat
Why?
I'm not sure if rules like that are intended to be questioned...
Too late the question is out of the bag.

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Phineas J. Whoopee
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Re: What's wrong with debt?

Post by Phineas J. Whoopee » Tue Oct 22, 2013 1:10 pm

bungalow10 wrote:
Phineas J. Whoopee wrote:
bungalow10 wrote:...Even with extremely high utilization, our credit score was great. We refinanced our home and apartment building several times while doing this.
...
Do you know what your credit score was then and is now? Or are you using your successful attempts at borrowing as a proxy? For somebody borrowing as much as you did, lenders will take a careful look at the big picture. A credit score is only one piece.

If you say utilization was not a factor for you then I believe you, but Fair Isaac Corp says it's part of the 30% factor of amounts owed.

If I may reiterate, lenders make their own decisions. For a new in-store card at Macy's they probably just retrieve the number and don't look more carefully. For your $50,000 new credit card and all your refinances on your home and investment property I suspect they did, and took all sorts of non-FICO factors into account. They may even have used your income and your six figure 5 - 6% interest rate bank balances which offset your credit card debt. Credit scores are something, but they aren't everything.

PJW
If you read that page you linked carefully, it doesn't say that utilization is always a negative on your score, just that it factors in.
Yeah. I can read. I did read. That's why I wrote, as you quoted me:
Phineas J. Whoopee wrote:If you say utilization was not a factor for you then I believe you, but Fair Isaac Corp says it's part of the 30% factor of amounts owed.
[Emphasis added.]
bungalow10 wrote:We danced with 800 while we had high utilization - I don't think we hit it though. Now I think I'm right above 700, which seems really low to me considering we have a higher income and little debt. In full disclosure, I've never used the myFICO service that appears to break your score down for you.
[Emphasis added.]

So you don't know your credit score after all, and therefore can't know how your credit utilization affected it.

I've been careful to say I believe your claims about yourself all along.
bungalow10 wrote:I'm not worried about my score because we tend to do business with credit unions and other companies that do full underwriting (like Penfed). Credit score is not much of an issue for them.
I thought that's what I said, in your quote of me above:
Phineas J. Whoopee wrote: For your $50,000 new credit card and all your refinances on your home and investment property I suspect they did, and took all sorts of non-FICO factors into account. They may even have used your income and your six figure 5 - 6% interest rate bank balances which offset your credit card debt. Credit scores are something, but they aren't everything.
Thanks, at least, for not misrepresenting my words.

But if we agree in all respects, why are we accusing one another of failing to read carefully?

PJW

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Re: What's wrong with debt?

Post by Grt2bOutdoors » Tue Oct 22, 2013 1:17 pm

Debt = Bondage. Pre-fix of bondage: Bond. Using some simple math statements: If no bond, then no age. If bond, then aging will most certainly follow! :moneybag :P
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Abe
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Re: What's wrong with debt?

Post by Abe » Tue Oct 22, 2013 1:36 pm

I would say, generally speaking, that it's best not to borrow money to buy depreciating assets. There are a few exceptions, for example cars. In some cases it may be better to finance a car as opposed to paying cash. As far as vacations, weddings, countertops and boats, it's best to get yourself in a position where you can pay cash for these things in my opinion. Credit cards are great as long as you pay them off each month. The problem a lot of people have is they run up a lot of credit card debt for consumer goods and get themselves overloaded where they can only make the minimum payment each month. Then to make matters worse, they get a home equity loan to "consolidate their debt". This is where, as I said in an earlier post, they are making payments on pots and pans for 20 years. If credit card debt is paid off each month, I don't really consider that to be debt because you are not paying any interest. You are actually using OPM for 30 days interest free.
Slow and steady wins the race.

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