The Wrong Way to Think About Debt - The White Coat Investor

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Rowan Oak
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The Wrong Way to Think About Debt - The White Coat Investor

Post by Rowan Oak »

By the time you read this, my family will have been completely debt-free for about three years. From the time I was 18 until the time I was 42, we had some sort of debt, usually either a mortgage or even when renting we had the $5K student loan I took out as a college freshman. We're (fairly, in my opinion) ignoring the current month's expenses placed on credit cards (always paid off automatically), the leverage used by limited partnerships/LLCs we invest in (since our loss is limited to our investment), and the leverage used by publicly traded companies whose stocks we own via index funds. Everything we now buy, including our home renovation (the most expensive purchase of our lives), we buy with cash. The White Coat Investor, LLC has never had any debt and we plan to continue to grow it debt-free.

That's not to say I've never tried to use debt to our advantage. All three of our homes we have bought with a mortgage. My last year of residency we funded our Roth IRAs using a 0% credit card that we would pay off as an attending a few months later. We pulled money from our accidental rental property in order to purchase our current home. We drug out our final mortgage a couple of years longer than maybe we had to. I say all that to point out that I'm far from innocent of the “financial sin” I'm going to describe today. Let me explain.

I often suggest people pay off their debt or that they are over-leveraged in a blog post, on a forum, on social media, and even in real life. While most agree with me, there is usually someone who pipes up to give some pushback. The argument usually goes something like this: “It's stupid to pay off a 2-4% debt because you expect your investments to do better than 2-4%.” I used to believe this argument too. It's easy to do so because mathematically it is correct. The older and wealthier I get, the more I see serious flaws in this argument, and I'd like to discuss them today because the argument is so darn common, even among people who are debt-free!

I've started pushing back on these people (and no, they don't like it) by asking them two questions:

1. Are you rich yet?

2. If you are, did carrying debt at 2-4% while investing contribute to any significant portion of it?

The answer to number one is almost always no, but even if it isn't, the answer to number two is also almost always no. I fully acknowledge that there probably is somebody out there who would answer yes to both questions. But they are surprisingly rare. I run into so few of them that I'm not sure I can even describe them for you, but I postulate that most of them are real estate investors who maintain reasonable loan to value ratios of 50-66% on their rental properties. The person advocating for more leverage is usually a 25-year-old with lots of debt, few assets, and little experience. It never seems to be the 60-year-old multimillionaire I'd like to emulate.

14 Reasons You're Thinking About Debt Wrong

Let's list out some issues with this argument. For purposes of our discussion today, let's define the argument as “You should not pay off 2-4% debt any faster than you have to because the long-term expected return on your overall portfolio is higher than that.” Now, let's debunk it.

# 1 Justification

The majority of the folks advocating this approach are simply using it as justification. “I'm not paying off that debt because I COULD invest at a higher rate.” They aren't actually doing it. It's a behavioral problem. In fact, having many kinds of debt (auto, credit card, etc.) reflects a behavioral issue, not a difficulty in understanding math. So the first thing I ask is “Are you actually investing the money that would go toward paying off that debt?” Too often, the answer is no. They are neither paying off their debts nor investing with that money–they're spending it.

“I wouldn't do that,” you say, but in reality, money is fungible. If you are spending money on ANYTHING above and beyond the true necessities of life AND you have 2-4% debt, you are borrowing to fund that spending. New pair of skis? You borrowed to buy them. Lift tickets? Same. A $15,000 car you paid cash for while you still have student loans and a mortgage? They're financed. A meal out? It's just like you put it on a 3% credit card. Now, maybe you're fine using borrowed money for luxuries, but most people are not. They view debt as either “good” (i.e. for a home or education or dependable car or an emergency) or “bad” (i.e. credit cards used to eat out and buy lift tickets). Just because you have SOME investments and/or invest SOME money every month does not mean that you are taking ALL of the money you would use to pay down the debt and investing it. Don't let the fact that your interest rate is low lead you to justify excessive spending.

Now, do I expect you to live a spartan existence until your final student loan and then mortgage payment is made? No, I don't. But every time you catch yourself not paying off your debts because the interest rate is low I want you to look around at everything you're buying and ask yourself if you can justify borrowing at 3% to buy it. I bet you'll spend a lot less, get out of debt a lot faster, build more wealth, and have more freedom in your life.

# 2 You Are Ignoring Risk...
https://www.whitecoatinvestor.com/the-w ... bout-debt/
Last edited by Rowan Oak on Wed Oct 14, 2020 8:01 pm, edited 6 times in total.
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Wricha
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Wricha »

Sound thinking although I am the guy in my 60’s
PluckyDucky
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by PluckyDucky »

While a decent article, I don't think it responds to the "lifecycle investing" theory or just buying something like NTSX.

I disagree with #6. I think it should read "Less debt means more insurance." I have enough insurance that if I die in a car accident, my family should be set for many years, if not forever. Having less debt means you can AFFORD more insurance.

It sounds like the article is targeted at the same people Dave Ramsey targets.
Carguy85
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Carguy85 »

Excellent read... so much of it hits the nail on the head. However, I listened to Dave Ramsey for quite some time before I had any money to invest so I may be a little less friendly with debt than some. Interestingly, some on here will take offense to it and have rationale to back it up.
Last edited by Carguy85 on Mon Oct 12, 2020 5:38 pm, edited 1 time in total.
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zaboomafoozarg
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by zaboomafoozarg »

Carguy85 wrote: Mon Oct 12, 2020 4:11 pm Excellent read... so much of it hits the nail on the head. However, I listened to Dave Ramsey for quite some time before I had any money to invest so I may be a little less friendly with debt than some. Interestingly, some on here will take offense to it and have rational to back it up.
Some people swear by debt and leverage, and the few people I know with lots of money used it to the full extent possible.

It's not really for me though. I'm content to do things the slow way, even if gets called suboptimal by lots of people.

I still haven't even bought a house because the mortgage kind of freaks me out.

It may have something to do with going broke as a kid and losing almost everything.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by daacrusher2001 »

I'm 61, have been debt free for awhile now. It's honestly liberating. The only debt I use now is interest free - for example, I bought a $2800 luxury item last year with zero down and 18 months interest free. I do this from time to time. I could pay cash, but have the cashflow and I'd rather leave my money invested.

I can't believe how many folks I know that have had to file for bankruptcy. They spent lots of money on trips and things when all of our kids were young. To the extent that they ended up losing their houses. No retirement money...I have to say, while it seemed appealing then to go to Cancun every time school was off, or having the hottest cars all the time, the biggest swimming pools, etc...it would suck being 61 and having to work until 80 or death, just to afford a crappy apartment and some spaghetti.

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Ben Mathew
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Ben Mathew »

The article does not address lifecycle considerations.

My wife and I are in our mid 40s, and we have a 15 year mortgage that we could be paying down faster. Instead, the extra savings are going into a 100% stock portfolio. This strategy better distributes our stock risk over our lives. People usually have too little stock risk when young (since most of their contributions aren't in yet), and too much risk closer to retirement (when their portfolios are full). Spreading out stock risk by increasing risk stock exposure in earlier years and reducing it closer to retirement results in lower risk over a lifetime for the same expected return.

If a young investor understands this principle well and has the mental fortitude and discipline to sustain large losses and gains with equanimity when young, then this has a lot of potential for improving one's lifetime risk-return profile.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Tingting1013 »

Disagree with #1.

Debt is not fungible. If I take out a mortgage and then sell my house I don’t get to keep the mortgage. Same with car loans, margin loans, leveraged ETFs, etc.

There needs to be a distinction made between the usefulness of secured debt vs unsecured debt. I don’t see a lot of folks advocating for the latter around here, and rightfully so.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by JBTX »

Maybe keeping it overly simplistic ala Dave Ramsey is best for most people. But I don't think there is anything wrong with carrying a low interest mortgage. What the article fails to mention is

- there is some value in liquidity. It is obviously difficult to quantify. It is kind of like insurance. For some paying a modest price for additional liquidity is worth it. I'm in a middle of a cash out refi that I will use for liquidity, and fund other investments like 401ks, iras and ibonds while on one income

- comparing a mortgage rate to an investment return is apples and oranges. If you are young, sure go ahead and take the low interest mortgage and invest some. Absolutely if it helps fund tax advantaged accounts.

- a mortgage rate is fixed. You can always choose to pay it off/down or refi if rates go down. If rates go up, you are locked in. To the extent mortgage proceeds are invested in an variable inflation adjusted instrument, you have an inflation hedge. There is value in that (essentially an option)

- sure. It is always best to lower expenses to next to nothing to avoid debt. But people are people. Good luck telling DW/DH we must eat Ramen noodles in spite of 7 figure net worth because we need to pay off a 2% mortgage. There is frugality and then there is ridiculousness.

- you will notice some very successful companies have debt yet are sitting on a mountain of cash, surely at lower rates than their debt. Why? For some of the reasons above - liquidity, locking in low rates in case rates go up, having "dry powder" when opportunities come up.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by JBTX »

daacrusher2001 wrote: Mon Oct 12, 2020 6:18 pm I'm 61, have been debt free for awhile now. It's honestly liberating. The only debt I use now is interest free - for example, I bought a $2800 luxury item last year with zero down and 18 months interest free. I do this from time to time. I could pay cash, but have the cashflow and I'd rather leave my money invested.

It's funny because I have no qualms with a low interest reasonable size mortgage but I've never liked the zero percent financing consumer loan deals, because often you will find if you dig down in the language, if you miss a payment, then you are charged retroactively at a much higher rate. I found that each month I obsessed with getting it paid early, until I finally figured it wasn't worth the hassle and paid it off.

That has been many years ago. I don't know if most 0% consumer loans are still structured that way.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Hyperchicken »

Seems like a bit of thesis substitution going on in this article - author begins from paying down debt vs. investing, then jumps to argument against overspending.
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Post by Starfish »

I personally cannot relate at all to the article. It addresses only a category of people, the ones with an uncontrollable spending issue. I personally don't know closely any of those people so I cannot relate.
Yes, buying a ski ticket while having a mortgage is like borrowing money for skiing. That is the point! Disregarding the value of time and youth it's a very big mistake. Even bigger than not saving enough for retirement! Of course I want to ski while I enjoy it, not in my 70s when I am financially secure. If it costs 3% a year, so be it.
I know people who have a lot of money but they did not do much except working until late in their 40s. They started to spend money recently. Regardless of how much they spend now they will never enjoy it as much as the would have in their 20s. In my opinion this is a fundamental mistake in how they lived their lives. It's the old stereotype about Americans and Japanese who travel the world in their 60s, 70s, 80s (or buying or Porsche or whatever) after wasting their entire lives working. It's too late. They should have done that in their 20s, 30s, 40s.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Day9 »

Based on the title of this blog I assume the target audience is doctors. A quick google search shows the bulk of medical school student debt interest is 6.36%-7.41%. I have heard it is quite tempting for a young doctor to reward their 30 years of diligence by splurging on luxury goods and oversized homes. This is very good advice for the target audience.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Tattarrattat »

Been debt free about 10-15 years since paying off the mortgage. A highly satisfying, serene feeling. Worth a lot. I would never go back into debt, I don't care what I'm leaving on the table by way of leverage or whatever. Plus I've seen a number of people's earning power abruptly cut off by serious health issues, can happen to anyone at anytime, and if it does, it's better to have financial obligations minimized. I understand the arguments for debt, and of course if you're young, it's the only way to buy a house, but having been both in and out of debt, I prefer out.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by JBTX »

Day9 wrote: Mon Oct 12, 2020 7:53 pm Based on the title of this blog I assume the target audience is doctors. A quick google search shows the bulk of medical school student debt interest is 6.36%-7.41%. I have heard it is quite tempting for a young doctor to reward their 30 years of diligence by splurging on luxury goods and oversized homes. This is very good advice for the target audience.
That would be a logical way to view it, but the article specifically references 2-4% low interest debt, and uses adjectives like "dumb", and an "otherwise intelligent" Boglehead who had 2.4% $80k loan and cash at 1.6 before tax.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by JonnyDVM »

Scoffing at 3% deductible mortgage debt is extreme.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Trader Joe »

100% debt free here. The feeling is so liberating and free that it really cannot be described.

I am sure that my heart and general health is also benefiting from being 100% debt free.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by JonnyDVM »

I’m big on getting rid of non deductible debt like student loans (for most here not deductible) or consumer debt. I draw the line at low interest deductible debt that has a tangible appreciating object attached to it. If you spent the last 5-10 years focusing on paying down your mortgage over investing, that was some pretty steep opportunity cost.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by MishkaWorries »

Hyperchicken wrote: Mon Oct 12, 2020 7:43 pm Seems like a bit of thesis substitution going on in this article - author begins from paying down debt vs. investing, then jumps to argument against overspending.
I found that odd too. What about us. Last year DW bought a new car and we financed it for 3% because I didn't want to take money out of the brokerage account. Then COVID-19 hit and our bond return bottomed out so I sold some bonds and paid off the new car.

In 2014, we bought my $22,000 car with 2% financing. I didn't have to lose the returns if I had paid cash.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Cycle »

Hard to say anything about the future, but i paid off my 2.8% mortgage during the 2010s in my early 30s when that money would have been growing at 15% per year since.

That will end up equating to a year or so extra working at megacorp. not the end of the world, but notable.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by SB1234 »

Cycle wrote: Mon Oct 12, 2020 9:27 pm Hard to say anything about the future, but i paid off my 2.8% mortgage during the 2010s in my early 30s when that money would have been growing at 15% per year since..
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by StevieG72 »

Great article, well written. I had not thought through the tax implications of paying down debt vs. investing.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by flaccidsteele »

Rowan Oak wrote: Mon Oct 12, 2020 3:27 pm
The person advocating for more leverage is usually a 25-year-old with lots of debt, few assets, and little experience. It never seems to be the 60-year-old multimillionaire I'd like to emulate.
I’m pretty sure every 60-year-old billionaire uses a lot of debt
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by TheLaughingCow »

flaccidsteele wrote: Mon Oct 12, 2020 10:58 pm
Rowan Oak wrote: Mon Oct 12, 2020 3:27 pm
The person advocating for more leverage is usually a 25-year-old with lots of debt, few assets, and little experience. It never seems to be the 60-year-old multimillionaire I'd like to emulate.
I’m pretty sure every 60-year-old billionaire uses a lot of debt
This was absolutely incredible bait, if you intended it.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by ray.james »

To me this reads, as emergDoc is becoming more wealthy, his debt aversion increases. I used to read his blog for some time and there is a definite correlation. I guess most wealth accumulators drift toward it. I model myself around this post of his:

https://www.whitecoatinvestor.com/pay-o ... or-invest/
#1 Get any employer match
# 2 Pay off high-interest rate debt- 8% or more
# 3 Max out available retirement accounts
# 4 Invest in assets with high expected returns
# 5 Pay off moderate interest rate debt (4-7%)
# 6 Invest in assets with moderate expected returns
# 7 Pay off low-interest rate debt (1-3%)
# 8 Invest in assets with low expected returns
In short, the 25 year old to 60 year old views is the trail of wealth :D .
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Dude2 »

JonnyDVM wrote: Mon Oct 12, 2020 8:43 pm Scoffing at 3% deductible mortgage debt is extreme.
I would be uncomfortable to see a person light up a cigar with $100 bill. The median price of a home in the US is $329,000. At the start (assuming 20% down), we will be burning nearly $8000.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by mesaverde »

I'm a public school teacher and have refinanced/extended my ~55% LTV 30 year fixed mortgage back out to 360 months several times.
Currently it's at 3%. If I can do a no cost refinance to 2.5% in the next year or so I won't hesitate.
The mortgage is the only debt I carry. I could choose to pay this debt off with extra principal payments but it would be incredibly stupid in my situation.

By not paying that mortgage down I'm able to contribute $45,000/year to a gov. 457b and 430b with Fidelity and Trad. IRA with Vanguard, which takes me me from the top end of the 22% federal income tax bracket to the top end of the 12% bracket. In effect a GUARANTEED 10% return on that portion of my income, with any investment returns from stocks and bonds icing on the cake. I'll remain in the 12% bracket (or its equivalent) in retirement.
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Post by firebirdparts »

mesaverde wrote: Tue Oct 13, 2020 6:08 am I'm a public school teacher and have refinanced/extended my ~55% LTV 30 year fixed mortgage back out to 360 months several times.
Currently it's at 3%. If I can do a no cost refinance to 2.5% in the next year or so I won't hesitate.
The mortgage is the only debt I carry. I could choose to pay this debt off with extra principal payments but it would be incredibly stupid in my situation.

By not paying that mortgage down I'm able to contribute $45,000/year to a gov. 457b and 430b with Fidelity and Trad. IRA with Vanguard, which takes me me from the top end of the 22% federal income tax bracket to the top end of the 12% bracket. In effect a GUARANTEED 10% return on that portion of my income, with any investment returns from stocks and bonds icing on the cake. I'll remain in the 12% bracket (or its equivalent) in retirement.
Well, okay, but if you were a medical doctor making $300,000 a year, you might do differently. That's who he's talking to.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by smitcat »

Trader Joe wrote: Mon Oct 12, 2020 8:50 pm 100% debt free here. The feeling is so liberating and free that it really cannot be described.

I am sure that my heart and general health is also benefiting from being 100% debt free.
Very interesting - we have had debt fluctuate up and down over the years with no real change in anything at all.
While the level of debt has made little change the amount of our net worth (savings & assetts - debt) has made a large difference.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Sandtrap »

At a personal finance level with an average pay job and a family to support, no debt is better than having debt.

There's a million ways to justify debt, but at this nuts and bolts, pay the bills, support a family, make ends meet, no debt is better than having debt.

Paddling downstream takes less effort than paddling upstream.

OTOH almost anything can be justified and intellectualized as a preferred course of action nowadays. . . . . :oops:
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by CyclingDuo »

Rowan Oak wrote: Mon Oct 12, 2020 3:27 pm
The person advocating for more leverage is usually a 25-year-old with lots of debt, few assets, and little experience. It never seems to be the 60-year-old multimillionaire I'd like to emulate.
https://www.whitecoatinvestor.com/the-w ... bout-debt/
Jim knocked it out of the park on that post!

We were in the camp of justification with the mortgage until I realized that the remaining balance was equal to only 4.7% of our investible assets and as Jim said in his post - leveraging that wasn't going to move the needle enough to hardly even notice. In addition, we no longer itemize with the new standard deduction. So we paid it off and moved on with life.

:sharebeer

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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by hudson »

Up until around age 50, I had a mortgage, always financed vehicles, and used credit cards for nice to have items.
My emergency fund was a credit card. Savings....ha!
There were family pressures to upgrade the house, remodel, add a pool, etc.
After I paid my bills, I spent the excess money to buy "toys."
Somewhere around age 50, it hit me: I'm doing this wrong.
I announced to anyone that would listen, that I wasn't borrowing anymore and I was going to payoff all loans.
If we wanted something, no more home equity advances, we would save up for it, then buy it.
It took a few years to get it right.
If someone asked about debt, I would encourage them to clear all debt and to go debt free...as possible.
Being debt free is freedom.

That doesn't mean that I would liquidate my retirement savings or emergency fund to retire debt. I would protect any safe pile of money. I would pay down debt with current income.
Would I take out a low interest loan (for vehicle or house, etc.) so that I could invest? never
Last edited by hudson on Tue Oct 13, 2020 10:16 am, edited 1 time in total.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by djpeteski »

Excellent! Very concise!
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by vitaflo »

There's a reason that those who do often describe a massive burden being lifted from their shoulders. It is similar to the reason that so few people who become debt-free go back into debt. That is always an option.
This one stuck out to me, and is very true. Once I was debt free it became almost a need to never have debt again. There is definitely a huge aversion to debt for those who have gotten out from under it. And it's not because "all debt is bad" (it's not), but it's a very real positive feeling to not be shackled down or owe anyone money. The value of this is hard to describe to those who still have debt.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by daacrusher2001 »

JBTX wrote: Mon Oct 12, 2020 7:39 pm
daacrusher2001 wrote: Mon Oct 12, 2020 6:18 pm I'm 61, have been debt free for awhile now. It's honestly liberating. The only debt I use now is interest free - for example, I bought a $2800 luxury item last year with zero down and 18 months interest free. I do this from time to time. I could pay cash, but have the cashflow and I'd rather leave my money invested.

It's funny because I have no qualms with a low interest reasonable size mortgage but I've never liked the zero percent financing consumer loan deals, because often you will find if you dig down in the language, if you miss a payment, then you are charged retroactively at a much higher rate. I found that each month I obsessed with getting it paid early, until I finally figured it wasn't worth the hassle and paid it off.

That has been many years ago. I don't know if most 0% consumer loans are still structured that way.
Oh yeah, this is still the case. What's improved is the way you set up payments. I have it auto withdrawn so I never have to think about it. I've been using Affirm. I like to buy Guitars and Amps...lol, and almost all the music stores offer 0% financing through Affirm. It's like free money [LOL, just kidding]
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by retiredjg »

Good blog post Jim. :happy Several new ways of looking at debt.
Valuethinker
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Valuethinker »

mesaverde wrote: Tue Oct 13, 2020 6:08 am I'm a public school teacher and have refinanced/extended my ~55% LTV 30 year fixed mortgage back out to 360 months several times.
Currently it's at 3%. If I can do a no cost refinance to 2.5% in the next year or so I won't hesitate.
The mortgage is the only debt I carry. I could choose to pay this debt off with extra principal payments but it would be incredibly stupid in my situation.

By not paying that mortgage down I'm able to contribute $45,000/year to a gov. 457b and 430b with Fidelity and Trad. IRA with Vanguard, which takes me me from the top end of the 22% federal income tax bracket to the top end of the 12% bracket. In effect a GUARANTEED 10% return on that portion of my income, with any investment returns from stocks and bonds icing on the cake. I'll remain in the 12% bracket (or its equivalent) in retirement.
It's perfectly sensible to use long term, low interest rate (after inflation) non-callable debt to finance maximum tax-deferred account contributions in a given year.

In Canada they actually have something called an ""RRSP loan" (equivalent to an IRA, I think) so that you can maximize your annual contributions -- you cannot carry those over year on year. Then you pay it back over the following 12 months. Not sure about what rates they charge.

But a home is a long term asset and a mortgage loan cannot be called. So you can ride the volatility of stock investments. Also US home mortgage rates are now close to the rate of inflation, so the actual interest rate you are paying is around 1% pa real?

There is a question of where you live in retirement? Do you sell the house and trade down to a cheaper house, or do you have some other source of money to pay off the loan? This is less of an issue in America, where I gather carrying your mortgage into retirement is both possible and quite common? It's a new thing in the UK. After age 55 we can access our pensions (soon to be raised to 57, and then 58 I believe) and people are doing that to pay off mortgages.

Other types of consumer credit, other than credit card balances paid off at the end of every month, should generally be avoided. However car finance is ubiquitous these days and, again, if the interest rates are low enough, may make sense.

There's too many ways to borrow in the modern economy, placing a huge burden on the strength of our behavioural systems of saving.

Believe it or not, there are plenty of people quietly going broke on $300k p.a.
Last edited by Valuethinker on Tue Oct 13, 2020 10:11 am, edited 1 time in total.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Valuethinker »

hudson wrote: Tue Oct 13, 2020 8:36 am Up until around age 50, I had a mortgage, always financed vehicles, and used credit cards for nice to have items.
My emergency fund was a credit card. Savings....ha!
There were family pressures to upgrade the house, remodel, add a pool, etc.
After I paid my bills, I spent the excess money to buy "toys."
Somewhere around age 50, it hit me: I'm doing this wrong.
I announced to anyone that would listen, that I wasn't borrowing anymore and I was going to payoff all loans.
If we wanted something, no more home equity advances, we would save up for it, then buy it.
It took a few years to get it right.
If someone asked about debt, I would encourage them to clear all debt and to go debt free...as possible.
Being debt free is freedom.

That doesn't mean that I would liquidate my retirement savings or emergency fund to retire debt. I would protect any safe pile of money. I would pay down debt with current income.
Would I take out a low interest loan so that I could invest? never
Totally true except for mortgage.

There's nothing wrong with having a 30 year mortgage, at current US mortgage rates, and using that to finance investments into tax deferred accounts- given that those balances generally cannot be carried over to subsequent tax years.

When you get to taxable investments that's a harder call, because your post tax return has to be above the cost of borrowing.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by willthrill81 »

The 'justification' argument that Jim makes is the same one that I've made here several times as well. Many claim to be investing the difference, and some are, but I don't doubt that some do not. Like many aspects of personal finance, it really pays to know oneself.

If someone truly is retaining low-interest fixed debt (e.g. mortgage) in order to buy stocks or rental real estate, then they are likely to improve their returns. But I've lost count of the number of people I've seen who are retaining such debt to buy bonds. The most frequent claim is that they want to retain liquidity, and this can be a valid reason, but I think that many BHs place too much value on liquidity, especially when they have a sizable portfolio. Further, having no debt can substantially decrease one's need for liquidity.

For instance, now that our mortgage is paid off, we could cover all of our essential spending from our state's regular (i.e. non-COVID) unemployment benefits, which last for six months, and I would gain penalty-free access to my 457 plan as soon I separated from my employer. We are well insured on all fronts. Consequently, we don't need much liquidity and don't retain a lot of readily accessible assets.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by finite_difference »

So I shouldn’t go skiing because I have a 30-year mortgage.

If I lived like that, I could probably pay off my mortgage in 10 years instead of 30.

I’d rather hit the slopes.

Balance in all things.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by hudson »

Valuethinker wrote: Tue Oct 13, 2020 10:08 am There's nothing wrong with having a 30 year mortgage,
I agree.
I would've never saved enough to buy a house without a nice 30 year 8 1/4% mortgage. If I was starting out, I'd do it again.
I paid it off, did a home equity, and continually tapped the home equity for years. I used it to help pay for 3 college educations.
When I got the fever to get out of debt, I paid the home equity off. I told the credit union person to tear up the contract. I waited a month, called and asked if I could borrow more. The guy said sure. I told him I wanted that account to go away; they finally closed it.

Until I started following Bogleheads, I thought that car loans were the norm...the standard....the only way to do business. I'd heard of folks paying cash, but no one in my family or others ever discussed that. I pay cash now; but I would only bring it up here or to those who are like minded.
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willthrill81
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by willthrill81 »

finite_difference wrote: Tue Oct 13, 2020 10:29 am So I shouldn’t go skiing because I have a 30-year mortgage.

If I lived like that, I could probably pay off my mortgage in 10 years instead of 30.

I’d rather hit the slopes.

Balance in all things.
I hit the slopes many times when we had a mortgage. It's just important to recognize that when you have debt, you're leveraging the rest of your money.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by tedgeorge »

I agree this article is targeted to high earners who have the means to reduce large debts in a short timeframe. I remember WCI talking about paying off those student loans in like two years by living like a resident. Can't imagine paying down $200K in that timeframe but if I could, I'd do it. Certainly worth missing a ski trip or two.

I do not have the funds to even think about reducing my 25 year mortgage to anything less than say 22. That makes me feel it's not worth it (even if the math says otherwise). But if I had the income to bring that 25 down to 3-5 years, I'd be staring at that option very hard.

Horses for courses as they say...
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by hudson »

tedgeorge wrote: Tue Oct 13, 2020 10:57 am I do not have the funds to even think about reducing my 25 year mortgage to anything less than say 22. That makes me feel it's not worth it (even if the math says otherwise). But if I had the income to bring that 25 down to 3-5 years, I'd be staring at that option very hard.

Horses for courses as they say...
tedgeorge,
I was in the same boat exactly for decades. I just started chipping away and prioritizing. I made vehicles last longer. I didn't take out any new loans. Now the debt is gone. My goal was to clear it all out at 50....but I may have missed it a few years. Even paid for, it's not inexpensive to maintain a home, but that fixed XXX dollars a month has gone away. Or for a vehicle, once the car payments are gone, a new set of tires isn't as painful.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Meg77 »

Mental accounting impacts all of us - no one is entirely immune to it. The behavioral arguments he touches on in the excerpt posted above are real, and they are exactly the reason why car companies offer 0% financing deals in the first place (and why retailers take credit cards and so on). Because if people had to actually pay cash for automobiles, even wealthy people who can afford a nice car would spend MUCH less!

And I agree VERY few people, even personal finance nerds and bloggers, plop $30,000 in the stock market from savings the same day they finance a $30,000 car purchase. The reality is they hoard higher cash/savings balances and/or they spend more over time - and typically they spend more on the car itself to boot (usually you have to buy a brand new model and add warranties you may otherwise skip just to get the 0%). Very rarely are people increasing retirement contributions or other investments due to the existence of a car loan.

Now I will say that mortgages and student loans are a bit different because they tend to be so much larger. Paying those off quickly or avoiding them altogether WOULD probably mean less investing for most people, at least for a few years. But the availability of debt still enables us all to put our money into mental buckets and justify spending and keeping debt around that otherwise we would not. It's not evil, but it's helpful to acknowledge our less than fully rational tendencies so we can keep them in check.

PS investing in bonds while keeping debt around is one of the things that is inherently not rational in many cases, from a net worth maximization perspective at least (there is some value to having a certain level of liquidity from a risk mitigation perspective). While a PORTFOLIO might well earn more than the rate on your debt, the reality is that bonds will very rarely pay more than debt costs - by definition: a bond is usually a pool of mortgages or other loans. But people like to invest in bonds while letting their "good" debts hand around for years if not decades happily paying interest on one hand while earning it on the other.
"An investment in knowledge pays the best interest." - Benjamin Franklin
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Hyperchicken »

Meg77 wrote: Tue Oct 13, 2020 12:24 pm ...
And I agree VERY few people, even personal finance nerds and bloggers, plop $30,000 in the stock market from savings the same day they finance a $30,000 car purchase.
...
Of course not - why would $30,000 sit in cash in the first place? It's been in the stock market all along, and no reason to take it out of there, not when you can borrow cheap, let alone borrow free (you mentioned 0% financing deals).
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Carguy85 »

It takes all kinds of kinds. Car companies make the most profit off the options....likewise restaurants enjoy the purchase of highly profitable extras like soft drinks and to probably a lesser extent appetizers. Bankers, car salesmen/women, credit card companies etc all have families to feed. ...so good for those people. :D
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MrBobcat
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by MrBobcat »

# 7 Use a More Aggressive Asset Allocation
People only have a certain amount of risk tolerance in their life. If you use it all up on leverage risk, you are less likely to have any left over to use elsewhere. Perhaps paying off your debt would allow you to tolerate a more aggressive asset allocation while still sleeping soundly at night. The long term benefits of that are likely to overwhelm any potential arbitrage between your car loan interest rate and rate of return on a few thousand dollars.
This put into words what I always felt regarding debt. Big stress/risk relief when debt is gone (at least for me), which does free up my risk tolerance on my AA.

Anywho, one of my more favorite quotes on debt:

"Too much debt doubles the weight on your horse and puts another in charge of the reins". - Texas Bix Bender "Don't Squat with yer Spurs On!"
mak1277
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by mak1277 »

I've started pushing back on these people (and no, they don't like it) by asking them two questions:

1) Are you rich yet?
2) If you are, did carrying debt at 2-4% while investing contribute to any significant portion of it?

The answer to number one is almost always no, but even if it isn't, the answer to number two is also almost always no
I think this is the crux of it for me. Sure, intellectually/mathematically, it's optimal to keep low rate debt and invest instead. But in reality, it's not going to make a big enough difference to matter in the long run. The intangible benefits of not having debt are good enough to forego the optimal, but minimal, benefits of keeping debt, at least for me.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by JackoC »

flaccidsteele wrote: Mon Oct 12, 2020 10:58 pm
Rowan Oak wrote: Mon Oct 12, 2020 3:27 pm
The person advocating for more leverage is usually a 25-year-old with lots of debt, few assets, and little experience. It never seems to be the 60-year-old multimillionaire I'd like to emulate.
I’m pretty sure every 60-year-old billionaire uses a lot of debt
But in most cases the lender won't have recourse to the billionaire personally. Home mortgage lenders also don't typically have recourse to borrowers' other assets in a few states though they do in most, and do in all states for almost all other kinds of consumer debt (margin loans, student loans, cars, CC etc). Whereas owning stocks is also 'using' debt in the sense it's usually a leveraged position in the company's assets, but without recourse to you are stock holder. So 'using' debt and being personally in debt are not the same.

Although it's true many very rich people are big risk takers, or were at some pivotal point in their lives. Back to the assumed audience for the article, MD's, they are mainly taking a risk of *becoming* a doctor, that they'd have some med school debt even if they flunked out. Once they're a doctor it's basically time and effort for attractive payoff without especially much risk. Same is generally true of other common categories of eventual multimillionaire, Wall Street or Big Tech. All have the risk of losing the lucrative position if you screw up personally, or the market for your skills changes enough that you can't adapt. But it's not comparable to the risk necessary to make large fortunes via entrepreneurship. Self made billionaires are a highly survivorship biased remnant of a larger group taking enormous risks heavily stacked against them.

On a practical scale of ordinary people, I can see having a home mortgage if buying a suitable place for cash (let's assume rent v buy is strongly in favor of 'buy') would mean they had nothing left to invest in stocks. Especially if they couldn't even max out tax deferred contributions, more especially if they had to leave 401k matching money on the table. But people financing taxable financial assets with mortgages on this forum are often not analyzing it correctly IME. As another post mentioned sometimes they are financing bonds with mortgages which almost never makes sense. Even against stocks, mortgages are not *that* cheap money (the implied borrowing rate of stock index futures is much lower). Also in various cases they overestimate the tax advantage of mortgages, and/or the value of the prepayment option. Although using mortgages to finance stocks is at least a serious topic, using car loans for example is not: too small, too short term.
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