Your opinion on debt?

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Topic Author
s8r
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Your opinion on debt?

Post by s8r » Mon Apr 01, 2019 2:37 am

I have noticed that many people seem to see debt mainly as a burden. Some even take special pride in being 100% debt-free. I see debt merely as an agreement from which both parties usually benefit. Being debt-free is safe and may be good psychologically, but usually it's not the smartest position to be in financially.

What is your opinion on debt? Is this a generational thing?

Note: I'm referring to mortgage mostly. Credit card debt, car loans, and other types of "unnecessary" debt are a different story.

daze
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Re: Your opinion on debt?

Post by daze » Mon Apr 01, 2019 3:00 am

If you can get a noncallable debt lower than inflation rate, it's probably good.

Valuethinker
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Re: Your opinion on debt?

Post by Valuethinker » Mon Apr 01, 2019 3:06 am

s8r wrote:
Mon Apr 01, 2019 2:37 am
I have noticed that many people seem to see debt mainly as a burden. Some even take special pride in being 100% debt-free. I see debt merely as an agreement from which both parties usually benefit. Being debt-free is safe and may be good psychologically, but usually it's not the smartest position to be in financially.

What is your opinion on debt? Is this a generational thing?

Note: I'm referring to mortgage mostly. Credit card debt, car loans, and other types of "unnecessary" debt are a different story.
Leverage increases returns and increases risk - upside and downside volatility.

Remember though that capitalist economies go through leverage cycles - and if you get caught in the deleveraging phase with a high debt load, it can be very painful. Negative equity on a house (when you have to move for work or other reasons) is no joke. And that is correlated with the downturns - deleveraging is highly likely to include job cuts, especially in financial services. So your labour income may be at risk.

The older one gets, the more one knows of examples of those caught by deleveraging, I find. That, plus the usual effects of age on risk-taking, make one more cautious about debt. I saw something similar with my parents, who remembered the 1930s (but probably should have levered up in the high inflation 1970s).

As per other poster, if you can take on non-callable debt at an interest rate at or below inflation, then it's probably a good deal. If your real interest rate is above 3.0%, say, it starts to get painful.

Norwegian
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Re: Your opinion on debt?

Post by Norwegian » Mon Apr 01, 2019 4:55 am

I don't pay more than the monthly minimum on our mortgage as of now, since I can get a much better interest rate on my pay-down-mortgage-cash in a "house savings account" – don't know the proper English term for this, sorry (3,6 % vs 2,1 % as the interest is on our mortgage). A good, normal savings account can be around 1,9–2,2 % as well, so no use loosing the liquidity of cash anytime soon, as long as our mortgage is this "cheap".

I also only pay the minimum on what little I have in student debt, since the interest is about the same as our mortgage, and won't be transferred over to my wife/kid if I die before paying it off.

dominque
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Re: Your opinion on debt?

Post by dominque » Mon Apr 01, 2019 5:17 am

I agree that maintaining home debt at the current ridiculously low interest rate is financially savvy. But I must say that once I retired my house debt, I don't think I could ever go back. Paying off the house also made me painfully aware of the amount of taxes and insurance I was paying.

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s8r
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Re: Your opinion on debt?

Post by s8r » Mon Apr 01, 2019 5:25 am

Norwegian wrote:
Mon Apr 01, 2019 4:55 am
A good, normal savings account can be around 1,9–2,2 % as well, so no use loosing the liquidity of cash anytime soon, as long as our mortgage is this "cheap".
Do they offer these savings accounts to foreigners?

I know Bank Norwegian does, but the interest rate is only 0.75%. However, even after tax it's still higher than our mortgage rate.

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nisiprius
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Re: Your opinion on debt?

Post by nisiprius » Mon Apr 01, 2019 5:52 am

Image

It is too simplistic to be "for debt" or "against debt," I'm not 100% serious when I post a picture of the boulder. But I would ask why you decided to start a thread about it, opening with your opinion that it is "merely" something. Are you about to take out a loan for something expensive? Are you about to use margin or make a leveraged investment? Why raise a general question about debt?
...I see debt merely as an agreement from which both parties usually benefit...
They usually do. The question is, how often does something unusual happen, and what is the magnitude of the consequences when it does? To put it another way, exactly what did you mean by putting in the word "merely?"

Financial sophisticates often like debt and leverage because, if your predictions of how various asset are going to fluctuate with respect to each other are reliable, then the use of debt can give you superior risk-adjusted returns. That is to say, debt amplifies both risk and return, but it can amplify return more than it amplifies risk.

Buying a house with a mortgage can provide various psychological and comfort benefits with an acceptable level of risk if the mortgage payments are manageable. But it is still an increase in personal financial risk.

Financial sophisticates are often overconfident. They often underestimate the risk, particular at the tails. They are willing to amplify the small, tame, tractable risks of what Taleb calls the land of Mediocristan, in pursuit of higher returns, because they don't really believe they are living in Extremistan. They really believe in their risk models that show that they can only be brought down by a ten-sigma event that can occur only once in 4,000,000,000,000,000,000,000 years. (Amazingly, after the fact, some financiers would rather believe that a ten-sigma event really occurred than believe that their judgement was bad and their risk models were wrong).

Sometimes people take risks because they are risk-tolerant and they have accurately judged the risk. That's reasonable.

Sometimes people take risks because they have convinced themselves that the risks exist for everyone else, but not for them, because they are so clever. That's dangerous. (Have you read the famous thread, A different approach to asset allocation?)

Sometimes people take risks because they like the adrenalin rush and are really willing to "make and lose several fortunes." That's OK for some people.

Sometimes people take risks because someone else has sold them something risky and made them believe that it wasn't. That's bad.
Last edited by nisiprius on Mon Apr 01, 2019 6:23 am, edited 1 time in total.
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hudson
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Re: Your opinion on debt?

Post by hudson » Mon Apr 01, 2019 6:22 am

nisiprius wrote:
Mon Apr 01, 2019 5:52 am
Image
I like nisiprius's image of one of Babson's Boulders done during the Great Depression. My grandmother grew up in a nearby fishing village but never mentioned the boulders.

My father-in-law said that borrowing is the only way that poor people can have anything.

I vote for no debt unless necessary.
I vote no debt to play financial games with investments.

JoeRetire
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Re: Your opinion on debt?

Post by JoeRetire » Mon Apr 01, 2019 6:26 am

s8r wrote:
Mon Apr 01, 2019 2:37 am
I have noticed that many people seem to see debt mainly as a burden. Some even take special pride in being 100% debt-free. I see debt merely as an agreement from which both parties usually benefit. Being debt-free is safe and may be good psychologically, but usually it's not the smartest position to be in financially.

What is your opinion on debt? Is this a generational thing?

Note: I'm referring to mortgage mostly. Credit card debt, car loans, and other types of "unnecessary" debt are a different story.
I see debt as a tool. In some instances it's handy and a smart use of leverage. For me, it has never been a burden - but of course I have never let my debt get out of control.

I don't believe in the "100% debt-free" thing. And in reality even the proponents don't, otherwise they would have saved enough to purchase every home outright and never have a mortgage.

It doesn't appear to be a generational thing in my experience.

indexonlyplease
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Re: Your opinion on debt?

Post by indexonlyplease » Mon Apr 01, 2019 6:28 am

I will never understand how people hate car payments but they are ok with a 30 plus year house loan. Why I say 30 plus years is because most people refinance their house loans.

Paying off your house is like any other debt. It allows you to save on the interest of the loan and also take away the risk of the loan. Financial advisors have always stated it's better to not pay down the loan and invest the money instead. Why because they say you will make more in the market. This only occurs with no mistakes in investing.

Paying off that loan guarentees you savings on interest. I would say the best approach is get a 15 year loan then you don't have to worry about making the extra payments. If the 15 year loan payment is to high then you bought to much house. You don't increase your car loan to 10 years to buy the more expensive car.

I will also agree when they say the house is not an investment. Sure it may increase or decrease in value but look at the money you spend over the years owning the house. I think that would be like paying an Investment Advisor 2% to manage your index fund.

6Pack
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Re: Your opinion on debt?

Post by 6Pack » Mon Apr 01, 2019 6:39 am

My opinion on debt is simple: it’s negative interest and should be avoided.

If I have $50,000 at Vanguard earning 6% and $50,000 in debt at 2%, my net interest is +4%. You’ll never break even with the market returns with debt.

Also, paying off debt is guaranteed to provide a high return on your investment. In the example above, if I paid off my $50,000 debt I’d be guaranteed a 4% return. You can’t get a guaranteed 4% return in this market.

So my opinion is that debt should be avoided. If debt can’t be avoided, then it should be paid off as quickly as possible.

B4Xt3r
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Re: Your opinion on debt?

Post by B4Xt3r » Mon Apr 01, 2019 6:40 am

The kinds of questions I kind of ask myself are:

(1) Will the debt secure value that I deem greater than the risk of default? For example, taking out a loan to get an engineering degree would pass this test. Colloquially, is the debt worthwhile?

(2) Is the debt the least intrusive way to accomplish (1)? Colloquially, is there a cheaper way to do what is worthwhile?

(3) Is the cost to service the debt a low fraction of my monthly cash flow? Even if its worthwhile the cheapest avenue, can I even afford it?

Maybe someone else will add questions (4)...to (n).

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Re: Your opinion on debt?

Post by djpeteski » Mon Apr 01, 2019 6:47 am

If you believe in the benefits of compounding interest then it is hard to understand those people that find debt acceptable. It is just compounding interest working against you. Sure, you can play the arbitrage game, but is the risk really worth 1% or so? I don't think so. Many people on this site have complained about the ability of finding a job later in life. Debt is pledging your future income.

Many do not consider the uncertainty of the future income. They may be reluctant to put money in the market "when it is high", but they will put a car on a 7 year note? The one they choose is certain to lose money.

And lets face it, most people are not initiating good debt. They are buying depreciating assets that should be well beyond their income and asset level. They are doing so to the detriment of their retirement savings.

Now I would be willing to borrow money to play the arbitrage game if the profit potential was enough. I'd have to be more like 20%. If Chick-Fil-A ever calls, I'd borrow money to open one.
Last edited by djpeteski on Mon Apr 01, 2019 6:49 am, edited 1 time in total.

JoeRetire
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Re: Your opinion on debt?

Post by JoeRetire » Mon Apr 01, 2019 6:48 am

6Pack wrote:
Mon Apr 01, 2019 6:39 am
If debt can’t be avoided, then it should be paid off as quickly as possible.
Of course mortgage debt can always be avoided.

Valuethinker
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Re: Your opinion on debt?

Post by Valuethinker » Mon Apr 01, 2019 7:08 am

s8r wrote:
Mon Apr 01, 2019 5:25 am
Norwegian wrote:
Mon Apr 01, 2019 4:55 am
A good, normal savings account can be around 1,9–2,2 % as well, so no use loosing the liquidity of cash anytime soon, as long as our mortgage is this "cheap".
Do they offer these savings accounts to foreigners?

I know Bank Norwegian does, but the interest rate is only 0.75%. However, even after tax it's still higher than our mortgage rate.
You have to be comfortable with Norwegian Kronor exchange rate risk?

Valuethinker
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Re: Your opinion on debt?

Post by Valuethinker » Mon Apr 01, 2019 7:11 am

Norwegian wrote:
Mon Apr 01, 2019 4:55 am
I don't pay more than the monthly minimum on our mortgage as of now, since I can get a much better interest rate on my pay-down-mortgage-cash in a "house savings account" – don't know the proper English term for this, sorry (3,6 % vs 2,1 % as the interest is on our mortgage). A good, normal savings account can be around 1,9–2,2 % as well, so no use loosing the liquidity of cash anytime soon, as long as our mortgage is this "cheap".
I think this is an Australian (and British) thing called a "flexible mortgage" or a "mortgage offset account". Your mortgage balance is offset by any deposits in your current account. They work fine if you have 1). flexible rate mortgages 2). a relatively large amount of equity in your home.
I also only pay the minimum on what little I have in student debt, since the interest is about the same as our mortgage, and won't be transferred over to my wife/kid if I die before paying it off.
In that sense a debt can be a form of life insurance.

MDfan
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Re: Your opinion on debt?

Post by MDfan » Mon Apr 01, 2019 7:35 am

Our only debt is our mortgage and I've resigned myself to carrying that well into retirement. We are financially able to pay it off but it's such a low rate (3.375) I just don't see a need to and don't want to give up the liquidity.

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s8r
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Re: Your opinion on debt?

Post by s8r » Mon Apr 01, 2019 7:36 am

Well, it seems that some people get too much into debt. I was talking about reasonable amounts of debt, which is generally a good thing.

For example, if my house burned down and the insurance company refused to compensate for some reason, it wouldn't be a life-changing financial disaster for me. That's a reasonable amount of debt.
Last edited by s8r on Mon Apr 01, 2019 7:39 am, edited 2 times in total.

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s8r
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Re: Your opinion on debt?

Post by s8r » Mon Apr 01, 2019 7:38 am

Valuethinker wrote:
Mon Apr 01, 2019 7:08 am
s8r wrote:
Mon Apr 01, 2019 5:25 am
Norwegian wrote:
Mon Apr 01, 2019 4:55 am
A good, normal savings account can be around 1,9–2,2 % as well, so no use loosing the liquidity of cash anytime soon, as long as our mortgage is this "cheap".
Do they offer these savings accounts to foreigners?

I know Bank Norwegian does, but the interest rate is only 0.75%. However, even after tax it's still higher than our mortgage rate.
You have to be comfortable with Norwegian Kronor exchange rate risk?
Bank Norwegian offers savings accounts in EUR, which is my home currency.

Nissanzx1
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Re: Your opinion on debt?

Post by Nissanzx1 » Mon Apr 01, 2019 7:43 am

At 39, We had finally paid off mortgage, wife’s law school loans, etc. We would never borrow again other than our credit card we pay balance on monthly.

The amount of money we can now invest is staggering. Wish I would have done it 10 years ago to be honest. True peace.

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Re: Your opinion on debt?

Post by Grt2bOutdoors » Mon Apr 01, 2019 8:00 am

s8r wrote:
Mon Apr 01, 2019 2:37 am
I have noticed that many people seem to see debt mainly as a burden. Some even take special pride in being 100% debt-free. I see debt merely as an agreement from which both parties usually benefit. Being debt-free is safe and may be good psychologically, but usually it's not the smartest position to be in financially.

What is your opinion on debt? Is this a generational thing?

Note: I'm referring to mortgage mostly. Credit card debt, car loans, and other types of "unnecessary" debt are a different story.
It’s fine to take a mortgage so long as you don’t over leverage yourself to the lender. If you need to borrow more than 80% of the purchase price, you are over levered. If you need two mortgages and/or HELOC, you are over leveraged. Mortgage debt is fine if you can make payments on a timely basis. Debt is not fine if you can not make payments on a timely basis, if you are burdened by it such that it impedes daily living and/or adds stress that creates harm in your life and/or relationships.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Norwegian
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Re: Your opinion on debt?

Post by Norwegian » Mon Apr 01, 2019 9:43 am

Valuethinker wrote:
Mon Apr 01, 2019 7:11 am
Norwegian wrote:
Mon Apr 01, 2019 4:55 am
I don't pay more than the monthly minimum on our mortgage as of now, since I can get a much better interest rate on my pay-down-mortgage-cash in a "house savings account" – don't know the proper English term for this, sorry (3,6 % vs 2,1 % as the interest is on our mortgage). A good, normal savings account can be around 1,9–2,2 % as well, so no use loosing the liquidity of cash anytime soon, as long as our mortgage is this "cheap".
I think this is an Australian (and British) thing called a "flexible mortgage" or a "mortgage offset account". Your mortgage balance is offset by any deposits in your current account. They work fine if you have 1). flexible rate mortgages 2). a relatively large amount of equity in your home.
It’s more like a normal savings account, but I’m only allowed to use the money I put in it to buy an apartment or pay rent.

That said there is a maximim amount you get the best interest on, after that it’s like any other 0,3–0,6 % account.

Edit: it’s only available until you turn 34.

Valuethinker
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Re: Your opinion on debt?

Post by Valuethinker » Mon Apr 01, 2019 9:45 am

s8r wrote:
Mon Apr 01, 2019 7:38 am
Valuethinker wrote:
Mon Apr 01, 2019 7:08 am
s8r wrote:
Mon Apr 01, 2019 5:25 am
Norwegian wrote:
Mon Apr 01, 2019 4:55 am
A good, normal savings account can be around 1,9–2,2 % as well, so no use loosing the liquidity of cash anytime soon, as long as our mortgage is this "cheap".
Do they offer these savings accounts to foreigners?

I know Bank Norwegian does, but the interest rate is only 0.75%. However, even after tax it's still higher than our mortgage rate.
You have to be comfortable with Norwegian Kronor exchange rate risk?
Bank Norwegian offers savings accounts in EUR, which is my home currency.
OK.

Then check its credit rating. And what happens if it has to be bailed out - Norway had a banking crisis in the early 1990s, and it has one of the highest levels of personal indebtedness in the world, so it could again.

The reason I say check that, is because in the case of some accounts Icelandic banks were offering in the UK, it turned out the deposit guarantee was made by the *Icelandic* government, not the British government, despite being regulated as UK retail deposits. And thus, there was a multi-year debate as to whether depositors would be paid back even up to the £32k (that was the deposit insurance limit in 2008) - the UK and Dutch governments had to negotiate with the Icelandic government which turned out to be a pretty tough negotiator (as anyone would have told you from the 1970s "Cod Wars" over fishing rights) - at the heart and soul, these are Vikings and they carry that spirit of their ancestors*.

It's essentially impossible for Norway as a whole to go bankrupt (given the $1 trillion state oil fund) but it would be worth knowing what happens if it hits the fan with Norwegian banking.

Eurozone interest rates are likely to go negative (are there, already, for some situations) as the Eurozone slumps into recession (not unlikely). So it's a scramble to lock in higher interest rates while you can, being ever mindful of credit risk.

* one of Alcoa's largest new plants is in Iceland. And it had an industrial safety issue. When the alarm rang, employees did not evacuate and move towards designated assembly areas as we are all taught to do**.

Instead they would run *towards* the source of the alarm incident. Even if not properly trained to deal with that particular problem and thus raising the chance of a harmful or fatal accident.

Vikings. These people are heart-and-soul, Vikings.

** we have a "scatter and hide" code as well. In case of a terrorist incident in central London. These times we live in.
Last edited by Valuethinker on Mon Apr 01, 2019 9:50 am, edited 1 time in total.

Valuethinker
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Re: Your opinion on debt?

Post by Valuethinker » Mon Apr 01, 2019 9:46 am

Norwegian wrote:
Mon Apr 01, 2019 9:43 am
Valuethinker wrote:
Mon Apr 01, 2019 7:11 am
Norwegian wrote:
Mon Apr 01, 2019 4:55 am
I don't pay more than the monthly minimum on our mortgage as of now, since I can get a much better interest rate on my pay-down-mortgage-cash in a "house savings account" – don't know the proper English term for this, sorry (3,6 % vs 2,1 % as the interest is on our mortgage). A good, normal savings account can be around 1,9–2,2 % as well, so no use loosing the liquidity of cash anytime soon, as long as our mortgage is this "cheap".
I think this is an Australian (and British) thing called a "flexible mortgage" or a "mortgage offset account". Your mortgage balance is offset by any deposits in your current account. They work fine if you have 1). flexible rate mortgages 2). a relatively large amount of equity in your home.
It’s more like a normal savings account, but I’m only allowed to use the money I put in it to buy an apartment or pay rent.

That said there is a maximim amount you get the best interest on, after that it’s like any other 0,3–0,6 % account.

Edit: it’s only available until you turn 34.
That sounds closer to some of the homebuyer assistance programmes the government has come up with here in the UK. You get a tax advantage to contribute but you can only draw the money out to purchase a new home (or eventually when you retire) - at least that's my rough understanding of programmes in which I am far too old to participate ;-).

KlangFool
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Re: Your opinion on debt?

Post by KlangFool » Mon Apr 01, 2019 9:59 am

OP,

I think that is the wrong question. If a person buys a house and the PITI is significantly less than rent, why pay off the mortgage? The problem is not the mortgage. It is the price of the house.

KlangFool

Norwegian
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Re: Your opinion on debt?

Post by Norwegian » Mon Apr 01, 2019 10:00 am

Valuethinker wrote:
Mon Apr 01, 2019 9:46 am
Norwegian wrote:
Mon Apr 01, 2019 9:43 am
Valuethinker wrote:
Mon Apr 01, 2019 7:11 am
Norwegian wrote:
Mon Apr 01, 2019 4:55 am
I don't pay more than the monthly minimum on our mortgage as of now, since I can get a much better interest rate on my pay-down-mortgage-cash in a "house savings account" – don't know the proper English term for this, sorry (3,6 % vs 2,1 % as the interest is on our mortgage). A good, normal savings account can be around 1,9–2,2 % as well, so no use loosing the liquidity of cash anytime soon, as long as our mortgage is this "cheap".
I think this is an Australian (and British) thing called a "flexible mortgage" or a "mortgage offset account". Your mortgage balance is offset by any deposits in your current account. They work fine if you have 1). flexible rate mortgages 2). a relatively large amount of equity in your home.
It’s more like a normal savings account, but I’m only allowed to use the money I put in it to buy an apartment or pay rent.

That said there is a maximim amount you get the best interest on, after that it’s like any other 0,3–0,6 % account.

Edit: it’s only available until you turn 34.
That sounds closer to some of the homebuyer assistance programmes the government has come up with here in the UK. You get a tax advantage to contribute but you can only draw the money out to purchase a new home (or eventually when you retire) - at least that's my rough understanding of programmes in which I am far too old to participate ;-).
Sound about right! Unfortunately I used the tax advantage one (you can only have one) for my first home purchase, so this account “only” has the high interest.

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Tycoon
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Re: Your opinion on debt?

Post by Tycoon » Mon Apr 01, 2019 10:02 am

Debt? We paid off our 5.625% debt many years ago and invested the money we would have paid the mortgage company. The investments have returned a good bit more than 10%. That's what I think about debt.
Emotionless, prognostication free investing. Ignoring the noise and economists since 1979. I see the world as it is; not how I wish it to be.

WildBill
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Re: Your opinion on debt?

Post by WildBill » Mon Apr 01, 2019 10:06 am

Howdy

The rich rule over the poor, and the borrower is slave to the lender.

Proverbs 22.7

Enough said. I completely understand in my rational brain the attraction of debt and the possibilities of leverage, but my lizard brain hollers “BS”, so I do not like debt.

Happy debt-free living.

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

runner3081
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Re: Your opinion on debt?

Post by runner3081 » Mon Apr 01, 2019 10:37 am

s8r wrote:
Mon Apr 01, 2019 2:37 am
I have noticed that many people seem to see debt mainly as a burden. Some even take special pride in being 100% debt-free. I see debt merely as an agreement from which both parties usually benefit. Being debt-free is safe and may be good psychologically, but usually it's not the smartest position to be in financially.

What is your opinion on debt? Is this a generational thing?

Note: I'm referring to mortgage mostly. Credit card debt, car loans, and other types of "unnecessary" debt are a different story.
There are tons of other unnecessary debts. For example, buying too much house is unnecessary debt.

The reality is that not having debt gives you more options with current cash flow.

mptfan
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Re: Your opinion on debt?

Post by mptfan » Mon Apr 01, 2019 10:42 am

s8r wrote:
Mon Apr 01, 2019 2:37 am
Being debt-free is safe and may be good psychologically, but usually it's not the smartest position to be in financially.
I respectfully disagree, I think being debt free is usually the smartest position to be in financially.

pdavi21
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Re: Your opinion on debt?

Post by pdavi21 » Mon Apr 01, 2019 11:18 am

There are hidden costs to debt. You have to beat the rate and the costs. Not always possible without taking on more risk than a debt laden person needs.

EDIT: As for "both parties benefit"...if you can beat your mortgage through investing, why doesn't the mortgage company just invest in what you were going to invest in without all the extra costs?
Last edited by pdavi21 on Mon Apr 01, 2019 11:21 am, edited 2 times in total.
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MathWizard
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Re: Your opinion on debt?

Post by MathWizard » Mon Apr 01, 2019 11:19 am

s8r wrote:
Mon Apr 01, 2019 2:37 am
I have noticed that many people seem to see debt mainly as a burden. Some even take special pride in being 100% debt-free. I see debt merely as an agreement from which both parties usually benefit. Being debt-free is safe and may be good psychologically, but usually it's not the smartest position to be in financially.

What is your opinion on debt? Is this a generational thing?

Note: I'm referring to mortgage mostly. Credit card debt, car loans, and other types of "unnecessary" debt are a different story.
It it not always possible to have all the money to do the things that you need to do. If you have parents who buy you your first car,
pay for college, and help with wedding costs, then maybe your only debt would be a mortgage, but not everyone has that.

I incurred debt to get a car to go to work so I could make money (no public transit where I lived.)
I incurred debt to have a place to live. (Kept it as small as possible.)
I incurred debt to increase my earning potential (college through PhD).
I incurred debt while in grad school to get an engagement ring & wedding bands ($300 total.), since I had virtually no money.
Some people even use leverage on stocks, but I don't do that.

Other debt I avoid, and I am debt free now. Credit Cards are used for convenience, so I don't consider them debt, just float.

Trader Joe
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Re: Your opinion on debt?

Post by Trader Joe » Mon Apr 01, 2019 11:22 am

s8r wrote:
Mon Apr 01, 2019 2:37 am
I have noticed that many people seem to see debt mainly as a burden. Some even take special pride in being 100% debt-free. I see debt merely as an agreement from which both parties usually benefit. Being debt-free is safe and may be good psychologically, but usually it's not the smartest position to be in financially.

What is your opinion on debt? Is this a generational thing?

Note: I'm referring to mortgage mostly. Credit card debt, car loans, and other types of "unnecessary" debt are a different story.
I have always avoided debt (all types). This has led to great success.

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s8r
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Re: Your opinion on debt?

Post by s8r » Mon Apr 01, 2019 11:51 am

The view on debt is probably dependent on where you live. It's no surprise that people living for example in North America or Central Europe are relatively debt averse since renting is quite competitive compared to owning.

However, in many parts of the world renting is far less attractive. My housing expenses weren't really that much lower in my old rental apartment compared to the house I currently own (well, the bank owns most of it for the time being).

EDIT:
Also, universities here are free. That means there are no hefty student loans to deal with anyway. Usually the only type of debt you need is a mortgage.
Last edited by s8r on Mon Apr 01, 2019 12:11 pm, edited 1 time in total.

bloom2708
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Re: Your opinion on debt?

Post by bloom2708 » Mon Apr 01, 2019 12:05 pm

Your views may change with experience.

Here is the baseline:

1. Every house has a mortgage (or 2) and a HELOC
2. Every car has a car loan
3. Every boat has a boat loan (insert jet ski, snowmobile, ATV, pontoon, lawnmower)
4. Every student has a student loan
5. Every person has 1 to 20 credit card loans (0%!)
6. Every piece of furniture has a furniture loan (0%!)
7. Every phone has a phone payment
8. Etc etc

This gets you spending your money before you earn it. Maybe up to 30 years before you might earn it.

As you go along, you may find that you don't need or want to borrow for every purchase (big or small).

It is a lifestyle choice and a mindset as much as anything. The waiting is the hardest part...
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

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Toons
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Re: Your opinion on debt?

Post by Toons » Mon Apr 01, 2019 12:19 pm

Debt-Eliminate
Free The Mind.
You won't have to give any of your mental energy.
Focus on something else
:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

bloom2708
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Re: Your opinion on debt?

Post by bloom2708 » Mon Apr 01, 2019 12:24 pm

s8r wrote:
Mon Apr 01, 2019 11:51 am
Also, universities here are free. That means there are no hefty student loans to deal with anyway. Usually the only type of debt you need is a mortgage.
Take care with "free".

Free = tax (someone is paying).

"Free healthcare" = tax (someone is paying)

"Free college" = tax (someone is paying)

There is no "free". :wink:
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

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marti038
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Re: Your opinion on debt?

Post by marti038 » Mon Apr 01, 2019 12:30 pm

We're comfortable carrying debt on appreciating assets, but avoid it on depreciating assets.

Basically, our mortgage is the only debt we have and probably the only debt we'll ever have going forward, although I would be comfortable with carrying a reasonable amount of debt to pay for education (assuming the education is likely to produce a higher return in the long run).

randomguy
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Re: Your opinion on debt?

Post by randomguy » Mon Apr 01, 2019 12:47 pm

indexonlyplease wrote:
Mon Apr 01, 2019 6:28 am
I will never understand how people hate car payments but they are ok with a 30 plus year house loan. Why I say 30 plus years is because most people refinance their house loans.

Paying off your house is like any other debt. It allows you to save on the interest of the loan and also take away the risk of the loan. Financial advisors have always stated it's better to not pay down the loan and invest the money instead. Why because they say you will make more in the market. This only occurs with no mistakes in investing.

Paying off that loan guarentees you savings on interest. I would say the best approach is get a 15 year loan then you don't have to worry about making the extra payments. If the 15 year loan payment is to high then you bought to much house. You don't increase your car loan to 10 years to buy the more expensive car.
Out of all the 30 year periods in the last 100 or so years, how often has paying off the mortgage won out? It is a tough calculation to do but on average paying off the mortgage is a loser move.

And I don’t know if you have seen the trends but people people have been increasing car loan terms for the past decade. I think 84 months is pretty standard😄

Ron Ronnerson
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Re: Your opinion on debt?

Post by Ron Ronnerson » Mon Apr 01, 2019 1:01 pm

I recently opened up a checking account that pays 4% interest (on up to $30k balance but multiple accounts are allowed). I’m in the 12% federal and 0% California income tax brackets so the after-tax rate is 3.52%. My mortgage is at 3.25% (30-year fixed) but I itemize on state taxes so the effective mortgage rate is a bit lower. The local rate of inflation over the past year has been 3.5%. My mortgage debt is not bothering me at all. Paying extra towards it means losing money.

markcoop
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Re: Your opinion on debt?

Post by markcoop » Mon Apr 01, 2019 1:03 pm

My view on debt varies with the associated interest rate.

If I buy a car and they are offering 0% interest, I think I'd be foolish not to take it. How about at 0.9% interest (which is what I currently have)? Clearly, the higher the interest rate, the worse it is to hold the debt. At 0.9%, I'm fine holding it.

I also have 10 years left on a 2.75% mortgage. When I was deducting the interest, I had planned on keeping it. I still may keep it. If I were to come into some unexpected money, I'd probably pay it off now.

Credit card - never.
Mark

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Re: Your opinion on debt?

Post by fposte » Mon Apr 01, 2019 1:04 pm

MathWizard wrote:
Mon Apr 01, 2019 11:19 am
It it not always possible to have all the money to do the things that you need to do. .
Yup, agreed. For me, practicality wins out over mental purity. I can be fiscally responsible and still find being debt-free a lower priority than, say, living in a house I enjoy. Money is a tool, not a goal.

quantAndHold
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Re: Your opinion on debt?

Post by quantAndHold » Mon Apr 01, 2019 1:08 pm

Debt is like a chainsaw. When used properly, it’s a useful tool that does jobs that would be difficult to do another way. Used improperly, you can cut off your own leg.

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Re: Your opinion on debt?

Post by bloom2708 » Mon Apr 01, 2019 1:10 pm

fposte wrote:
Mon Apr 01, 2019 1:04 pm
MathWizard wrote:
Mon Apr 01, 2019 11:19 am
It it not always possible to have all the money to do the things that you need to do. .
Yup, agreed. For me, practicality wins out over mental purity. I can be fiscally responsible and still find being debt-free a lower priority than, say, living in a house I enjoy. Money is a tool, not a goal.
It it not always possible to have all the money to do the things that you need to do.

It it not always possible to have all the money to do the things that you want to do.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

fposte
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Re: Your opinion on debt?

Post by fposte » Mon Apr 01, 2019 1:15 pm

bloom2708 wrote:
Mon Apr 01, 2019 1:10 pm
fposte wrote:
Mon Apr 01, 2019 1:04 pm
MathWizard wrote:
Mon Apr 01, 2019 11:19 am
It it not always possible to have all the money to do the things that you need to do. .
Yup, agreed. For me, practicality wins out over mental purity. I can be fiscally responsible and still find being debt-free a lower priority than, say, living in a house I enjoy. Money is a tool, not a goal.
It it not always possible to have all the money to do the things that you need to do.

It it not always possible to have all the money to do the things that you want to do.
I can't tell if you're agreeing or disagreeing, and whether it's with me or MathWizard. But since it was possible to have the thing I wanted for an interest rate I was willing to support, making for a total cost that was absolutely worth it to me, a mortgage was a reasonable thing for me to acquire.

hightower
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Re: Your opinion on debt?

Post by hightower » Mon Apr 01, 2019 1:18 pm

s8r wrote:
Mon Apr 01, 2019 2:37 am
I have noticed that many people seem to see debt mainly as a burden. Some even take special pride in being 100% debt-free. I see debt merely as an agreement from which both parties usually benefit. Being debt-free is safe and may be good psychologically, but usually it's not the smartest position to be in financially.

What is your opinion on debt? Is this a generational thing?

Note: I'm referring to mortgage mostly. Credit card debt, car loans, and other types of "unnecessary" debt are a different story.
The problem I have with debt is that you are really borrowing from your future self's freedom. You are guaranteeing that you HAVE to go to work to pay it back. Whether it's for a mortgage, car, boat, whatever, doesn't matter. As long as you have debt, you are required to do something to repay it. I think that's why you hear a lot of people talking about being debt-free as a positive thing. Being debt free means you are free to work for yourself and because you want to, not necessarily because you have to. That changes things in terms of your happiness in my opinion. Some people love what they do for a living and others don't. I guess if you're in the camp that loves their job and feels secure and happy there, then debt probably doesn't feel like a big deal.
For me, I'd love to be able to switch jobs, but I can't because I'm still repaying debt that I took on years ago. So, I learned my lesson the hard way. Now, I only pay cash for things or I plan on paying them off before the credit card billing statement comes. I pay cash for cars. I plan on downsizing my house if I ever move again with the rule being that my mortgage has to stay the same size or get smaller. That's how much I hate debt now.

bloom2708
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Re: Your opinion on debt?

Post by bloom2708 » Mon Apr 01, 2019 1:20 pm

fposte wrote:
Mon Apr 01, 2019 1:15 pm
bloom2708 wrote:
Mon Apr 01, 2019 1:10 pm
fposte wrote:
Mon Apr 01, 2019 1:04 pm
MathWizard wrote:
Mon Apr 01, 2019 11:19 am
It it not always possible to have all the money to do the things that you need to do. .
Yup, agreed. For me, practicality wins out over mental purity. I can be fiscally responsible and still find being debt-free a lower priority than, say, living in a house I enjoy. Money is a tool, not a goal.
It it not always possible to have all the money to do the things that you need to do.

It it not always possible to have all the money to do the things that you want to do.
I can't tell if you're agreeing or disagreeing, and whether it's with me or MathWizard. But since it was possible to have the thing I wanted for an interest rate I was willing to support, making for a total cost that was absolutely worth it to me, a mortgage was a reasonable thing for me to acquire.
I wasn't agreeing or disagreeing. That one word changes the statement and perhaps the use of debt.

My car died. I need a car. I have $5,000 saved for my next car. I could buy a $5,000 car (satisfy the need) or buy a new $30k car using debt (satisfy the want). :wink:
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

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whodidntante
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Re: Your opinion on debt?

Post by whodidntante » Mon Apr 01, 2019 1:22 pm

markcoop wrote:
Mon Apr 01, 2019 1:03 pm
My view on debt varies with the associated interest rate.

If I buy a car and they are offering 0% interest, I think I'd be foolish not to take it. How about at 0.9% interest (which is what I currently have)? Clearly, the higher the interest rate, the worse it is to hold the debt. At 0.9%, I'm fine holding it.

I also have 10 years left on a 2.75% mortgage. When I was deducting the interest, I had planned on keeping it. I still may keep it. If I were to come into some unexpected money, I'd probably pay it off now.

Credit card - never.
My debt aversion is proportional to the interest rate also.

MathWizard
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Re: Your opinion on debt?

Post by MathWizard » Mon Apr 01, 2019 2:38 pm

bloom2708 wrote:
Mon Apr 01, 2019 1:20 pm
fposte wrote:
Mon Apr 01, 2019 1:15 pm
bloom2708 wrote:
Mon Apr 01, 2019 1:10 pm
fposte wrote:
Mon Apr 01, 2019 1:04 pm
MathWizard wrote:
Mon Apr 01, 2019 11:19 am
It it not always possible to have all the money to do the things that you need to do. .
Yup, agreed. For me, practicality wins out over mental purity. I can be fiscally responsible and still find being debt-free a lower priority than, say, living in a house I enjoy. Money is a tool, not a goal.
It it not always possible to have all the money to do the things that you need to do.

It it not always possible to have all the money to do the things that you want to do.
I can't tell if you're agreeing or disagreeing, and whether it's with me or MathWizard. But since it was possible to have the thing I wanted for an interest rate I was willing to support, making for a total cost that was absolutely worth it to me, a mortgage was a reasonable thing for me to acquire.
I wasn't agreeing or disagreeing. That one word changes the statement and perhaps the use of debt.

My car died. I need a car. I have $5,000 saved for my next car. I could buy a $5,000 car (satisfy the need) or buy a new $30k car using debt (satisfy the want). :wink:
I'll chime in. I did mean need to do.

One might argue that the engagement ring was not a "need", but this was an event that represented a fork in the road for my life.

I had the choice of continuing grad school or going into the field in oil exploration, which paid very well,
but I would be away from home almost constantly, not the life I wanted as a family man.

She said yes, so we have two great kids and a 36 year marriage.
Had she said no, I would have made more money, but not be been "richer".
There is more to a "rich" life than money.

(I hadn't bought the ring at the time I proposed, she helped pick it out, and it was inexpensive.)

EddyB
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Re: Your opinion on debt?

Post by EddyB » Mon Apr 01, 2019 2:52 pm

bloom2708 wrote:
Mon Apr 01, 2019 12:24 pm
s8r wrote:
Mon Apr 01, 2019 11:51 am
Also, universities here are free. That means there are no hefty student loans to deal with anyway. Usually the only type of debt you need is a mortgage.
Take care with "free".

Free = tax (someone is paying).

"Free healthcare" = tax (someone is paying)

"Free college" = tax (someone is paying)

There is no "free". :wink:
There is no meaning without context.

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