Your opinion on debt?

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RobLyons
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Re: Your opinion on debt?

Post by RobLyons » Mon Apr 01, 2019 3:01 pm

I'm completely OK with mortgage debt and any debt under 3% as long as the borrower has the means to pay and uses it wisely as leverage.

With that said, I'm also not going to wipe out my EF to pay back the last of the wife's school loan this month when I can pay it off slower over the rest of the year, and simply pay another $75-$100 in interest and have less worries.
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JoeRetire
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Re: Your opinion on debt?

Post by JoeRetire » Mon Apr 01, 2019 3:10 pm

hightower wrote:
Mon Apr 01, 2019 1:18 pm
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.
Unless you already have the money with which you would pay off the debt. Then, there is no need to go to work to pay the debt off.
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.
That depends on the new job, doesn't it? Certainly you don't believe that someone in debt has never changed jobs?
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.
But if it stays the same size or gets smaller, you'll still be in debt!

Instead you should sell your house, pay off the mortgage, and rent, right?

Dottie57
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Re: Your opinion on debt?

Post by Dottie57 » Mon Apr 01, 2019 4:04 pm

Debt is spending future income.

My mortgage (1987) was at 10%. Several yearsI refinanced to 8%, kept paying the original amount and paid off early. I was really glad to get rid of the debt.

Tdubs
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Re: Your opinion on debt?

Post by Tdubs » Mon Apr 01, 2019 4:16 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:
This is overlooked by most comments here. A willingness to borrow alters your behavior. You buy more car/boat/school than is wise. A loan unleashes your inner wants. Ok sometimes, but don't make it a habit.

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midareff
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Re: Your opinion on debt?

Post by midareff » Mon Apr 01, 2019 4:31 pm

Debt can be useful in my opinion and a money maker. Financed part of a new car a year ago at 1.49%. Payoff money for the car is sitting in IT Tax-Ex Munis at VG yielding 2.9% tax free. Mortgage is at 3.0% and (at least until recently) a useful IRS deduct for the interest. Have not paid a penny in interest to any other sources in roughly 25 years.

Wricha
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Re: Your opinion on debt?

Post by Wricha » Mon Apr 01, 2019 8:24 pm

WildBill wrote:
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
What does Proverbs/you think of a non recourse loan common in business? As I carry no personal debt but have loans in business. My feeling is debt is essential for maintaining our lifestyle in a free society.

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knpstr
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Re: Your opinion on debt?

Post by knpstr » Mon Apr 01, 2019 8:31 pm

djpeteski wrote:
Mon Apr 01, 2019 6:47 am
If Chick-Fil-A ever calls, I'd borrow money to open one.
It costs $10,000 to start a Chick-fil-A.
You don't have $10,000 to invest?
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

lack_ey
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Re: Your opinion on debt?

Post by lack_ey » Mon Apr 01, 2019 8:43 pm

I also have a car loan at a rate of 0.9%. Keeping that. I was originally going to pay cash, but why not take this?

Mortgage at 3.5%. I'm going to pay it off in around 10 years. The home price was less than 11x the yearly rent the previous owner was getting on it.

Debt is just an investment that somebody else makes on you. I don't really see what the big deal is. Obviously high interest rates are very bad for you.

WildBill
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Re: Your opinion on debt?

Post by WildBill » Mon Apr 01, 2019 9:34 pm

Wricha wrote:
Mon Apr 01, 2019 8:24 pm
WildBill wrote:
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


What does Proverbs/you think of a non recourse loan common in business? As I carry no personal debt but have loans in business. My feeling is debt is essential for maintaining our lifestyle in a free society.
Howdy

A very good question.

Like you I have used loans in business as financing. And as you mention, non-recourse. That never bothered me. Worst case scenario is business is liquidated. All of them worked out.

In my non-business life I have used debt once, for a mortgage, which I paid off as soon as possible. Growing up, our family had difficult finances and we were constrained by debt. I hated it and vowed to never have that happen with my family. And it hasn’t.

Bottom line, the only way to go broke is to borrow money you cannot repay. And to avoid that happening, avoid debt.

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

Wricha
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Re: Your opinion on debt?

Post by Wricha » Tue Apr 02, 2019 10:50 am

WildBill wrote:
Mon Apr 01, 2019 9:34 pm
Wricha wrote:
Mon Apr 01, 2019 8:24 pm
WildBill wrote:
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
Thanks for the reply I am also, personal debt adverse. I realizing I was being disingenuous because I have very large business debt, that you ultimately funds my retirement and employs a number of people.

What does Proverbs/you think of a non recourse loan common in business? As I carry no personal debt but have loans in business. My feeling is debt is essential for maintaining our lifestyle in a free society.
Howdy

A very good question.

Like you I have used loans in business as financing. And as you mention, non-recourse. That never bothered me. Worst case scenario is business is liquidated. All of them worked out.

In my non-business life I have used debt once, for a mortgage, which I paid off as soon as possible. Growing up, our family had difficult finances and we were constrained by debt. I hated it and vowed to never have that happen with my family. And it hasn’t.

Bottom line, the only way to go broke is to borrow money you cannot repay. And to avoid that happening, avoid debt.

W B
Thanks for the rely. I am also debt adverse. Then I realized that I was being disingenuous because I have a large business debt that ultimately funds my retirement and employs a number of people.

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s8r
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Re: Your opinion on debt?

Post by s8r » Tue Apr 02, 2019 11:30 am

WildBill wrote:
Mon Apr 01, 2019 9:34 pm
Bottom line, the only way to go broke is to borrow money you cannot repay.
Well, you can also go broke by simply not making enough money. With or without debt.

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djpeteski
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Re: Your opinion on debt?

Post by djpeteski » Tue Apr 02, 2019 1:41 pm

knpstr wrote:
Mon Apr 01, 2019 8:31 pm
djpeteski wrote:
Mon Apr 01, 2019 6:47 am
If Chick-Fil-A ever calls, I'd borrow money to open one.
It costs $10,000 to start a Chick-fil-A.
You don't have $10,000 to invest?
I would put the cost of starting a Chick-Fil-A at well over 2 million for a stand alone. Probably more like 250K in a mall. I think you need to own a stand alone before you can open a mall one.

Yea, I have the 10K to invest.

BradJ
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Re: Your opinion on debt?

Post by BradJ » Tue Apr 02, 2019 1:47 pm

Debt to me is like running a marathon with work boots on. I also understand that finding your "pain points" is necessary for living your version of a successful life. Having debt is no big deal to some people, but for me it just hurts writing a check to anyone other than a charity/religious organization or to myself.

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knpstr
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Re: Your opinion on debt?

Post by knpstr » Tue Apr 02, 2019 2:04 pm

djpeteski wrote:
Tue Apr 02, 2019 1:41 pm
knpstr wrote:
Mon Apr 01, 2019 8:31 pm
djpeteski wrote:
Mon Apr 01, 2019 6:47 am
If Chick-Fil-A ever calls, I'd borrow money to open one.
It costs $10,000 to start a Chick-fil-A.
You don't have $10,000 to invest?
I would put the cost of starting a Chick-Fil-A at well over 2 million for a stand alone. Probably more like 250K in a mall. I think you need to own a stand alone before you can open a mall one.

Yea, I have the 10K to invest.
How do you figure $2M and $250K of your own money?

Chick-fil-a says that it costs $10,000 for a franchisee to start one. Chick-fil-a pays for everything else (real estate, equipment, etc) and you pay them back through % of sales and net income, forever.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

DaftInvestor
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Re: Your opinion on debt?

Post by DaftInvestor » Tue Apr 02, 2019 2:07 pm

If its 0% I usually take it (bought three cars at 0%). If its less than 1% I consider it. Otherwise - I no longer take on debt.

JoeRetire
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Re: Your opinion on debt?

Post by JoeRetire » Tue Apr 02, 2019 3:13 pm

Tdubs wrote:
Mon Apr 01, 2019 4:16 pm
A willingness to borrow alters your behavior. You buy more car/boat/school than is wise. A loan unleashes your inner wants.
Some of us are able to control those impulses.
Sadly, not everyone can.

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s8r
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Re: Your opinion on debt?

Post by s8r » Wed Apr 03, 2019 1:02 am

s8r wrote:
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.
I want to further emphasize the regional differences in attitude towards debt.

In my neighbor country Sweden it's not uncommon to have a 100-year mortgage. You read that right, 100 years. I think the maximum is somewhere around 120+ years. People are basically paying interest only and putting the extra cash into stocks or consumption. Naturally, real estate prices are quite high.

I'm not saying it's smart to have a 100-year mortgage. But things can be quite different depending on where you live.

msk
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Re: Your opinion on debt?

Post by msk » Wed Apr 03, 2019 2:40 am

Choose debt as a business decision. The debt comes at X% interest rate. If I can make 3X% with reasonable assurance I would go for it. Only 2X% and I am not tempted. Another yardstick: If I am ready to take on $100k in debt because it is so attractive, why not a million $? Same as the common queries about investing in one-unit RE. Do NOT ask whether it's OK to invest in one rental unit if the arithmetic terrifies you when you look at 100 units... Mega businesses invariably go bust for having taken on excessive debt. Those debts all looked attractive when initiated, but stuff happens. Ditto for human beings.

beans21
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Re: Your opinion on debt?

Post by beans21 » Wed Apr 03, 2019 6:33 am

Assuming you need to purchase something worth $10k, and you actually have that cash, but are also able to borrow these funds at an interest rate of x% per year

* Option 1: borrow the $10k, invest the $10k with an expected return of y% per year
* Option 2: pay cash

As long as x < y, what is the rational argument against option 1 (I understand the emotional argument that option 1 might lead to borrowing the $10k and spending the cash instead of investing it)?

With current interest rates being so low (i.e. x <<< y), in particular for mortgages (where you also have tax benefits in my country) but even for car loans etc, taking debt at low interest rates and investing cash seems really interesting , no? What am I missing?

Call_Me_Op
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Re: Your opinion on debt?

Post by Call_Me_Op » Wed Apr 03, 2019 6:49 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.
Huh? Why not? I think it's a great position to be in. Debt is never a plus in my view, and frequently leads to such things as foreclosure and bankruptcy.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

EddyB
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Re: Your opinion on debt?

Post by EddyB » Wed Apr 03, 2019 9:59 am

Call_Me_Op wrote:
Wed Apr 03, 2019 6:49 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.
Huh? Why not? I think it's a great position to be in. Debt is never a plus in my view, and frequently leads to such things as foreclosure and bankruptcy.
Too much debt is suboptimal. Not enough debt is suboptimal. The right amount of debt depends on circumstances.

lostdog
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Re: Your opinion on debt?

Post by lostdog » Wed Apr 03, 2019 11:56 am

The borrower is slave to the lender.
VT/VTWAX+BNDW

harrychan
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Re: Your opinion on debt?

Post by harrychan » Wed Apr 03, 2019 6:44 pm

I think you should rename the thread to "Your Opinion on Mortgage?". The issue with debt is that the forces of nature, temptations with keeping up with the jones and what is deemed "normal" is because of debt. It is much easier to sign away years of your life and paycheck with just a signature than it is to pay it off. And yes, this goes for a mortgage too. People put emphasis on the space and location they want rather than what they can realistically afford or need. I'm glad this is better where you live but it isn't the case here.
This is not legal or certified financial advice but you know that already.

Starfish
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Re: Your opinion on debt?

Post by Starfish » Wed Apr 03, 2019 11:39 pm

My opinion on debt is strictly related to the conditions of the debt contract and it has nothing to to with what was used the money for.
There is no difference between mortgage and debt for a car or a tv. It's just mental accounting. y guess is some people conflate 2 separate issues, debt and necessity of and expense. A bad expense is bad regardless if it's on debt or not.
In conclusion if I can get non callable low FIXED interest rate debt, I would take it any day. For a car, or for my grocery expenses. And often the car loans have very good rates and the dealer usually gives you a discount so of course I bought all my cars with loans. Of course the risk of leveraging has to be weighted.

However, I would not like debt at all in retirement because I would have to generate taxable income to service the debt and it becomes expensive.

Starfish
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Re: Your opinion on debt?

Post by Starfish » Wed Apr 03, 2019 11:41 pm

harrychan wrote:
Wed Apr 03, 2019 6:44 pm
I think you should rename the thread to "Your Opinion on Mortgage?". The issue with debt is that the forces of nature, temptations with keeping up with the jones and what is deemed "normal" is because of debt.
Why would that be when the person taking the debt already has savings/net worth? How did they not spend the savings?

Starfish
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Re: Your opinion on debt?

Post by Starfish » Wed Apr 03, 2019 11:42 pm

Call_Me_Op wrote:
Wed Apr 03, 2019 6:49 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.
Huh? Why not? I think it's a great position to be in. Debt is never a plus in my view, and frequently leads to such things as foreclosure and bankruptcy.

Of course debt can be a plus. When the effective interest rate is 2% and market provides 10%, this plus is exactly 8%.

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s8r
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Re: Your opinion on debt?

Post by s8r » Thu Apr 04, 2019 12:18 am

harrychan wrote:
Wed Apr 03, 2019 6:44 pm
The issue with debt is that the forces of nature, temptations with keeping up with the jones and what is deemed "normal" is because of debt.
I believe "keeping up with the Joneses" is mainly a US phenomenon. In many parts of the world it is considered highly inappropriate to show off with your wealth (or pretend that you can afford to do so).

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peterinjapan
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Re: Your opinion on debt?

Post by peterinjapan » Thu Apr 04, 2019 1:21 am

I never do "bad" debt, but I don't consider a low interest rate mortgage to be bad.

I actually maintain some debt, money I owe my company, because of the low rate (it's in Japan) and because the Japanese government has a high death tax they intend to charge when I die. Rather than half a debt-free portfolio I'll be happy to leave some debt to offset what they intend to take.

msk
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Re: Your opinion on debt?

Post by msk » Thu Apr 04, 2019 2:36 am

Even non-callable mortgages are not always super attractive. E.g. let us assume you can wangle your arithmetic to have your mortgage down to 3% after tax deductions, etc. Paying that off immediately is a guaranteed return of 3%, forever, after tax. You also, in addition, stand a decent probability that your home's value will rise with inflation. What alternative investment offers those terms? Bonds?! Check the returns after tax. TIPS?! Stocks? Did you forget that the whole AA discussion of bonds:stocks hinges on our common fear that stocks can plummet 50% without warning? Depending on how you view things, an assured 3% + probable keeping pace with inflation certainly looks pretty good. Somehow I find it extremely difficult to justify having a mortgage and simultaneously holding any bonds. Mind you, I would gladly take a 7-figure mortgage for a RE deal, but that's a business decision, and in any business there are situations where debt is appropriate. Been there, done that when I was paying >10% interest on mortgages in the early 1980s for rental RE.

Norwegian
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Re: Your opinion on debt?

Post by Norwegian » Thu Apr 04, 2019 4:56 am

s8r wrote:
Thu Apr 04, 2019 12:18 am
harrychan wrote:
Wed Apr 03, 2019 6:44 pm
The issue with debt is that the forces of nature, temptations with keeping up with the jones and what is deemed "normal" is because of debt.
I believe "keeping up with the Joneses" is mainly a US phenomenon. In many parts of the world it is considered highly inappropriate to show off with your wealth (or pretend that you can afford to do so).
Hello, Law of Jante!

JoeRetire
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Re: Your opinion on debt?

Post by JoeRetire » Thu Apr 04, 2019 5:50 am

beans21 wrote:
Wed Apr 03, 2019 6:33 am
As long as x < y, what is the rational argument against option 1 (I understand the emotional argument that option 1 might lead to borrowing the $10k and spending the cash instead of investing it)?

With current interest rates being so low (i.e. x <<< y), in particular for mortgages (where you also have tax benefits in my country) but even for car loans etc, taking debt at low interest rates and investing cash seems really interesting , no? What am I missing?
Some people don't have the willpower to invest the money. Instead, they borrow, then spend the money they would have used on something else.

JoeRetire
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Re: Your opinion on debt?

Post by JoeRetire » Thu Apr 04, 2019 5:55 am

msk wrote:
Thu Apr 04, 2019 2:36 am
Paying that off immediately is a guaranteed return of 3%, forever, after tax.
Forever? Or one time?
You also, in addition, stand a decent probability that your home's value will rise with inflation.
The potential rise of your home's value has nothing to do with having or not having a mortgage.
Depending on how you view things, an assured 3% + probable keeping pace with inflation certainly looks pretty good.
You seem to be conflating several things here.
Somehow I find it extremely difficult to justify having a mortgage and simultaneously holding any bonds.
Any bonds? Can you expand on that a bit? I don't understand the logic there.

are_cynic
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Re: Your opinion on debt?

Post by are_cynic » Thu Apr 04, 2019 6:50 am

The question is too open ended and will result in perpetual motion of the goal posts.

Use debt if there is no other way to accomplish your goal. Everyone has their own goal, and the wisdom of that goal is a separate discussion. If you don’t have the capital you need, you must leverage. Debt is the off ramp from the chicken and the egg problem.

Is investing good or bad? I would rather not invest, given risk of loss, loss if use, etc. But is there any other way to amass the critical mass needed to sustain myself after work ends? Not for me, and not having enough is the real risk. So, invest I must.
"Invert, always invert" ~Carl Jacobi

msk
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Re: Your opinion on debt?

Post by msk » Thu Apr 04, 2019 8:00 am

JoeRetire wrote:
Thu Apr 04, 2019 5:55 am
Somehow I find it extremely difficult to justify having a mortgage and simultaneously holding any bonds.
Any bonds? Can you expand on that a bit? I don't understand the logic there.
Taking on mortgage debt is often viewed as attractive in a low interest rate environment. Bonds yield even lower interest rates in the same environment. Your home mortgage is on a reasonably secure property. For bonds most BHs lean towards US government issues to get the highest (higher?) sense of security and hence the lowest interest rates. There are some foreign government bonds (tiny countries) issued in US$ that yield around 8%. I doubt that many BHs even consider those. I have no religious disinclination against loans but any loan I maintain has to earn me much more than the prevailing mortgage rate, e.g. leveraged RE deals. Interactive Brokers offer margin loans at very attractive rates, comparable to mortgages and I expect that when we use such margin for leveraging our investments we can somehow also get a tax break on the loans. But how many BHs leverage via IB margin loans? I don't; because I cannot find anything reassuring enough, with a high enough prospective return, to entice me to take the plunge. Hey, even IB cannot, otherwise they would not make their margin loans so low interest.

JoeRetire
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Re: Your opinion on debt?

Post by JoeRetire » Thu Apr 04, 2019 9:16 am

msk wrote:
Thu Apr 04, 2019 8:00 am
JoeRetire wrote:
Thu Apr 04, 2019 5:55 am
Somehow I find it extremely difficult to justify having a mortgage and simultaneously holding any bonds.
Any bonds? Can you expand on that a bit? I don't understand the logic there.
Taking on mortgage debt is often viewed as attractive in a low interest rate environment. Bonds yield even lower interest rates in the same environment. Your home mortgage is on a reasonably secure property. For bonds most BHs lean towards US government issues to get the highest (higher?) sense of security and hence the lowest interest rates. There are some foreign government bonds (tiny countries) issued in US$ that yield around 8%. I doubt that many BHs even consider those. I have no religious disinclination against loans but any loan I maintain has to earn me much more than the prevailing mortgage rate, e.g. leveraged RE deals. Interactive Brokers offer margin loans at very attractive rates, comparable to mortgages and I expect that when we use such margin for leveraging our investments we can somehow also get a tax break on the loans. But how many BHs leverage via IB margin loans? I don't; because I cannot find anything reassuring enough, with a high enough prospective return, to entice me to take the plunge. Hey, even IB cannot, otherwise they would not make their margin loans so low interest.
So for you, if you have a mortgage (or perhaps you mean any loans at all), you should own no bonds at all?

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s8r
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Re: Your opinion on debt?

Post by s8r » Thu Apr 04, 2019 10:42 am

lostdog wrote:
Wed Apr 03, 2019 11:56 am
The borrower is slave to the lender.
Just like the employee is slave to the employer. :wink:

must go to work = must pay debt
new job = refinancing
financial independence = debt paid

8-)

Starfish
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Re: Your opinion on debt?

Post by Starfish » Thu Apr 04, 2019 12:20 pm

s8r wrote:
Thu Apr 04, 2019 12:18 am
harrychan wrote:
Wed Apr 03, 2019 6:44 pm
The issue with debt is that the forces of nature, temptations with keeping up with the jones and what is deemed "normal" is because of debt.
I believe "keeping up with the Joneses" is mainly a US phenomenon. In many parts of the world it is considered highly inappropriate to show off with your wealth (or pretend that you can afford to do so).

By "many" you mean maybe couple of countries in north west Europe. Because in many parts of the world (most of it) Americans look very reasonable in terms off showing off.
For example the entire south of Europe and East is much MUCH worse in terms of ratio of net worth vs. showing off. For example in Easter Europe is not uncommon for somebody to own an 50-100kE car (new value) but not to have money to fill the tank.
Last edited by Starfish on Thu Apr 04, 2019 1:18 pm, edited 1 time in total.

Starfish
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Re: Your opinion on debt?

Post by Starfish » Thu Apr 04, 2019 12:22 pm

s8r wrote:
Thu Apr 04, 2019 10:42 am
lostdog wrote:
Wed Apr 03, 2019 11:56 am
The borrower is slave to the lender.
Just like the employee is slave to the employer. :wink:
And the business owner is slave to the customer and... we can go on and on. It's obviously untrue.

Nowizard
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Re: Your opinion on debt?

Post by Nowizard » Thu Apr 04, 2019 12:45 pm

We have always carried mortgage debt at a higher level than necessary in order to invest the capital. It has worked well for us over the years, but has to be refigured in today's environment relative to the new tax laws if a person is no longer itemizing and deducting mortgage interest.

Tim

Starfish
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Re: Your opinion on debt?

Post by Starfish » Thu Apr 04, 2019 1:17 pm

JoeRetire wrote:
Thu Apr 04, 2019 9:16 am
msk wrote:
Thu Apr 04, 2019 8:00 am
JoeRetire wrote:
Thu Apr 04, 2019 5:55 am
Somehow I find it extremely difficult to justify having a mortgage and simultaneously holding any bonds.
Any bonds? Can you expand on that a bit? I don't understand the logic there.
Taking on mortgage debt is often viewed as attractive in a low interest rate environment. Bonds yield even lower interest rates in the same environment. Your home mortgage is on a reasonably secure property. For bonds most BHs lean towards US government issues to get the highest (higher?) sense of security and hence the lowest interest rates. There are some foreign government bonds (tiny countries) issued in US$ that yield around 8%. I doubt that many BHs even consider those. I have no religious disinclination against loans but any loan I maintain has to earn me much more than the prevailing mortgage rate, e.g. leveraged RE deals. Interactive Brokers offer margin loans at very attractive rates, comparable to mortgages and I expect that when we use such margin for leveraging our investments we can somehow also get a tax break on the loans. But how many BHs leverage via IB margin loans? I don't; because I cannot find anything reassuring enough, with a high enough prospective return, to entice me to take the plunge. Hey, even IB cannot, otherwise they would not make their margin loans so low interest.
So for you, if you have a mortgage (or perhaps you mean any loans at all), you should own no bonds at all?
It depends for what.
As an investment, definitely not. Use the money to pay the loan. Why would you put money in a worse investment?
As liquidity (short term bonds) for emergency situations, yes, you can/should.

JoeRetire
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Re: Your opinion on debt?

Post by JoeRetire » Thu Apr 04, 2019 1:43 pm

Starfish wrote:
Thu Apr 04, 2019 1:17 pm
JoeRetire wrote:
Thu Apr 04, 2019 9:16 am
msk wrote:
Thu Apr 04, 2019 8:00 am
JoeRetire wrote:
Thu Apr 04, 2019 5:55 am
Somehow I find it extremely difficult to justify having a mortgage and simultaneously holding any bonds.
Any bonds? Can you expand on that a bit? I don't understand the logic there.
Taking on mortgage debt is often viewed as attractive in a low interest rate environment. Bonds yield even lower interest rates in the same environment. Your home mortgage is on a reasonably secure property. For bonds most BHs lean towards US government issues to get the highest (higher?) sense of security and hence the lowest interest rates. There are some foreign government bonds (tiny countries) issued in US$ that yield around 8%. I doubt that many BHs even consider those. I have no religious disinclination against loans but any loan I maintain has to earn me much more than the prevailing mortgage rate, e.g. leveraged RE deals. Interactive Brokers offer margin loans at very attractive rates, comparable to mortgages and I expect that when we use such margin for leveraging our investments we can somehow also get a tax break on the loans. But how many BHs leverage via IB margin loans? I don't; because I cannot find anything reassuring enough, with a high enough prospective return, to entice me to take the plunge. Hey, even IB cannot, otherwise they would not make their margin loans so low interest.
So for you, if you have a mortgage (or perhaps you mean any loans at all), you should own no bonds at all?
It depends for what.
As an investment, definitely not. Use the money to pay the loan. Why would you put money in a worse investment?
As liquidity (short term bonds) for emergency situations, yes, you can/should.
Seems like we have a lot of fans of 100% equity + a mortgage.

I wouldn't have guessed that.

Starfish
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Re: Your opinion on debt?

Post by Starfish » Thu Apr 04, 2019 5:08 pm

JoeRetire wrote:
Thu Apr 04, 2019 1:43 pm
Seems like we have a lot of fans of 100% equity + a mortgage.

I wouldn't have guessed that.
Why not as long as is mathematically correct?
It does not make any sense to take a loan (mortgage) to buy worse performing bonds. Why would you do that?
It does make sense to leverage for equity, but with care (sufficient emergency fund for example). If you want to deleverage, the way to do it is paying off the mortgage not buying an worse asset.

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timboktoo
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Re: Your opinion on debt?

Post by timboktoo » Thu Apr 04, 2019 7:32 pm

Debt can increase risk. Debt can increase reward. I think that it's a very personal decision. I personally prefer to be debt-free.

- Tim

Strayshot
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Location: New Mexico

Re: Your opinion on debt?

Post by Strayshot » Thu Apr 04, 2019 9:21 pm

6Pack wrote:
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.
This post seems to be very bad math. If you carry 50k debt at 2% and can invest that 50k to get 6%, you get a free 4% of 50k ($2000) minus taxes every year. That is a good deal.
If you paid off the 50k of debt at 2%, you are guaranteed a 2% return on that “investment” because that was the rate of the debt. To be honest, if I can get 6% on my invested money and had another 50k laying around, rather than pay down debt I would up my investment at Vanguard to 100k and keep the 50k debt at 2%. Then my yearly profit would be 6000 minus 1000 equals $5000 a year minus taxes.

Valuethinker
Posts: 38382
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Re: Your opinion on debt?

Post by Valuethinker » Fri Apr 05, 2019 3:10 am

Starfish wrote:
Thu Apr 04, 2019 12:20 pm
s8r wrote:
Thu Apr 04, 2019 12:18 am
harrychan wrote:
Wed Apr 03, 2019 6:44 pm
The issue with debt is that the forces of nature, temptations with keeping up with the jones and what is deemed "normal" is because of debt.
I believe "keeping up with the Joneses" is mainly a US phenomenon. In many parts of the world it is considered highly inappropriate to show off with your wealth (or pretend that you can afford to do so).

By "many" you mean maybe couple of countries in north west Europe. Because in many parts of the world (most of it) Americans look very reasonable in terms off showing off.
For example the entire south of Europe and East is much MUCH worse in terms of ratio of net worth vs. showing off. For example in Easter Europe is not uncommon for somebody to own an 50-100kE car (new value) but not to have money to fill the tank.
I must admit I'd never heard that! The Renault (Romanian) Dacia is the best-selling car in Eastern Europe? Other than a Japanese? The Dacia is hardly high-end. The big thing in Eastern Europe is the roads are not as good and so people need/ buy stronger suspensions, 4WDs (especially in Russia) etc.

Italians live very frugally - look at the personal savings rate, and the lack of personal debt compared to Anglo Saxon countries.

Conspicuous Consumption was a term invented by an American of Scandinavian origins (Thorsten Veblen) who first described it.

There are certainly flash Americans but really in the last 30 years much of the debt taken on is in response to the stagnant median wage. And even in high status areas a huge amount of it is mortgage debt. Compared to 2007 Americans still don't have the same level of personal debt, I believe.
Last edited by Valuethinker on Fri Apr 05, 2019 3:16 am, edited 1 time in total.

Valuethinker
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Re: Your opinion on debt?

Post by Valuethinker » Fri Apr 05, 2019 3:14 am

Starfish wrote:
Thu Apr 04, 2019 12:20 pm
s8r wrote:
Thu Apr 04, 2019 12:18 am
harrychan wrote:
Wed Apr 03, 2019 6:44 pm
The issue with debt is that the forces of nature, temptations with keeping up with the jones and what is deemed "normal" is because of debt.
I believe "keeping up with the Joneses" is mainly a US phenomenon. In many parts of the world it is considered highly inappropriate to show off with your wealth (or pretend that you can afford to do so).

By "many" you mean maybe couple of countries in north west Europe. Because in many parts of the world (most of it) Americans look very reasonable in terms off showing off.
For example the entire south of Europe and East is much MUCH worse in terms of ratio of net worth vs. showing off. For example in Easter Europe is not uncommon for somebody to own an 50-100kE car (new value) but not to have money to fill the tank.
I would challenge that "Conspicuous Consumption" is only an American thing.

It's certainly a phenomenon in East Asia - China in particular. The market there is obsessed with brands - Burberry does 60% of its sales there.

The whole immigrant thing matters. You go home (to Mexico, or to Portugal from France) and you want to show your prosperity - nice car for example. Turks worked in the Mercedes factory in Stuttgart, and brought Mercedes home to Turkey. Where you have a relation who is working in a developed economy that tends to be where you see really nice cars in Emerging Market countries? other than the local rich (or government officials).

If you are part of the professional classes there's a whole host of ways of "showing off". Besides living in a nicer 'hood (which costs you a multiple of annual earnings), there's sending the kids to private schools, in America and some places you have private universities, there's holidays in exotic places, there's the ski weekends in Switzerland (or Aspen) ...

Meritocracies means your daughter's attendance at law school or your son at medical school is a way of "showing off".

Chris42163
Posts: 84
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Re: Your opinion on debt?

Post by Chris42163 » Fri Apr 05, 2019 3:44 am

Current interest rates and inflation make long term mortgages attractive. At ~4%, the more leverage you have on a house, the better. If you figure inflation, and thus the increase in real estate absolute value, at 2+% indefinitely, and you got the house at fair market value, then the cost of that loan to your net worth is the remaining 2%. You can pull your money from equities, put it into treasuries and earn a risk-free return greater than the 2% you're actually paying.

With rental properties, the same thing applies. The more leverage you have on your property, the more your ROI on actual money invested. You just have to ensure positive cash flow on each unit and be adept at getting fair deals on your purchases.

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s8r
Posts: 116
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Location: Northern Europe

Re: Your opinion on debt?

Post by s8r » Fri Apr 05, 2019 4:09 am

Valuethinker wrote:
Fri Apr 05, 2019 3:14 am
Starfish wrote:
Thu Apr 04, 2019 12:20 pm
s8r wrote:
Thu Apr 04, 2019 12:18 am
harrychan wrote:
Wed Apr 03, 2019 6:44 pm
The issue with debt is that the forces of nature, temptations with keeping up with the jones and what is deemed "normal" is because of debt.
I believe "keeping up with the Joneses" is mainly a US phenomenon. In many parts of the world it is considered highly inappropriate to show off with your wealth (or pretend that you can afford to do so).

By "many" you mean maybe couple of countries in north west Europe. Because in many parts of the world (most of it) Americans look very reasonable in terms off showing off.
For example the entire south of Europe and East is much MUCH worse in terms of ratio of net worth vs. showing off. For example in Easter Europe is not uncommon for somebody to own an 50-100kE car (new value) but not to have money to fill the tank.
I would challenge that "Conspicuous Consumption" is only an American thing.

It's certainly a phenomenon in East Asia - China in particular. The market there is obsessed with brands - Burberry does 60% of its sales there.

The whole immigrant thing matters. You go home (to Mexico, or to Portugal from France) and you want to show your prosperity - nice car for example. Turks worked in the Mercedes factory in Stuttgart, and brought Mercedes home to Turkey. Where you have a relation who is working in a developed economy that tends to be where you see really nice cars in Emerging Market countries? other than the local rich (or government officials).

If you are part of the professional classes there's a whole host of ways of "showing off". Besides living in a nicer 'hood (which costs you a multiple of annual earnings), there's sending the kids to private schools, in America and some places you have private universities, there's holidays in exotic places, there's the ski weekends in Switzerland (or Aspen) ...

Meritocracies means your daughter's attendance at law school or your son at medical school is a way of "showing off".
Well, I guess my statement was a bit of an exaggeration. I definitely agree regarding East Asia.

But at least here in the Nordics you mostly make a fool of yourself by showing off. "Good for you if you're successful, but please don't shout it from the rooftops", that's how people generally think.

Valuethinker
Posts: 38382
Joined: Fri May 11, 2007 11:07 am

Re: Your opinion on debt?

Post by Valuethinker » Fri Apr 05, 2019 4:47 am

s8r wrote:
Fri Apr 05, 2019 4:09 am
Valuethinker wrote:
Fri Apr 05, 2019 3:14 am
Starfish wrote:
Thu Apr 04, 2019 12:20 pm
s8r wrote:
Thu Apr 04, 2019 12:18 am
harrychan wrote:
Wed Apr 03, 2019 6:44 pm
The issue with debt is that the forces of nature, temptations with keeping up with the jones and what is deemed "normal" is because of debt.
I believe "keeping up with the Joneses" is mainly a US phenomenon. In many parts of the world it is considered highly inappropriate to show off with your wealth (or pretend that you can afford to do so).

By "many" you mean maybe couple of countries in north west Europe. Because in many parts of the world (most of it) Americans look very reasonable in terms off showing off.
For example the entire south of Europe and East is much MUCH worse in terms of ratio of net worth vs. showing off. For example in Easter Europe is not uncommon for somebody to own an 50-100kE car (new value) but not to have money to fill the tank.
I would challenge that "Conspicuous Consumption" is only an American thing.

It's certainly a phenomenon in East Asia - China in particular. The market there is obsessed with brands - Burberry does 60% of its sales there.

The whole immigrant thing matters. You go home (to Mexico, or to Portugal from France) and you want to show your prosperity - nice car for example. Turks worked in the Mercedes factory in Stuttgart, and brought Mercedes home to Turkey. Where you have a relation who is working in a developed economy that tends to be where you see really nice cars in Emerging Market countries? other than the local rich (or government officials).

If you are part of the professional classes there's a whole host of ways of "showing off". Besides living in a nicer 'hood (which costs you a multiple of annual earnings), there's sending the kids to private schools, in America and some places you have private universities, there's holidays in exotic places, there's the ski weekends in Switzerland (or Aspen) ...

Meritocracies means your daughter's attendance at law school or your son at medical school is a way of "showing off".
Well, I guess my statement was a bit of an exaggeration. I definitely agree regarding East Asia.

But at least here in the Nordics you mostly make a fool of yourself by showing off. "Good for you if you're successful, but please don't shout it from the rooftops", that's how people generally think.
Not sure about Finland and Denmark, but the personal leverage in Norway & Sweden has become scary. Associated with housing booms (and negative real interest rates) I think. Consumers in these countries are leveraged to the hilt.

Canadians are worse. It must be something to do with the cold weather ;-).

Mr.BB
Posts: 990
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Re: Your opinion on debt?

Post by Mr.BB » Fri Apr 05, 2019 5:44 am

Being in debt (loan, credit cards or mortgage) means the cost of the item you bought actually cost more ( because of interest ) then what you actually paid for it; which actually reduces its original value.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

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