How I think about debt
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How I think about debt
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Re: How I think about debt
#2TL;DR: having tons of cash is better than having debt.
Re: How I think about debt
#3TL;DR: having tons of cash is better than having debt.
I thought the "The more debt you have, the less financially resilient you are" was the more important message.
Re: How I think about debt
#4TL;DR: having tons of cash is better than having debt.
Having both can often be the ideal situation. It’s also really dependent on what the debt is, how is it being serviced…etc. For some people, not having any debt at all is extremely liberating, and that benefit outweighs any of the benefits of getting marginal returns.
Re: How I think about debt
#5TL;DR: having tons of cash is better than having debt.
I thought the "The more debt you have, the less financially resilient you are" was the more important message.
But this isn’t true, one has to consider the debt ratio, not just the debt. Someone with a million dollars of debt is financially resilient if they have a debt ratio of .1
Re: How I think about debt
#6I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility.
I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered.
If I had decided not to leverage several hundred thousands of dollars of debt, then yes I'd have more cash directly now, but I might have suffered the fate that lots of others faced with the recent spikes in rent that have happened due to COVID. I simply didn't have to worry about that.
Obviously there's different types of debt; some insanely high-interest loan you get from a payday loan place absolutely is a bad and will hurt your ability to stand volatility.
Re: How I think about debt
#7I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility. I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered. If I had decided not to leve…
The way I think about this is:
You already are in "debt" by being alive. You have the huge liabilities of needing food and housing and maybe sometimes some healthcare, in order to stay alive.
By buying a perpetual source of one of those you aren't investing or expanding your liabilities-- just the opposite, you are hedging against and closing out your liability by prepaying for it. To take this idea further, this is why I think buying a little bit of stock in energy and agriculture companies is "risk free" because while they could go down if those things get cheaper, you would then win out as a consumer. You will need food and energy down the line anyway, so a modest investment in those closes out that hedge rather than expanding liability
Re: How I think about debt
#8Earlier quoted context omitted.
I thought the "The more debt you have, the less financially resilient you are" was the more important message.
But this isn’t true, one has to consider the debt ratio, not just the debt. Someone with a million dollars of debt is financially resilient if they have a debt ratio of .1
True, but that is not the situation most of humanity is facing.
Re: How I think about debt
#9I'm not qualified to expound on it but the featured article doesn't cover opportunity cost, and a scale of risk appetites. To name just two concepts it's missing.
Re: How I think about debt
#10I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility. I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered. If I had decided not to leve…
I tend to agree with Dave Ramsey on this point. A home loan is just about the only “good” type of debt for an individual to have. Because it tends to retain or gain value with little risk. He also recommends a 15 year loan instead of 30, which has been amazing for me.