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How I think about debt

collabfund.com

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Re: How I think about debt

#11

Post by coopertyme »

mym1990 wrote: post #4
pif wrote: post #2

TL;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.

>For some people, not having any debt at all is extremely liberating

Indeed. I lived with my parents into my 30s, saved up for ~10 years and bought a nice house cash, no mortgage. Was it financially optimal? Probably not, but the peace of mind of being immune to market crashes or interest hikes (we tend to not have 20+ years fixed mortgages here) is just really nice.

Re: How I think about debt

#12

Post by leononame »

tombert wrote: post #6

I 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 think the article still holds up. A financial crisis where you lose your job, a war causing deflation, a housing bubble bursting are all events that could lead to you paying _much_ more than rent. If you can't pay, they'll take your house and everything else until they decide that the debt is paid. In case of a bubble bursting this can mean that you _still_ owe money after they took your house. This has happened to people.

I also have a mortgage on my apartment and I also think it's a decent choice, especially considering that I'll have less income after retirement. But most people are only a couple of bad turns in life away of losing everything they own.

All in all, I'd say the way to think this article presents does hold up to mortgage as well.

Re: How I think about debt

#14

Post by leononame »

mym1990 wrote: post #5
falcolas wrote: post #3

Earlier 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

That's only true if the rest of their bet worth isn't tied up in some high risk investment where they could lose everything. Just because it's financially more optimal to have some debt in some situations doesn't mean that it's also more resilient. Yes, debt ratio plays a role (although a debt ratio of 0.1 is almost like having no debt at all), but no debt is for sure more resilient than debt.

Re: How I think about debt

#15

Post by sssilver »

coopertyme wrote: post #11
mym1990 wrote: post #4

Earlier quoted context omitted.

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.

>For some people, not having any debt at all is extremely liberating Indeed. I lived with my parents into my 30s, saved up for ~10 years and bought a nice house cash, no mortgage. Was it financially optimal? Probably not, but the peace of mind of being immune to market crashes or interest hikes (we tend to not have 20+ years fixed mortgages here) is just really nice.

You simply restructured your debt and borrowed from parents instead, no?

That is to say, you owe them for those ten years.

Not saying there’s anything wrong with it. Most people in average circumstances owe a lot to their parents.

Re: How I think about debt

#17

Post by phkahler »

2d8a875f-39a2-4 wrote: post #9

I'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.

>> the featured article doesn't cover opportunity cost, and a scale of risk appetites.

If your business is moving along just fine and you have a decent cash reserve, what opportunity cost is all that important? FOMO doesn't seem like a good thing to let influence business decisions.

Re: How I think about debt

#18

Post by necovek »

vlunkr wrote: post #8
mym1990 wrote: post #5

Earlier quoted context omitted.

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.

I read that as an example to illustrate a point: it could also have said debt of $1000 with a debt ratio of 0.1 which is still pretty resilient.

Re: How I think about debt

#19

Post by tombert »

vlunkr wrote: post #10
tombert wrote: post #6

I 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.

I thought Dave Ramsey was pretty much completely wrong about student loan debt, at least if I remember his position on it being "you shouldn't have student loans".

But I agree that most debt is probably bad to have.

Re: How I think about debt

#20

Post by deadbabe »

tombert wrote: post #6

I 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…

Are you going to live in that house for 30 years? What’s your plan when you need to move?
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