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How I think about debt

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Re: How I think about debt

#71

Post by avgDev »

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.

While I think Dave can be helpful for some, having 30 year old loan makes more financial sense if you are financed at 3%. You can pay it off sooner if you want.

The further you get from the initial purchase date the dollar will have a lower value, and in theory you should be making more money.

Plus, even tbills are returning over 5% and are state tax exempt.

Re: How I think about debt

#72

Post by anon7725 »

galdosdi wrote: post #7
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…

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…

There are lots of ways that stock in food and energy companies could go down while prices go up. A drought or pipeline disruption come to mind.

Re: How I think about debt

#73

Post by Joel_Mckay »

cess11 wrote: post #64
Joel_Mckay wrote: post #51

Debt is essentially sacrificing future well-being for immediate access to some product or service utility normally inaccessible from current market conditions. Even if a specific type of debt load is not necessarily a liability for personal profit, it is assuredly someones problem eventually... The theory debt doesn't matter only applies to 0.04% of the population dodging tax burdens with structured financial instrum…

Might want to read this monograph from 1990: https://www.cambridge.org/core/books/governing-the-commons/A...

Another counterargument: is the opportunity for individuals to improve family living standards increasing or decreasing since the 1950's?

I'll spare you the exhaustive list from education, housing, infrastructure, and medical service access. It is not, kids are no longer getting stable jobs, their own homes, or starting families until later in life.

In my opinion, creating financial securities out of communities just turned most cities into theme-park economies. Fun, but innately unsustainable for all visitors except the board.

Personally, I have found the contradictions formed between macroeconomics and microeconomics fascinating. Primarily because tragedy can be profitable in a global context, but destructive from a personal perspective.

"Do you want to be right or do you want to be happy?" (Phillip C. McGraw)

Re: How I think about debt

#74

Post by avgDev »

gbalduzzi wrote: post #62
nineplay wrote: post #55

You can take money and pay off your mortgage or you can take that same money, throw it in a low cost index fund, and keep the mortgage. Most people are going to end up better off with the later. Cash has the illusion of being safer but start talking about inflation and it starts to lose its luster.

Sure, and what happens when, after you do that, some calamity happens and stocks go down by more than 50%, you lose your job and you can't pay the mortgage anymore? That is of course extreme, but proves the article point: by not having debt, you can sustain a much broaden series of events. As everything in life, it's a spectrum. I think it's pretty reasonable to accept the "sustainability narrowing" that comes from a…

You can easily plan for such events.

What if your house collapses due to some event that is not covered by your insurance and you used all the capital to purchase it? This is as an extreme example as the market dropping 50%.

Surviving market crashes is not rocket science, don't be 100% in stocks. Have a decent emergency fund if you have a family, have some bonds, have a house with decent equity, and don't subscribe to consumerism.

Re: How I think about debt

#75

Post by falcolas »

necovek wrote: post #18
vlunkr wrote: post #8

Earlier quoted context omitted.

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.

Resilient? Sure. Realistic for anyone with only $10k in assets? Not even remotely. Not in the market we have today. There are too many people who are using debt just to get their basic needs met, let alone something with enough permanence to be considered an asset.

Re: How I think about debt

#76

Post by anonporridge »

adverbly wrote: post #49

This is an overly simplistic model which happens to have applied very well to Japan but would break down if applied in other economies where inflationary risk is present. I'm pretty sure there's a joke about there being three types of economies: developed, undeveloped, and Japan. Cash is useless if the value of the cash goes down by 10,000% and you don't have an inflation adjusted revenue stream. You have to do somet…

My bet is most of these long lived businesses also maintain a large pile of gold, which is a fantastic multi generational store of value.

But yeah, cash is really just a call on the local monopoly on violence, which changes all the time over the long arc of history. Terrible long term store of value.

Re: How I think about debt

#77

Post by dmoy »

trogdor wrote: post #63
dmoy wrote: post #28

Earlier quoted context omitted.

> and everything else Unless you live in a no-recourse state, where they can't take everything else. In AZ, CA, TX, WA, and a handful of other states, banks can't go after your other assets, just the house that's mortgaged.

Interesting. Do you know if mortgage rates in those states are higher, to compensate lenders for the increased risk?

I think it matters a lot more for commercial mortgages. In any event, it's like 20-30bps or less according to the Fed. So higher, but not that much higher even for commercial mortgages, and even less for residential where there's a lot more federal protection going on.

The bigger impact, I believe, is that housing prices can go more crazy. People will take more risk if they know they can walk and leave the bank holding the bag, so there isn't that limiting factor on prices.

(Though I suspect, but obviously can't confirm, that the effect from non-recourse mortgage is absolutely dwarfed by other factors, especially out here on the west coast where we have very restrictive zoning policies, weaponized environmental policies inside urban areas, etc)

Re: How I think about debt

#78

Post by sokoloff »

dehrmann wrote: post #54
francisofascii wrote: post #26

Earlier quoted context omitted.

People don't realize how risky housing is compared to other investments. It is risky because it is SO MUCH MONEY and it is not diversified at all. If your house loses half its value, that represents hundreds of thousands in losses. And don't think that can't happen. You buy a penny stock for $2K and lose half, no big deal compared to your house. BUT, we need housing, we need a stable school for our kids, or a comfort…

If you ask a financial advisor for advice on investing half your net worth on 5x leverage in an liquid asset with one customer and one location, they'd think you're crazy.

When that one customer is "your family", it's a little bit different, though.

PS: From context, I suspect you meant to say "illiquid asset".

Re: How I think about debt

#79

Post by sokoloff »

incomingpain wrote: post #68

I love this article. Very well laid out and simply explained. This article is explaining the set in stone mental health association with debt servicing. >I’m not an anti-debt zealot. There’s a time and place, and used responsibly it’s a wonderful tool. I am, here's how I would add to this article. How do you tell how in debt you are. How tight is the graph? Its not just your debt. Your paycheque comes from your neigh…

> Norway is 210% debt to income.

> Canada is 178% debt to income.

> The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt.

You're confusing two different measures there. The first two are "total debt" (a stock) vs "total income" (a flow). Then, in the last paragraph, you switch to talking about consumption declines as if the total debt stock was directly comparable to a total income flow, which it obviously isn't.

The total interest due on the debt is the flow that you should be comparing to the total income flow. (Otherwise, if spending stopped at 100% debt-to-income, how could Canada and Norway's economy be working at 1.8 and 2.1 times that trigger threshold?)

My mortgage debt (the stock) is give-or-take 100% of our annual household income (the flow).

We have plenty of money left over each month to buy things, because the payments on that mortgage (the flow) are a sensible fraction of our household income (the flow).

Re: How I think about debt

#80

Post by mym1990 »

leononame wrote: post #14
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

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.

I think my point was more that 1 million dollars of debt is a pretty large sum to most people, but not much to someone who has substantial assets. You can draw up "that's only true" scenarios on basically any situation, so its not very helpful to go back and forth.

I will say the point about having debt limits your future possibilities is very true, and if someone would like to maintain an open future, stay away from large amounts of debt(homes, expensive cars, boats, etc...)

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