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How I think about debt

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Re: How I think about debt

#81

Post by mym1990 »

triceratops wrote: post #31
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

Debt to income or debt to asset is the only way of evaluating if someone's debt is high or low. I thought it was obvious that's what GP meant.

I did not get that assumption from "The more debt you have, the less financially resilient you are". Debt is an absolute value, and debt-to-asset ratio is...not. You can also evaluate debt loads by debt-to-income ratio, which is not to be overlooked as most homeowners buy homes based on their income, rather than their savings. As others have said, debt-to-asset is also not a golden ratio, because if your assets are not liquid and you get called for your debt, you still have a bad situation.

Re: How I think about debt

#82

Post by DiggyJohnson »

eadmund wrote: post #45
throw0101d wrote: post #30

The author of the article, Morgan Housel, is also the author of the book The Psychology of Money . This thoughts on, e.g., paying down his mortgage: > It just increased our independence, even if it made no sense on paper. So that's another element of debt that I think goes misunderstood. And a lot of that for both of those points is this idea that people don't make financial decisions on a spreadsheet. They don't mak…

> > it's okay to make financial decisions that don't make any sense on paper if they work for you I consider that to be (mostly) pernicious nonsense, like ‘it’s okay to walk off of a cliff, if that works for you.’ To a very great degree, finances are a mathematical/legal reality: the path of wisdom is to adjust one’s emotions to that reality rather than to imagine that reality matches one’s emotions. There is some de…

Walking off a cliff doesn't work for anyone, that's why you're missing the point. The "some" degree of truth to it is the entire point. Nobody is suggesting to "do whatever feels right or good when it comes to financial decisions."

Re: How I think about debt

#83

Post by Tade0 »

francisofascii wrote: post #26
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…

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 your house loses half its value, that represents hundreds of thousands in losses.

I never understood that part. Barring actual damage that would necessarily affect its worth it's still the same house.

Or in other words: why should I care what others think my house is worth when I'm not selling, as I currently live there?

Re: How I think about debt

#84

Post by mym1990 »

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.

That was exactly my point...a million dollars of debt is astronomical for the majority of people, but adding another data point such as DTA or DTI would make for a clearer picture of what the debt load actually is. Its like putting down a 100kg kettle bell and asking a group of people "is it hard to lift"? For the average person sure...but you're going to get a variety of answers if you put that kettle bell in front of kids vs a group of gym rats.

Edit: I guess a smaller amount like 10k USD might be better to illustrate the point.

Re: How I think about debt

#85

Post by fwip »

Tade0 wrote: post #83
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 your house loses half its value, that represents hundreds of thousands in losses. I never understood that part. Barring actual damage that would necessarily affect its worth it's still the same house. Or in other words: why should I care what others think my house is worth when I'm not selling, as I currently live there?

Well, you don't always know if you're going to want to sell later. Maybe you lost your job, maybe you need to move to another city, maybe you just hate the neighborhood.

Re: How I think about debt

#86

Post by mym1990 »

falcolas wrote: post #75
necovek wrote: post #18

Earlier quoted context omitted.

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.

We're just using arbitrary numbers to demonstrate a point, we aren't trying to assess anyone's actual financial health.

Re: How I think about debt

#87

Post by mym1990 »

sssilver wrote: post #15
coopertyme wrote: post #11

Earlier quoted context omitted.

>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.

This is a very transactional view of it, but I can see the line of thinking. My mom gave me everything I needed to succeed as an adult, and I owe her a lot, so now whatever she needs, I try to take care of it. Hopefully other people come to the same conclusion, but I don't think parents usually expect a financial ROI on raising kids haha.

Re: How I think about debt

#88

Post by glitchc »

francisofascii wrote: post #26
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…

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…

No, it's far less risky to invest in housing. These two graphs over long term illustrate the difference in risk:

Average home price since 1965: https://fred.stlouisfed.org/series/ASPUS

Average Dow Jones index since 1919 [adjust scale to ~1965]: https://www.macrotrends.net/1319/dow-jones-100-year-historic...

Re: How I think about debt

#89

Post by mym1990 »

phkahler wrote: post #39
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

If your other millions are not liquid then the one million of debt is still a potentially significant liability when adverse events happen. If it is liquid then why bother borrowing for something so small? The spent cash can be replenished quickly when there are no debt payments.

Very true, I think the article is pretty high level, and so are my comments. Actual financial health can be difficult to evaluate given that world events are pretty open ended and anything can happen.

Re: How I think about debt

#90

Post by phaedrus »

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…

Besides taxes, there is another sense in which outside circumstances can break your "rent control" model of home ownership with 30 year mortgage. Here in Oklahoma, insurance rates have skyrocketed in the last couple years. I now pay more in homeowner's insurance monthly than either my principle or interest payment (though perhaps not both together - yet). And I have a 4.something% mortgage.

I suspect it has or will soon reach the point where the Kelly criterion says mathematically I'd be better off to self-insure - if I didn't have a bank loan.

It's not just insurance (which is likely also weather-related); after a fluke super-cold Winter we had, our natural gas companies incurred a huge wholesale market bill which they've passed on to customers. I have a family member who owns his house free and clear whose gas bill went up so much he could no longer afford to heat his house. The gas company still tried / is trying to assess a one-time very large retroactive fixed fee even though he turned off his gas.

My point, I guess, being even homeowners are not totally insulated from being screwed over by outside market forces.

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