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How I think about debt

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Re: How I think about debt

#111

Post by aidenn0 »

glitchc wrote: post #88
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…

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...

Isn't the latter CPI adjusted, but not the former?

Re: How I think about debt

#112

Post by nicbou »

phaedrus wrote: post #90
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 s…

In Berlin, only a small percentage of landlords beat inflation. It's a lot of work and a low return for an illiquid investment. Depending on the timing, many qualify housing as a lifestyle decision instead of an investment.

Aside from what you've mentioned, the state can raise the efficiency standard to protect the environment, raise the cost of services, or make you pay to rebuild the street or sidewalk in front of your home. Then come the maintenance: new roof, new windows, new kitchen and so on.

If your country has good tenant rights, there are not so many reasons to buy. It's better to invest the money for a while.

Re: How I think about debt

#113

Post by olddustytrail »

WalterBright wrote: post #106
leononame wrote: post #12

Earlier quoted context omitted.

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…

> they'll take your house Yes, and they'll sell the house to cover the debt. But the amount they receive from selling the house in excess of the debt goes to you. I.e. you'll get the equity portion. It's in your mortgage contract. Worth reading.

Yes but I think they're referring to negative equity.

Re: How I think about debt

#114

Post by oooyay »

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 have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"

This only works in places with fixed property tax. When I lived in Texas my property tax went up hand over fist every year as my property increased in value and automatic reassessments occurred. If your salary remains relatively stagnant and does not increase with cost of living (most salaries are subject to this) then you can certainly find yourself being subject to nuevo rent rates as a long time mortgage holder.

I do agree with you that different types of debt should be classified differently.

Re: How I think about debt

#115

Post by Night_Thastus »

DrPhish wrote: post #22

“Debt is slavery” is how I’ve always thought about debt, and what I’ve taught my kids.

For low-income people, debt is slavery.

For high-income people, debt is a powerful tool.

The vast majority of people fall into group #1 and need to treat debts like credit cards and car payments with extreme caution.

Re: How I think about debt

#116

Post by psychlops »

adverbly wrote: post #56
k__ wrote: post #52

Earlier quoted context omitted.

What about deflationary currencies?

I don't think there have been any currencies that have been deflationary for 100+ years so it's impossible to say. Obviously currency risk is what you have to watch out for though if you're not able to consistently both spend and collect from this single currency over the lifetime of your business.

Bitcoin is a deflationary currency.

Re: How I think about debt

#117

Post by psychlops »

Night_Thastus wrote: post #115
DrPhish wrote: post #22

“Debt is slavery” is how I’ve always thought about debt, and what I’ve taught my kids.

For low-income people, debt is slavery. For high-income people, debt is a powerful tool. The vast majority of people fall into group #1 and need to treat debts like credit cards and car payments with extreme caution.

> For high-income people, debt is a powerful tool.

How?

Re: How I think about debt

#118

Post by milkytron »

oooyay wrote: post #114
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 have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control" This only works in places with fixed property tax. When I lived in Texas my property tax went up hand over fist every year as my property increased in value and automatic reassessments occurred. If your salary remains relatively stagnant and does not increase with cost of living (most salaries are subj…

I've experienced this. My property taxes have gone up maybe 30% in the past few years. My income has increased pretty substantially, so it's not like I'm unable to pay for the increases. Compared to rent though, and having a mortgage where every month the amount of principle paid off increases, it still seems like the better option.

Rent has increased 30-50% where I live over the same time period. At least when my property tax increases, it's because I have an asset that has increased in value. If I am at some point forced to sell because I can no longer afford the property taxes, then I'll walk away with more money than if I had been paying rent for those same years.

Property taxes can force the same type of relocation that rent increases cause, but I think the typical outcome from someone being forced out by rising property taxes will be better than the person forced out by rising rents.

Re: How I think about debt

#119

Post by jonfw »

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…

I know someone who recently retired, sold his expensive home, and bought a new home in a cheaper area outright with cash.

He had a fixed income that would easily cover his living expenses. He had an investment portfolio that he is planning to pass on to his family.

By investing his cash and getting a mortgage on his home- he certainly would have made enough money to cover his mortgage on interest. But, he'd be at risk of going cash flow negative, and having to liquidate some of his investments to cover his mortgage + lifestyle.

He knew that having to liquidate investments would bother him- it'd be a lot harder to justify that vacation if he'd have to sell some stocks. Those stocks are for his family in his mind.

By buying that home outright, he now knows that he's going to be cash flow positive for as long as he's alive. He'll never have to dip into his stocks. And he'll never have to stretch a dollar.

It's not a strategy that you'd come up with on a spreadsheet, but he's one of the happiest guys I know

Re: How I think about debt

#120

Post by avgDev »

yowlingcat wrote: post #101
avgDev wrote: post #71

Earlier quoted context omitted.

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.

That's not always the case if you have a prepayment penalty on a mortgage (which isn't always the case but certainly something to watch for).

Very uncommon in the US but one needs to do their due diligence.
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