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How I think about debt

collabfund.com

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Re: How I think about debt

#301

Post by al_borland »

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…

The math equations play out differently based on the physiology.

When I got my home I went crazy trying to pay it off as fast as possible. I did it in 30 months and it was the best feeling in the world. I deferred my immediate happiness on many things for almost 3 years to hit that goal and it was euphoric. Since doing that, I’ve been able to increase my savings rate dramatically. I save much more now than I would be saving if I still had a mortgage and made minimum payments. My net worth jumped up considerably during that period, since I had a clearly defined goal just around the corner it was easy to give up more for it. Now it’s easy to give more to investments because I don’t really want for anything and my expenses are low. When nothing is competing for your dollars it is easy to start stacking them up. I was also maxing out my 401k while paying off the home, so it’s not like I wasn’t investing or completely out of the market.

Most people paying the minimum on their “good debt” aren’t aggressively investing what they otherwise would have applied. They’re spending the money and have nothing to show for it at the end of the day. The potential investment is the justification to not pay the debt, but it’s not the reality of what they’re doing.

I find a lot of peace knowing that if something happens to my job, I can probably get a job just about anywhere and still make ends meet. My emergency fund also went from 6 months of expenses to 12 months without adding another dime, but by eliminating my biggest expense.

Another thing I thought about a lot was the 2008 crash. If I were to not pay down my house, and invest instead, I could still end up in a situation where I lost my job and with the markets down, couldn’t afford to stay in or get out of my house if needed. Paying it off eliminates that risk. Property taxes for the whole year are about equal to 2 months of rent in most places around me.

I love businesses that are 100s of years old. They may not be the biggest, but they don’t need to be huge to weather the storms of life, they just need deep roots. That’s what I want for my life. Stability. Investments can buy some flexibility when times are good, but a paid off home will give me a place to rest easy when times are bad.

Re: How I think about debt

#302

Post by throwaway2037 »

synergy20 wrote: post #246
Dylan16807 wrote: post #232

Earlier quoted context omitted.

I agree that house prices should come down. But given that you need a home, what's the difference between $1000 in rent+fees and $1000 in mortgage+taxes+fees? Normally the biggest difference between renting and buying with debt is that you can stop renting. But you're not going to stop having a home.

my landlord friend told me, many of her tenants earn decent salary, definitely more than her income, they can even spend $8000 or more to remodel a car or things like that, but can never save up to the 20% down payment ever.

    > remodel a car
What does this mean?

Re: How I think about debt

#303

Post by throwaway2037 »

ryandrake wrote: post #286
Dylan16807 wrote: post #232

Earlier quoted context omitted.

I agree that house prices should come down. But given that you need a home, what's the difference between $1000 in rent+fees and $1000 in mortgage+taxes+fees? Normally the biggest difference between renting and buying with debt is that you can stop renting. But you're not going to stop having a home.

Just a minor nit pick, but important: When comparing the costs of renting vs owning, you need to compare rent+fees to mortgage_interest+property_taxes+fees, minus any real estate tax deductions (if you itemize). The principal portion of your mortgage payment is not an expense, it turns into your own home equity so it's money coming out of one pocket and going into the other. The interest portion is generally federal…

    > it turns into your own home equity so it's money coming out of one pocket and going into the other
What if house prices are falling?

Re: How I think about debt

#304

Post by WalterBright »

krisoft wrote: post #231
WalterBright wrote: post #181

Earlier quoted context omitted.

> A house has intrinsic worth It's value is only what people will pay for it. For example, a relative of mine died some years ago. She had a house full of expensive furniture. You couldn't give that furniture away, even though it was in perfect condition. It had no value. The average estate value, excluding land, houses, and cars, is about $900. I have friends who ran an estate liquidation service. You'd net somethin…

> It's value is only what people will pay for it. If that is how you define it then by definition that is true. It is not the only possible definition though. In my world I prefer to sleep in a place where the rain doesn’t fall on me. Having a place with a roof over me is value to me. If this meaning of the word “value” does not work for you then simply we are talking different languages. Perhaps try thinking about “…

The value of it to you is how much you're willing to pay for it. There really isn't much getting away from that.

Re: How I think about debt

#305

Post by WalterBright »

Nevermark wrote: post #260
WalterBright wrote: post #140

Earlier quoted context omitted.

> That isn't true. People find out it is true when they try to sell something. > If you wouldn't sell your house for $1M, then it is worth $1M to you If you're willing to pay $1M for it, then it's worth that to you.

>> If you wouldn't sell your house for $1M, then it is worth $1M to you (Sorry, deleted that phrase after getting distracted while making my comment. In my mind the edit was instant!) > What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it. > People find out it is true when they try to sell something. Of course there is intrinsic value. A buyer has to pay you what you want…

> A buyer has to pay you what you want for your house. You are setting the market price.

A buyer offers what he wants to pay for it. You negotiate until reaching an agreement. That is the market price.

I.e. The Law of Supply and Demand.

If you think the seller sets the market price, try selling your car for $10 million.

Re: How I think about debt

#306

Post by _heimdall »

I have always hated the recommendation that people should avoid paying off debt and instead leverage that money in interest paying investments.

Sure, on paper you seem better off when you keep a mortgage at 5% and have investments paying 9%, but you're locked in place. That 4% in potential gains means you aren't nearly as flexible when it comes to a job and income, selling your house may be untenable or impossible if markets fall meaningfully, and ultimately you are living in a house that the bank owns while someone took your money and replaced it with IOUs.

Re: How I think about debt

#307

Post by ryandrake »

throwaway2037 wrote: post #303
ryandrake wrote: post #286

Earlier quoted context omitted.

Just a minor nit pick, but important: When comparing the costs of renting vs owning, you need to compare rent+fees to mortgage_interest+property_taxes+fees, minus any real estate tax deductions (if you itemize). The principal portion of your mortgage payment is not an expense, it turns into your own home equity so it's money coming out of one pocket and going into the other. The interest portion is generally federal…

> it turns into your own home equity so it's money coming out of one pocket and going into the other What if house prices are falling?

Your home equity = your property's value minus your loan balance. So even if that value is currently negative, every dollar you pay towards principal increases it. It's not an expense.

Re: How I think about debt

#308

Post by al_borland »

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…

I took the article as these businesses keep a healthy amount of assets and don’t feel an obsessive need to buy things for the business they can’t afford, or scale at all costs.

If everything they have is paid for, and people are still buying stuff from their business, their prices can adjust with inflation. Some of their cash might get devalued in a period of hyper inflation, but if they still have enough to get by, as well as new sales, they should be ok. They hopefully also diversified their assets in some things that will handle an inflationary period and don’t just have mattresses full of money.

Re: How I think about debt

#309

Post by qudat »

lr4444lr wrote: post #263
TexanFeller wrote: post #200

I have a paid off house and zero debt. Sure I might be ahead if I had used some of the cash to buy stocks instead of paying down the house early, but I’m completely happy with my decision. There is no peace of mind like not owing anyone a cent and keeping your living expenses low. Having debt was incredibly stressful and no longer worrying about making payments is the best thing that’s ever happened to my mental heal…

To each his own, but I get more peace of mind with a larger retirement account due to the low fixed rates we had in the US from 2009 to around 2022. I can't liquidate my house piecemeal when I need money like I can my brokerage assets.

But can’t those all go to zero overnight, leaving you with nothing? The same could happen with a home, but that’s what insurance is for. So I guess the gamble is between a natural or fire disaster or our financial system collapsing.

Re: How I think about debt

#310

Post by al_borland »

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.

I see this a lot and I think it hurts more than it helps. People read this as, “if I want to be rich, I need to take out debt.” And they almost always take on debt for the wrong reasons.
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