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How I think about debt

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Re: How I think about debt

#371

Post by jjav »

dheera wrote: post #222
rcxdude wrote: post #218

Earlier quoted context omitted.

because the risk with debt is not being able to pay it back - and you are paying the lender for their side of that risk (generally paying less the more of that risk falls on your side, like secured debt). It's a service they are freely offering (and in fact benefits them disproportionately on average), I don't see how it's a moral issue at all.

The moral issue I have is that simply put, if I don't have the money for something, I wasn't meant to have that something. I need to earn the money for it, after which I deserve to have that something. However, the most basic clean-and-functional versions of basic necessities (food, water, shelter, and transportation) should be accessible to everyone working a full-time job, in my opinion, without having to spend oth…

> The moral issue I have is that simply put, if I don't have the money for something, I wasn't meant to have that something.

You're thinking of debt as a consumer. Like, take a personal loan or credit card debt and buy a big screen TV. Yes, that's dumb.

Not all debt is like that. Picture this scenario: Your bank pays 5% interest on deposits. You're offered a loan from somewhere for an interest rate of 4.9%. It is a no-brainer to take that loan, go into debt, for as much as possible! Deposit it into your bank account and profit each month. If the rates change such that the bank pays less, just pay off the loan.

Now, sure, that's a simplistic scenario since nobody will offer you a loan for less than the banks are paying interest right now. But with time being another variable, you can manouver yourself into that situation. Right now my bank pays more interest than the percentage I pay on my mortgage balance. I'm literally making money every month by having debt. It would be very dumb to pay off that mortgage debt even though I have the cash to do so.

Re: How I think about debt

#372

Post by jjav »

booleandilemma wrote: post #217
dheera wrote: post #204

Earlier quoted context omitted.

I never understood buying things that I can't afford. I always thought you earn money and when you earn enough money to buy something you can buy that something. That is always how I have lived life. For that reason I also find it ridiculous that it's the social norm to take debt to buy a roof to put over your head. A (simple, clean, functional) house is a basic need, not a luxury item. I always assumed that if I don…

I'm in the same spot. I'm in the middle class, I've been renting for years, and I refuse to go into debt by taking out a loan for a house. This is a societal failure.

> I refuse to go into debt by taking out a loan for a house

But you are renting.

While renting isn't debt, it can be helpful to think of it as debt you have to pay every month (unless you plan to be homeless).

So you have 12N (where N is the number of years you think you might still live) of rent debt payments that you are committed to pay. If you transform that into mortgage payments, at least you're building equity. And it will only be 1230 payments (given a 30 year mortgage) so it is a bounded number unlike 12*N.

Re: How I think about debt

#373

Post by dtx1 »

dheera wrote: post #347
zharknado wrote: post #335

Earlier quoted context omitted.

I think halal mortgages are instructive on this point. To be clear, I’m not Muslim nor a lending expert, I just think it’s a really interesting setup. As I understand it, sharia law forbids paying interest, so a conventional mortgage is not an option for adherents. However, several different mechanisms are allowed by which the purchaser gradually gains full ownership of the home. E.g. one is roughly equivalent to a r…

Well damn, can I just take out $10M in personal loans, tell them my religion doesn't believe in paying interest, buy Treasury bonds with it, and live off the interest?

If you find someone who lends you 10M interest free sure

Re: How I think about debt

#374

Post by jjav »

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…

> Here in Oklahoma, insurance rates have skyrocketed in the last couple years.

Insurance company profiteering is a disaster but that's a whole different topic.

But remember that rental properties are also insured. And the renter is paying for that insurance, it's just bundled in the rental price. So renters are also paying the wild insurance hikes.

And utilities like gas are generally directly paid by renters, so no difference.

Re: How I think about debt

#375

Post by jjav »

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…

> People don't realize how risky housing is compared to other investments.

Do not compare your house to other investments, that's as apple to oranges as it gets.

Compare it to renting, since you have to live somewhere.

Re: How I think about debt

#376

Post by jjav »

WalterBright wrote: post #108
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…

Houses have always been a lousy investment for me. Once you factor in all the costs (property tax, insurance, repairs, 6% real estate commissions, the time the house sits empty waiting for a buyer, etc.) the returns are not that good at all. Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.

> Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.

Most people might not do the proper accounting, but not in the direction you suggest.

Maybe they made 100K gross profit but after deducting all the expenses they only made $1000. Ok, was that bad? No, it's great because the comparison is to renting where they would've lost tens of thousands of dollars.

Re: How I think about debt

#377

Post by jjav »

temporarara wrote: post #166
Kirby64 wrote: post #125

Earlier quoted context omitted.

Anyone buying a house with a mortgage generally is taking a 5:1 leverage (a 5% down loan is 20:1 leverage) position on the house. Making $100k on a $200k investment, with 5:1 leverage means making 100k on a 40k investment, which isn't a 50% return... it's a 250% return. And it's tax free, assuming it's your primary residence (up to 250k cap gains). You have to spend an obnoxious amount on costs to not have it make se…

While there is some "leverage" in mortgage, you actually need to pay the whole sum, and with interest too, so taking a $200k loan means you pay usually something like $250k for it in the end, and this means you have to make $50k profit to not lose. And houses age too. If the location is superb you can justify it as an investment, otherwise it's pure nonsense in every way. Thinking normal housing as an investment is o…

> and this means you have to make $50k profit to not lose

No, it doesn't. Because the alternative was renting, which isn't free.

Even if you end up losing 50K on the home, all told, but if renting for the same number of years would've cost you 100K, you're ahead by 50K.

Re: How I think about debt

#378

Post by cies »

DrPhish wrote: post #22

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

Have you see what rent is like lately?

BTW rent is not much different from a loan. You just do not pay principle.

You are either way paying to use someone else's asset(s).

Re: How I think about debt

#379

Post by Tade0 »

WalterBright wrote: post #305
Nevermark wrote: post #260

Earlier quoted context omitted.

>> 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.

Don't you think that your take is a little bit reductionist?

There are plenty of things which are valuable or bring value, but are never sold or bought.

Case in point: how much is the Sun worth according to you?

Re: How I think about debt

#380

Post by Ekaros »

psychlops wrote: post #116
adverbly wrote: post #56

Earlier quoted context omitted.

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.

But it also has been extremely volatile over the lifetime. And quite volatile at all points.
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