financial independence

The Joy of Debt

Why I want to live the rest of my life in debt (as long as it’s the good kind)

Have you ever been inspired by those stories of regular folks who ran up giant debts (car loans, student loans, credit cards, etc) – only to pull themselves up by their bootstraps, buckle down, stop spending, and emerge debt-free?

I look at those people and (often) scream “NOOOO!”

Sorry, Dave Ramsey, but sometimes it’s just a bad idea to pay off debt. In fact, debt has gotten such a bad name (just look at the shelves full of books dedicated to being debt free), that I feel compelled to rise to its defense. Even if it’s just to defend certain kinds of debt.

And what kinds are these? Let’s explore together…

Mortgage debt: this is my favorite kind of debt; I hold several mortgages (on several properties, mind you). How many ways do I love thee, mortgage debt? Let me count the ways:

  • It’s cheap: as of this writing, the average 30 year fixed interest rate was 3.875%; 15 year mortgages could be had for as low as 2.874%. For veterans, they’re even lower. I struggle to find a credit card at even 12%. So it’s an awfully cheap way to get money
  • The rates are fixed (usually): so if we ever experience a return  of inflation, your payments stay the same
  • It’s deductible: yes, I know, the IRS is lowering the limits – but you can still write off the interest on mortgages up to $750k – and on investment properties, the write-off is limited only by the total amount of interest you’re paying.

Student Debt: there has been much hand wringing about ballooning student debt, but I say it’s cause for celebration! I seethe with jealousy at those lucky students and their low interest rates, grace periods and deferment options. A federally subsidized loan is currently going for just 3.4% – at that rate I am tempted to go back to school just to get my hands on that cheap money. Caveats: non-subsidized loans are currently costing a less enviable 7.6% – and man, you better get a good paying job out of school because you WILL need to pay these back.

0% financing that is NOT 0% financing: and by that I mean 0% interest credit cards, whose praises I have sung in prior posts. The upfront fees are unpleasant, but still, 4% upfront for 18 months of 0% interest still averages out to about 2.7% a year. And, I have friends that have just rolled over the same debt, year after year, into new 0% offers… generating a virtual long term personal, unsecured loan at less than 3% interest.

0% financing that IS 0% financing: for example, for new cars. OK, I have trouble believing that they aren’t just jacking up the price of the car to afford this… but if you really see a true zero percent deal, why wouldn’t you take it? An example: say you have $30,000 to spend on a car. If you take a 4 year, zero interest loan, you could invest that $30,000  it in a 4 year CD at 2.5%, paying $750 per year. Four years later, you’ve paid $30,000 but have made $3,000 to partially offset that amount. Net cost: $27,000.

401K Loans: yes, you miss out on the earnings you would get by leaving the cash in your retirement account. But these come with a relatively modest (6-7%) interest rate that you pay back to yourself. Isn’t that better than borrowing on a credit card and giving the bank 12%-24%?

Family: If your parents want to lend you the money for a down payment on a house… I would take that deal. Family members not only tend to charge lower interest, but a loan can be a great deal for all parties. I have a friend that regularly borrows money from his mother at 4% interest to fund (short term) his house flips. For Mom, that beats 2% on a CD, and she has the ultimate collateral: if he doesn’t pay it back she’ll simply deduct the loan amount from his inheritance.

In conclusion, I understand the impulse to live debt-free. But, there are many instances when debt is appropriate, for example to establish leverage for greater returns. And, if you must get into debt, there are some great alternatives to the usual go-to’s like credit cards and bank loans. Not all debt is bad, and some debt can even be an important ingredient in the path to financial independence.

Are you in debt and loving it? Tell me about it in the comments below!

1 reply »

  1. One of the dumbest financial moves I did was to pay back one of my mortgages before the deadline…

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