Debt. Good, bad, or whatever?

[0stones0]

Originally Posted by Silver14

Nobody said rewards are how people earn their income, living, or that it made them a millionaire. If someone offered you $500, $1000, or even $2000 a year for free and it didn’t change anything you do, would you refuse it?

That’s how some people use rewards. They treat their card like cash, pay it off monthly without accruing interest, and get a reward back. It’s not the typical credit card user experience, but it happens. Not everyone overextends themselves or spends more than planned solely because some do.

They can be a tool in ones financial toolbox despite most using them in a way that makes their finances worse.

+1

[trm2]

Originally Posted by pyroguy

Just because a bank says you can afford the payment doesn’t mean you can.

It is worse than that. Just because you can make the payment doesn’t mean you can afford it.

Originally Posted by Iron Lung Jimmy

Pyroguy... I meant the bank makes the insurance payments for you out of escrow so that is one less thing you have to deal with.

Why have an escrow account if you don’t need it? Once a year I pay my property taxes and insurance. I get to keep my money and earn on it vs having an escrow account earning zero. It is kind of like getting a tax refund from the fed, that is one of the last things you want.

Yes sometimes debt is good. I have a mortgage balance that is less than one year of net income at about 2.5%. I also have a brokerage account (outside of a retirement fund) with enough to pay said mortgage balance. That account is in a very well balanced fund that has returned over 19% over the last 12 months. True the S&P is over 30% in the same time, but I am way ahead by having a mortgage.

Like others have said, debt is a tool. Used properly, it can help build great things. Used improperly, well, any machine is a smoke machine if you use it wrong enough.

[KenKat]

Originally Posted by pyroguy

So the arguments so far for debt are:

High credit score
Rewards points/miles
Cash back on credit card usage
Mortgage tax write off
You can’t live life without debt
Sometimes you can earn a higher rate of return, especially after taxes are considered, by utilizing low interest debt like mortgages and HELOCs and investing that capital instead

Over the past 20+ years, a mortgage and a larger 401k beats a paid off house and a smaller 401k. Did for me at least.

Now, if you want to exclude mortgage debt, I’d be more inclined to agree with you that all debt is bad. And some people will take out the mortgage and never put the money into the 401k - or cash it out when they switch jobs, etc. Worst of all worlds there.

[Vegas Bound]

Originally Posted by BuddyLee

Paying cash for a home is not always the right strategy. If you use all of your available cash to payoff a home so that you have no payment and you have no available cash for emergency or repairs where do you get money? Because your home equity is not liquid. So you get a home equity loan? get a credit card? or raid your retirement fund? Also a home loan interest is tax deductible, you do not have that write off as well. A fully paid for home is non liquid and non tax deductible.

Convention wisdom states you should have 4-6 months reserve for emergencies. I have 3 years of liquid cash.

[mlee]

Originally Posted by Vegas Bound

Convention wisdom states you should have 4-6 months reserve for emergencies. I have 3 years of liquid cash.

There is a reason 4 to 6 months is wise. The other 2.5 years or cash you have should be invested. It can be easily obtained in 4 to 6 months.

[Vegas Bound]

Originally Posted by mlee

There is a reason 4 to 6 months is wise. The other 2.5 years or cash you have should be invested. It can be easily obtained in 4 to 6 months.

It is all invested and I have access within 1 business day. I guess I should have called it post-tax funds.

[mlee]

Originally Posted by Vegas Bound

It is all invested and I have access within 1 business day. I guess I should have called it post-tax funds.

Okay... there you go. Post tax is key...

[s346k]

Originally Posted by pyroguy

So the arguments so far for debt are:

High credit score
Rewards points/miles
Cash back on credit card usage
Mortgage tax write off
You can’t live life without debt

you forgot the instant gratification of having nicer things now that you'd otherwise miss out on for a lot of years.

[Vegas Bound]

Originally Posted by s346k

you forgot the instant gratification of having nicer things now that you'd otherwise miss out on for a lot of years.

Entitled sentiment.

[BuddyLee]

Originally Posted by trm2

It is worse than that. Just because you can make the payment doesn’t mean you can afford it.



Why have an escrow account if you don’t need it? Once a year I pay my property taxes and insurance. I get to keep my money and earn on it vs having an escrow account earning zero. It is kind of like getting a tax refund from the fed, that is one of the last things you want.

Yes sometimes debt is good. I have a mortgage balance that is less than one year of net income at about 2.5%. I also have a brokerage account (outside of a retirement fund) with enough to pay said mortgage balance. That account is in a very well balanced fund that has returned over 19% over the last 12 months. True the S&P is over 30% in the same time, but I am way ahead by having a mortgage.

Like others have said, debt is a tool. Used properly, it can help build great things. Used improperly, well, any machine is a smoke machine if you use it wrong enough.

Many business use debt to increase the size of their business. They raise cash by selling corporate bonds. Rather than borrow from a bank they sell the bonds to anyone at a set interest rate. One great of example of this is Microsoft. A company who has enough cash yet proceeds from the seven-part deal, which includes a 10-year bond with a 3.3% coupon, used for general corporate purposes, including the repayment of short-term debt used to help fund Microsoft’s $26 billion acquisition of LinkedIn Corp.

[BuddyLee]

Originally Posted by mlee

There is a reason 4 to 6 months is wise. The other 2.5 years or cash you have should be invested. It can be easily obtained in 4 to 6 months.

I thought that as well. Why have more than 6 months in reserve parked into a savings account at .02% and not into a liquid safe money fund earning even 2%?

[pyroguy]

Originally Posted by BuddyLee

Okay, now you have a mortgage 200K at 5% for 30 years that you have paid on for 10 years but you can refinance at 3% for 30 years. Home loans pay back interest on the early years first the principle next. So in the early years of the new new you are paying more interest than principle again. Better to stay with the 5% for 20 more years or go for 3% for 30 more years?

A mortgage doesn’t pay interest first and then principle later. A mortgage is the same amount of interest no matter what part of the term you’re in. The problem is that the longer you stretch out the term the longer you will pay interest and the less you will decrease your principle. I had a 30 year loan on my first house. After a couple years I refinanced down to a 15 year. Partially because of a lower rate, but also because I would knock out more principle that way. I made more progress in the first 6 months of my 15 year loan than I had in the first 5 years of the 30 year loan.

What my financial advisor recommended and I agree with is to go no longer than a 15 year loan that amounts to no more than 25% of your take home pay. It has worked out very well for my family even though we don’t have the biggest house we could “afford” with a 30 year, we have plenty of house for 2 adults and 2 toddlers.

Originally Posted by Silver14

Nobody said rewards are how people earn their income, living, or that it made them a millionaire. If someone offered you $500, $1000, or even $2000 a year for free and it didn’t change anything you do, would you refuse it?

That’s how some people use rewards. They treat their card like cash, pay it off monthly without accruing interest, and get a reward back. It’s not the typical credit card user experience, but it happens. Not everyone overextends themselves or spends more than planned solely because some do.

They can be a tool in ones financial toolbox despite most using them in a way that makes their finances worse.

I know nobody said on this thread that they made all of their money from their rewards. However, the myth that you can get back so much money by beating the credit card companies by only using their cards for your every day purchases is just that, a myth. Statistically speaking, at some point you either spend on something you wouldn’t have or you spend more than you meant to because you weren’t paying as close of attention.

I would be happy to get money back every year, but the fact of the matter is, statistically speaking, you’ve spent an extra $1,000, $2,000, or $4,000 more than you planned to throughout the year to get your $500, $1,000, or $2,000 had you used an alternative form of payment than a credit card. I referenced the millionaire research because I’d like to be a millionaire one day and I would like to mimic what they do so that I can be financially well off like them.

[Silver14]

Originally Posted by pyroguy

A mortgage doesn’t pay interest first and then principle later. A mortgage is the same amount of interest no matter what part of the term you’re in.

You may want to read up on amortization schedules.

https://www.bankrate.com/calculators...alculator.aspx
"Initially, most of your payment goes toward the interest rather than the principal. The loan amortization schedule will show as the term of your loan progresses, a larger share of your payment goes toward paying down the principal until the loan is paid in full at the end of your term."

Originally Posted by pyroguy

I know nobody said on this thread that they made all of their money from their rewards. However, the myth that you can get back so much money by beating the credit card companies by only using their cards for your every day purchases is just that, a myth. Statistically speaking, at some point you either spend on something you wouldn’t have or you spend more than you meant to because you weren’t paying as close of attention.

I would be happy to get money back every year, but the fact of the matter is, statistically speaking, you’ve spent an extra $1,000, $2,000, or $4,000 more than you planned to throughout the year to get your $500, $1,000, or $2,000 had you used an alternative form of payment than a credit card. I referenced the millionaire research because I’d like to be a millionaire one day and I would like to mimic what they do so that I can be financially well off like them.

What happens to most does not happen to all. I agree with the general idea of your post but not the absolutes. Statistically there will be outliers that will not spend the extra money.


Edit to ask - will you share the statistics you are referencing? Sounds like they'd be interesting to read!

[pyroguy]

Originally Posted by trm2

Yes sometimes debt is good. I have a mortgage balance that is less than one year of net income at about 2.5%. I also have a brokerage account (outside of a retirement fund) with enough to pay said mortgage balance. That account is in a very well balanced fund that has returned over 19% over the last 12 months. True the S&P is over 30% in the same time, but I am way ahead by having a mortgage.

Originally Posted by KenKat

Over the past 20+ years, a mortgage and a larger 401k beats a paid off house and a smaller 401k. Did for me at least.

Now, if you want to exclude mortgage debt, I’d be more inclined to agree with you that all debt is bad. And some people will take out the mortgage and never put the money into the 401k - or cash it out when they switch jobs, etc. Worst of all worlds there.

trm2 why do you still carry a mortgage? Why not pay the house off and put the mortgage payment into your investments? Imagine what you could do if you had that mortgage payment (minus taxes and insurance) going into a retirement account.

KenKat, I will politely disagree that a big 401k and mortgage beats paid for house and small 401k. If you became strapped and needed money you could always sell your house and rent or move down in house. Is it easy or quick to do? No. However, if you pulled money out of a 401k you would be taxed at your tax rate PLUS a 10% early withdrawal penalty. Besides, with a paid for house you can put your house payment (minus taxes and insurance) into your 401k, Roth IRA, or other investment to build up a large investment account.

Investing in general is a risk. You risk whether your investment will go up or go down. However, if you have a paid for house you have a good idea of your upcoming expenses and the things you don’t anticipate you have an emergency fund for.

I will 100% give you credit for brining up the point about people who switch jobs cashing out their 401k’s as a bad idea. It is a good idea to do a direct transfer to your own IRA/Roth IRA so you have better control over your money, but cashing it out is a HORRIBLE idea.

Originally Posted by mlee

There is a reason 4 to 6 months is wise. The other 2.5 years or cash you have should be invested. It can be easily obtained in 4 to 6 months.

It’s smart to have an emergency fund. Over funding an emergency fund just means you’re missing out on the potential for compound interest from investments.

Originally Posted by s346k

you forgot the instant gratification of having nicer things now that you'd otherwise miss out on for a lot of years.

Originally Posted by Vegas Bound

Entitled sentiment.

Thank you! The “instant gratification” situation is why so many people are underwater in debt these days. It’s the “I want it all and I want it now and to hell with the fact that I’ll never be able to pay it back” mentality.

Originally Posted by BuddyLee

Many business use debt to increase the size of their business. They raise cash by selling corporate bonds. Rather than borrow from a bank they sell the bonds to anyone at a set interest rate. One great of example of this is Microsoft. A company who has enough cash yet proceeds from the seven-part deal, which includes a 10-year bond with a 3.3% coupon, used for general corporate purposes, including the repayment of short-term debt used to help fund Microsoft’s $26 billion acquisition of LinkedIn Corp.

There’s many businesses that do that. However, I know of a VERY successful business about 10-15 minutes up the road from me that has been built 100% debt free. They’re in the middle of finishing the second half of their GIGANTIC office building that is on land owned by the CEO, built debt free by the CEO, and the entire business has been built without debt by the CEO.

Also, as a counter to your argument, Anheuser-Busch was bought out by InBev because they over extended themselves. The Busch family no longer owned 50% interest in the company and as such was out voted by the investors to sell to InBev. A mover that most St. Louisians have HATED. When I went on the brewery tour soon after the sale happened, the tour guide even booed the InBev products.

Originally Posted by BuddyLee

I thought that as well. Why have more than 6 months in reserve parked into a savings account at .02% and not into a liquid safe money fund earning even 2%?

Why have more than 6 months of expenses in a money market/savings account at all? Any more than that, unless you’re expecting a kid, job loss, or some other catastrophic event is just burning money up. Emergency funds are insurance and there’s a price for insurance (little compound interest). However, the rest should be in a good investment vehicle or paying off debt.