My daughter's "Finance" professor told the class that "debt is a tool"

Why do you think that virtually every major company and government in the world issues bonds? Because debt isn't a tool? CFA in your dreams, tool.

........ wrote:

Why do you think that virtually every major company and government in the world issues bonds? Because debt isn't a tool? CFA in your dreams, tool.

If they go bankrupt using debt, they lose less than if they used their own savings.

Corporate debt is one thing; personal debt is an entirely different thing. I believe that personal debt, including mortgage debt, in all but a very few cases, is a bad thing. I've read in multiple places that mortgage interest deductions return, on average, about 35 cents for every dollar spent. I know one person who uses their mortgage deduction to keep them out of a higher tax bracket in which they would otherwise fall. For most though, mortgages make no sense from a debt stand point that I can discern.

I recently had a college business professor tell me that I was wrong, that mortgage debt is a good thing, but he couldn't make an actual dollars and cents argument to support his contention. He talked about opportunity cost and higher-yield investments, but I would argue that in these days of very unpredictable yields, which tend to be very low, taking out leverage in the hopes of higher returns seems incredibly foolish.

Other than the tax bracket thing I noted above, or the potential to own a low-cost mortgage and otherwise invest that money to gain a higher yield, can anyone explain to me how mortgage debt can be seen as a positive? Is there a genuine structural, common sense reason to carry mortgage if one doesn't have to?

debt just means you had more fun than you were supposed to

Personal debt allows guys to buy nice clothes and cool stuff, which attracts women and allows him to find a mate. Married men are proven to live longer, more successful and happier lives. Ergo, personal debt is a tool

so since your still in college i assume you don't own a home. and unless you leave in a very cheap part of the country, the only way to get a home is to use that tool you bad mouth, called debt.

What do you consider buying on margin? the use of debt. effectively your broker is loaning you money on your assets.

is using a credit card (while paying it off every month) another form of using short term debt? or do you pay for everything with cash?

what about the 0% interest for 6 months on a purchase. assuming you pay it off in time and have no fees, this allows you to invest that money you would have spent and get interest for 6 months. i'd call that using the tool of debt.

student loans?

car loan?

these are all personal debt examples.

listen to your professors they know more than you.

You have a mortgage because you love having more money. What is better?

a) 500k invested making 2%

b) 500k invested making 2%, 400k debt costing you 4%, 400k invested making 8%

b is a heck of a lot better 90%+ of all 30 year periods. You are taking on risk and getting rewarded for it. If you can't take on risk (i.e. people in retirement are often trying to minimize risk versus maximize returns), you avoid mortgage. Looking to maximize returns? You take on debt. What doesn't make sense is holding tons of low return instruments (say holding 400k in the bank making 1%) while you have debt (say mortage at 4%). For that to work out you have to be making market timing bets (you will be able to invest your 400k at some point) which rarely work out.

Your tax bracket thing tends to be the rational of people that don't understand the tax code. Sure deducting at 39.6% instead of 35% is better but it doesn't change the math much for most people in terms of it being a good idea or not.

Debt is great when it is invested in productive assets and you can handle the payments. Taking on debt so you get a 200k/year job instead of a 50k/year one is a great tool. In general debt lets you take on more risk. If it works out, you do better. If it doesn't you do worse. You need to figure out if the upside is worth it and if you can handle the downside.

People rail against debt when it is used for stupid things like buying cars you can't afford, vacations, and the like. Those are drastically different cases than when you are investing in productive assets.

Debt can be used as an effective tool.

Ramsey is a tool.

There is no reason for me to pay off my under 3 percent mortgage other than phychological reasons. If I have extra cash at all he end of each month I can put it in a balanced no load low annual expense mutual fund and be alnost certain I will earn a higher return over the term of the mortgage

Would ramsey think I should wait years and years to buy my home and pay rent? Or get a fixed rate mortgage and Buy and no longer have increases in rent each year? Yes, I have to pay for upkeep and HOA fees and property tax but ny mortgage and those fees are about equal to the rent I would be paying and rents go up over time in my area so in a few years I will be paying less than I would be paying in rent and by buying I am building equity and the home is appreciating in value.

Ramsey's idea to pay off credit cards with the least amount due is laughable. Any sane person would first pay off the card with the highest interest rate.

Ramsey's ideas are directed to people who have no self discipline and do not have a clue. He gives runner's world like advice of never increase your weekly mileage by over 10 percent. Okay. It is not terrible advice but it is not a rule that needs to be followed by everyone.

Hell, I get over $2500 in cash from using my credit card each year and he tells people to cut up their cards. But if one has a good credit card and pays it off each month it is a really good tool.

Wrong. I am in my 50s and my home is paid for, although I carried a mortgage for many years. That doesn't mean that was "good debt" IMO. I shudder to think how many dollars I threw at bankers over the years on those mortgages.

I have never bought investments on margin and would consider it foolish to do so. Do you know investors who were bankrupted during the downturn? How many of them lost because they were hubristically over-leveraged?

I will agree that using the credit card to accumulate miles/points, assuming the discipline to pay it off monthly, is useful. The whole point to the cards, and those mileage clubs, is that most consumers do NOT have the discipline to keep them paid off every month. Even a couple months of interest on those cards and those club advantages disappear.

0% interest on consumer purchases CAN be useful, but it usually means buying something that one otherwise cannot really afford. It also lures the consumer into a risky spot with the hope that nothing will change in their lives during the term of that debt.

Student loans are terrible and wrecking younger generations! Car loans? Are you phukking kidding? Car loans are NEVER an example of good debt. You lose all credibility here goofball.

By the way, NO, professors don't know more than the rest of us. Debt is not useful and it's not a tool at the personal level. At its best it's an occasional and necessary evil that we have to deal with. You made my points in several of your examples. I had a mortgage for many years, but I would hesitate to run the total cost of ownership numbers for my houses, because considering debt cost, home maintenance, furnishings, etc, I likely have not "made" nearly as much money on these homes as one might think.

People seem to forget, so soon after a financial meltdown in this country, that debt equals leverage, and it's leverage OVER YOU. Life is unpredictable, while debt repayments on the personal level are not.

So again, somebody (other than the last poster) convince us that mortgages and other personal debt are a great bargain for some structural reason.

Car loans are not good debt? Are YOU kidding? Kindly explain how, e.g., a 0.9% car loan in a period with 2%+ inflation is not amazingly good debt.

Here's a better bet by far: buy your cars with cash. You would argue that ANY debt assumption is required, and or worthy, when the smart thing to do is buy your transportation with cash? Foolish, especially on a machine that depreciates like mad the minute you drive it away from the lot. There is NO good car debt.

Car loans wrote:

Car loans are not good debt? Are YOU kidding? Kindly explain how, e.g., a 0.9% car loan in a period with 2%+ inflation is not amazingly good debt.

So you're advocating giving away both the capital opportunity and 1% of that capital, simultaneously? That's ridiculous.

Depreciation, yes. That's an argument against buying a new car, not against getting a low interest loan.

Suppose your mortgage is less than 3 percent like mine.

Suppose your employer offers a 401(k) plan where the employer offers a match up to 3 percent of what you contribute in deferrals to the plan. This is not unusual situation.

Do you think a person in that situation should contribute at least 3 percent to his 401k and get the 3 percent match or not defer anything because having debt is bad so use all income to pay off debt is the best policy?

Sounds like the sort of gibberish that comes from those who are bankrupted by their own hubris every time the economy takes a turn for the worse. You know as well as I do that those who take out car loans, of any kind, buy more car than they can truly afford, take a massive loss on it as soon as they drive it, and are NOT taking that same amount and responsibly investing it. No, you aren't either, but it's uncomfortable to consider that you are a consumer lemming, and you want to drive more car than you can actually afford to drive. Debt is nothing more than leverage at the personal level. It is not "opportunity", at least not unless you are damned lucky.

Car loans wrote:

Car loans are not good debt? Are YOU kidding? Kindly explain how, e.g., a 0.9% car loan in a period with 2%+ inflation is not amazingly good debt.

Maybe on a used car, but new cars lose about 30% value the first year.

Let's suppose you have your house paid off. You have no debt. Your full time job can easily cover a mortgage for your entire home. You have a multi million dollar idea but it's going to cost you 100k to get it off the ground and you don't have that much money liquid...... You could use a little debt as a ______ to finance your idea.

Ok...keep renting then idiot.

I guess you don't read much. I am still young-ish and own my home outright. I also have no other debt. I acknowledged that debt is sometimes a necessary evil, but it is still not a good thing. Debt is leverage, debt is risk. ANother poster above you noted debt that might be used to finance a business start-up, which is a different beast entirely, although I would never use personal debt and personal risk to start a business if there were ANY other way. There are really a lot of idiots here who don't seem to remember that the entire economy collapsed just a few short years ago. That mortgage is great until you're underwater on the values right? That student debt is cool until your salary is so low that you're going to be impoverished until you're 50 years old. Those credit card miles kick ass until something happens and you fall behind and have to make high-interest payments.I have friends who are still underwater on their mortgages after the crash, all these years later. I know those who took seconds to finance a new kitchen and now cannot sleep at night because they struggle to make payments. For the majority of consumers, the majority of the time, debt is not good, it's simply dangerous risk. You want to sleep well at night? Shed all of the debt you have and live within your actual means. Drive a reasonable car that you can buy with cash. Save a little money. That's the way to go for most consumers. Those who advise otherwise are charlatans in my book.

Car loans wrote:

Car loans are not good debt? Are YOU kidding? Kindly explain how, e.g., a 0.9% car loan in a period with 2%+ inflation is not amazingly good debt.

What is the price of the same cars that are 6 months older, with possibly 1000 miles on them? Usually 70% of the original sales price. But the catch is.....you usually have to pay cash.

Car financing is merely a means by which to get consumers to pay the full price. Those who can't afford to pay cash must pay a premium.