In the simplest possible example I can think of:
Say you pay your rent quarterly. This is common at university halls.
The first payment comes around and your monthly paycheck doesn't cover the couple of thousand dollars. You go into debt.
However, you know that you will be able to pay off that debt next month. You have avoided late payment fees on your rent. You have used debt as a tool and avoided homelessness.
dasasdfa wrote:
Hmmmm... wrote: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?
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.
You are spot on. The OP is a troll.
Silly goose;
Rojo is a tool.
Debt is debt.
Dave Ramsey, CFA wrote:
Listen to Finance professors, and you will end up broke
Debt is a tool for the rich. (Leverage and banks and Wall Street, etcetera)
And debt for college kids is another amenity for the rich. (What you said, basically)
If you don't have adequate capital, connections and other assets, debt will not be a tool.
Dave Ramsey, CFA wrote:
Listen to Finance professors, and you will end up broke
False advice from a glorified accountant.
How much did you have to pay for that diploma mill "CFA"?
Since this is a finance professor and not a home ec teacher, I assume he's talking about taking on debt to purchase income producing assets. Can you explain why this is universally a bad idea?
Dave Ramsey, CFA wrote:
Listen to Finance professors, and you will end up broke
For corporations, debt is most certainly a tool.
For individuals, most debt is probably a bad idea. Obviously credit cards that aren't paid off are bad. Car loans are probably bad, too. Yes, you can get 0% financing for new cars, but they'll depreciate instantly and you'll only have to pay the present value of the car payments if paying upfront in cash (as long as you negotiate well). Better still, just buy a used car with cash.
Mortgage debt and student loans are trickier. You need a place to live. You can either rent or buy. I don't see how it's financially savvier to rent. The big problem nowadays is that people buy way too much house and put too little down up front, thus paying the stupid PMI which likely adds thousands to the price. A family of 4 does not need 2600 square feet:
http://www.aei.org/publication/new-us-homes-today-are-1000-square-feet-larger-than-in-1973-and-living-space-per-person-has-nearly-doubled/Getting a degree is generally a good way to earn more money and debt can help if you're young and don't have money saved (and your parents can't help because they bought a 2600 square foot home they can barely afford). As with mortgages, though, you have to be careful not to buy too much education. Use community colleges and state universities, live at home and try to work as you go to school.
Spezzzz wrote:
Debt can be used as an effective tool.
Ramsey is a tool.
Correct.
Since this forum is so found of analogies, debt is a tool like a circular saw is a tool. Dangerous in the wrong circumstances, incredibly useful in others.
Leverage
Lumpkin County wrote:
Silly goose;
Rojo is a tool.
Debt is debt.
Why then does which Apple has more than $250 billion in cash, still have bonds on its books, along with other liabilities such as mortgages and leases? Bad management, I guess.
Finance professors in business schools are not talking about personal finances.
Galloud wrote:
Dave Ramsey, CFA wrote:Listen to Finance professors, and you will end up broke
False advice from a glorified accountant.
How much did you have to pay for that diploma mill "CFA"?
The CFA exams are no joke.
John Utah wrote:
Galloud wrote:False advice from a glorified accountant.
How much did you have to pay for that diploma mill "CFA"?
The CFA exams are no joke.
Right. I've got like five friends with their CFP charters and they're dumb as a cinder block.
Did this "Finance" professor also teach your daughter about the CAPM, the Efficient Frontier, Beta, Alpha, Correlation Coefficients, the EMH, and the Halloween effect?
Ho boy.
You do not understand finance.
Because borrowing is as inexpensive as it has ever been in human history, and your company makes more money than any other in human history.
Pull in dollars, make more on the dollars than your 4% bonds, repatriate trillions and give us iPhone 8.
The q4 numbers will be utterly staggering.
Perhaps 100 billion in profits....
From a complete amateur:
There are tax differences. You can deduct mortgage interest with mortgage payments, but only if you are paying a lot of interest will you be able to itemize deductions over the standard (that is, mortgage interest plus other deductions over 6300 single/9300 hh, etc.). So, if you have a big mortgage and/or are paying it back over a long period of time, you can deduct that. That means you change your tax bracket; it is not a dollar for dollar deduction. Maybe you are getting 30-40% reduced on the figure above your standard deduction?
You do take risk in carrying debt. What if your investments go bad? What if you lose your job? What if you have a big unexpected medical debt crop up that prevents you from taking care of the other debts? Then you might end up bankrupt. Med. bankruptcies used to be 1/2 of all of individual ones before the ACA. Now, by contrast, if you are paying off your mortgage in 15 years or even in five or six years on 2x/month payments on a 15 yr mortgage, and interest is 3-4%, you might save 50-100k in interest and be able to devote your salary to savings entirely after that time is up. It also functions as a big forced savings program, so that you have the value of your house at the end--the forced savings--and then with that discipline you will hopefully be able to continue to sock away a good portion and earn interest on that. All in all, maybe it is a wash, but I think that it is likely better to do this for most who could not otherwise put the extra money from lower payments on debt over a 30 year mortgage into high-earning investments, etc. Of course, I'm not factoring in inflation--at 2% per year inflation, but 3% interest, your debt is appreciating only at 1% per year in real dollars, not counting payments, so that is very sustainable and a run of higher inflation and it may actually decline in real dollars. Another factor is that on average salaries are increasing pretty close to inflation, maybe a bit more.
Hmmmm... wrote:
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.
You are only looking at half the equation. Yeah it sucks to have paid 200k in interest. But it is pretty nice to have made 400k because of your ability to use the banks money instead of your own to buy the house. It is easy to ignore opportunity cost but it is just as expensive as paying interest.
dasasdfa wrote:
Hmmmm... wrote: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.
You are only looking at half the equation. Yeah it sucks to have paid 200k in interest. But it is pretty nice to have made 400k because of your ability to use the banks money instead of your own to buy the house. It is easy to ignore opportunity cost but it is just as expensive as paying interest.
Further, a portion of this debt inflated away over time so the real rate paid is lower than the nominal.
If Finance professor knew so much about building wealth, then why are they working as professors? Think about that. Any finance professors want to compare bank accounts with me? Didn't think so.
Some people don't understand opportunity cost.
And they often don't consider rent expense will almost always exceed interest expense in rent vs buy over time.
Home equity is often not taken into consideration, just dollars out.
And even credit card debt isn't as bad as it is made out.
The debt balance is meaningless. It's only the interest expense that matters.
Interest expense is the trade off you make for having something now vs later.
If you value now you'll pay interest and it will be worth it.
Time is a commodity that has value.
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