An anonymous commenter on my 130-year mortgage post said this:
“I don’t understand your aversion to debt…”
I suppose I am averse to debt, or at least certain kinds of debt. Now, if the debt is used to control an asset that will bring in more per month than the payment on the loan, then I'm all over that kind of debt. Bring it on! (I haven't found any such opportunities, more probably that I don't trust myself to recognize one.)
I have mortgage debt, but I'm paying it down faster than I'm obligated to by the terms of my note. My house is only a place to live. It doesn't produce any income. So this is a debt that I don't want hanging around any longer than I absolutely have to. So I guess that this makes me averse to this debt.
This is the only debt I have. No car payments, no credit card balances.
This isn't meant to brag. I know that there are many people who carry credit card balances and have car loans and HELOCs because of some trying circumstances, medical problems, accidents, etc., and at the moment their financial lives are a stretch and they can't pay down their debt without really tough sacrifices. That's not what I have issue with. I take issue with living beyond one's means, justifying doing so because the payment is affordable, and not really making any effort to get rid of the debt.
What's wrong with owning things free and clear? With credit as easy to get as it is for most people — in 2005 more than six billion credit card offer s were mailed to households which is about one offer every two to three days — it sure has been easy to pay over time. Six billion offers tells me that consumer debt is incredibly lucrative. And it is!
Lenders want as much of your money as possible. They want you paying interest as long as possible. They want every assurance that they will get their money back. They will charge fees and raise your rates at the first sign of trouble. They are leeches that will suck you dry if you let them.
I view my one debt — my mortgage — as consumer debt. One of the wiser consumer debts perhaps (along with student loans) but a consumer debt nonetheless. Surprisingly, paying my mortgage down faster actually reduces the risk for the lender at the same time it saves me interest payments, because there is more equity. It's easier for the bank to recoup its expenses should they need to foreclose. So I don't strap myself by prepaying too much. More protection for me, not the lender. The borrower is servant to the lender (Proverbs 22:7) and by many accounts lenders are cruel masters with very long memories that prey on the weak. You'll get lots of credit offers even after you declare bankruptcy, if only because the interest rates will be very high and you won't be able to charge off the debt again for years!
So yes — I'm averse to debt and to being at the mercy of lenders. That's why I love seeing people reducing their debt to absolutely nothing!
You're halfway there…
1. Get rid of all "bad" debt – CC balances, car loans etc.
2. Live "debt free" – save up and pay cash for everything
3. Recognise that capital gains build net worth as much as income, and can be estimated as well as income (eg. share index capital gains vs. dividends). Borrow against existing net worth to invest in additional assets, as long as there is a reasonably expectation that total return (income+CG) will be greater than the interest cost of borrowing.
Step 3 requires getting educated about reasonable risk and return estimates for the various asset classes, understanding of your own risk tolerance, planning to control the amount of risk you actually take on.
Being frugal, paying off debt, saving and paying cash is better than living off credit. But you have to take on some investment risk if your savings are to earn more than the risk free rate (which is usually around the inflation rate).
If you are truly "risk averse" than you won't get past step 2, and your net worth will only ever be a multiple of whatever part of your earned income you can save. eg. Working and saving 10% of your earned income for 40 years and earning the risk free rate on your savings you'll end up with 4x your average salary as your retirement "nest egg". Taking on some risk (eg. including stock/bond assets in your investment portfolio) but with no borrowing you could increase this to 6-8x average salary. To accumulate significant wealth via investments requires some level of debt (gearing).
I think the financial markets have gotten somewhat more sophisticated since (Proverbs 22:7) was written.
Regards
http://enoughwealth.blogspot.com
Yes financial markets are much more complex yet has behavior changed since proverbs 22:7 was written concerning the relationship between lender and borrower? I suggest not…
After our assets went over our balance due on our mortgage a few years ago, we ran the numbers on paying off our mortgage versus keeping our cash and working it down, and the numbers were emphatically on the side of keeping the mortgage, to the tune of several hundred grand.
I guess this would be a variant of "debt making an higher-yielding asset available", although the asset is not controlled by the debt.
Thanks for all of the comments.
Enough Wealth, I'm writing a post that responds to your comment. Your points on assessing investment risk are good. Though I don't necessarily agree that the financial markets have gotten more sophisticated since biblical times. They've gotten a lot more complicated with many more exciting ways to hang yourself. But it's still the borrower serving the lender until the debt is repaid, and there is a lot more legislation available for that to happen. (I side with SiK on this one.)
Foobarista, I guess you have a fixed-rate mortgage?
Yes, it's 5.5% fixed. Our investments make about 10-12% a year.
Do you consider a wedding to be an accident or a medical condition? There several types of purchases that are almost impossible to make without having a credit card. And if you are wise in managing your budget you won't have any problems paying that money off.
Credit Card User, thanks for your comment.
That's a tough one. It's once in a lifetime (hopefully) so you definitely want to do it right. But when you get right down to it, one can get married much more cheaply than what society would deem standard. You can't really do a drive-through hospital stay for an accident or a medical condition.
I have to agree that as long as you are able to manage your finances and use your credit card to a minimum, then it is fine to keep it. For emergency use that is. I have had my car loans and been using credit card to pay for it and works well for me.