Taking Advantage of Debt

[questions]

I think you do a disservice to your readers when you tell them that they should avoid debt. People should use debt to make more money. Haven't you ever heard of the phrase "use other people's money to make money"? That is how the super rich make their money. If you live by this philosophy then debt is always your friend. There may be some risk, but there is risk in everything we do. Driving a car to work is risky.

If you are so against debt, what do you think about this? Don't you think that debt can be good and that people should take advantage of debt when it will make them money?

[Broken Arrow]

Strange question, if there is one.

Unlike other sites, I think most here don't have anything against the responsible use of debt to get further ahead. Perhaps the most common example here is the approval of rewards or cash back credit cards.

On the other hand, I think we also need to be careful not to over-generalize the benefits of leveraging debt. Sometimes, it's just not worth it, and can even be financially harmful.

For example, it certainly wouldn't be worth a loan or margin account with, say, 8% interest because it would be difficult to beat that and make a profit. Much simpler and perhaps more effective would be to simply remain debt-free and slowly build up cash to invest.

So, I don't think "the rich" will get ahead by simply leveraging debt per se. If anything, I think they will get ahead by crunching the numbers and considering all of their options carefully. If it makes more sense to reduce debt, then they will do that. If it makes more sense to leverage certain types of debt, then they will do that instead.

[kork13]

BA is very correct--it's not that holding loans is a black mark that dooms you to an impoverished state of life. There are many ways to responsibly use and manage debt to your advantage. Reward CC's which are paid off monthly is a good use of debt. Student loans and mortgages are good uses of debt. With these examples, the proviso is just that what you borrow should be the an amount that you realistically will be able to repay. If you get a degree in underwater basket weaving but somehow rack up $120k in student loans, there's something wrong. Or buying a $500k home on a $60k/yr salary. Buying a car on debt is worth it if you need that car in order to hold a job. However, you should only get a car that is reasonable for you. You shouldn't get a $40k car if you're only working a minimum wage job.

The problem is that many people do just the opposite of what I'm describing here. People take on debt that they cannot reasonably expect to pay off given their situation (job, expenses, family matters, medical state, etc.). I see no problem with having debt if it is done RESPONSIBLY.

I got a $30k loan at 1%. I took it because it's essentially guaranteed that I can make money off of it, and in the 1.5 years I've had it, I've done just that. It seems that this is the situation you're trying to talk about here... But most people don't have access to such an advantageous arrangement. In my case, I only got it as a "career starter" incentive from my bank, a one-time opportunity to help establish yourself after finishing college.

As BA brings up, it's difficult to make a profit off of most debt arrangements, because most loans have interest rates above 5-6% at the very least. Factor in taxes, and you're looking at a requirement to earn at least 7-8% to just break even, let alone make a profit.

[maat55]

I would argue that the rich get rich off lending money to the poor and middle-class. It would be interesting to know how much interest an individual pays in their lifetime, not to mention that interest compounded in an investment.

I contend that, if everyone were to stop borrowing money and invest 10% living on the other 90%, it would close the gap tremendously.

[arthurb999]

Certain types of debt are ok... not all.

Aren't you the guy who's 90K upside down on your house... that is an example of debt that is not ok.

[jeffrey]

CAren't you the guy who's 90K upside down on your house... that is an example of debt that is not ok.

"Questions" is an admin account we use for people that email questions to Nate and me, so they aren't the same person

[arthurb999]

"Questions" is an admin account we use for people that email questions to Nate and me, so they aren't the same person

Oh

[Ima saver]

The area I live in is a perfect example of people going into a lot of debt in order to make money. 5 years ago, this area really took off. Real estate was selling like hot cakes. Everyone and his brother became a builder. Lots went from $20,000 to $80,000 and up. Everyone we knew was building spec houses to make a lot of money. All of a sudden, this economy took a dive. Now everyone is stuck with homes and land that they can't sell. Since they borrowed from the banks to build, they owe a lot of money. Money that now, they cannot pay back.
To me, it is better to pay cash as you go and not owe any money.

[simpleyme]

i had people telling me I was being foolish to not leverage my property equities, but I feel the equity in my homes is not realized until I sell so I do not touch it.

and somehow now i am "lucky" not to be upside down LOL

[Tree0164]

I think in today's world getting into debt to make money isn't smart.

If you are responsible using the rewards CC are okay. However I have seen where people have taken advantage of 0% offers and then put it in the market or a high paying interest account, I just never got why they did it.

[disneysteve]

I think the OP is absolutely right, although may not have articulated his/her case clearly. There is such a thing as "good" debt.

As BA said, using credit cards to reap the rewards is a perfect example. Quite a few of us here do that, like myself and Julie (Ima saver). That is using debt to our advantage.

Another great example is student loans. How many of us would be where we are in life and career today if not for student loans? I certainly wouldn't be where I am. If I had to do it all over again, I'd do it pretty much the same way, debt and all.

And, of course, there is most people's biggest debt of all: their homes. How many people could buy a house if not for debt? Very few.

As I've said many times, debt isn't evil. Credit cards aren't evil. Loans aren't evil. They are all financial tools. If properly used, they can help you a great deal. If abused, they can get you into a ton of trouble, but if they do, don't blame the tools, blame the person using them.

[Inkstain82]

Debt is like a power tool.

It can be useful, but only when used by cautious, trained professionals in a controlled environment with a clear idea of what they are trying to accomplish.

[Broken Arrow]

It can be useful, but only when used by cautious, trained professionals in a controlled environment with a clear idea of what they are trying to accomplish.

You remind me of the Mythbusters when you say that. Hehe.

I don't about going so far as all that, but I agree with the general sentiment.

[maat55]

So far, I'm averaging around 75.00 per month in rewards towards my mortgage using my countrywide visa.

[disneysteve]

So far, I'm averaging around 75.00 per month in rewards towards my mortgage using my countrywide visa.

That's great. That's right about what we earned in rewards last year - $900.

I just ordered a $100 check from my Chase Visa. That's the second one this year from that card. We also earned tens of thousands of Marriott Reward points and cash back from Discover.