Not all Debt is Bad

Debt is a 4 letter word in the personal finance community.  Rightfully so.  It’s a dangerous drug that can be extremely addictive.  You can get what ever you want with a simple swipe of a card, or a signed piece of paper at the bank.

I mean think about this… You take out a 30 year mortgage and depending on your rate you can pay back the loan in multiples (table below is for 30 Year fixed mortgage).

 

Interest RateRepayment Multiplier
3.5%1.6x
5%1.9x
6.5%2.2X
8%2.6x

 

Now, seeing that, just imagine the repayment plans on higher rates or longer time frames.  Crazy!!!

So, yes, debt should be avoided, as much as humanly possible.  It’s not good, plain and simple.

Exceptions To The Rule

Like every rule or question in real life.  The answer is “Depends”.  I hate giving that answer, it always seems like a cop out.  There are places where it might make sense to take on a little debt, but doing so means that you have to fully understand the repercussions of the debt and you should be getting something in return for that debt.

Yes, we are carrying a little debt.  Nothing that is out of control.  And no we don’t own a house, or anything like that.

  1. Mr Wow’s Student Loans – So, yeah.  I still have student loans.  It’s kind of obnoxious, but this is way before I became in anyway versed in the ways of the Financial Jedi.  But, that being said, I hit the loans at the right time, and consolidated them.  I had some loans from undergrad, and maxed out the federal loans for grad school.  And when I graduated, student loans were still variable rates, so I refinanced them and consolidated them for an interest rate of 2.25%.  At this point, we could cut a check and wipe out the balance, but I don’t really see the need.  I can use the cash to invest in the market and just continue paying down the loan at that very low interest rate.  We do over pay it every month to knock it down sooner, but again, that’s just part of our budget.  Had I just cut the check when I could, I would have missed out on all the gains on that money over the last several years.
  2. Mrs Wow’s Car – Sacrilege!!!  A financial blogger with a car loan?!?!  What is going on here??  Well, the Mrs needed a new car.  She drives a lot for work, and I mean A LOT!!  All day every day back and forth to people’s houses all over the city.  She also has to drag toys and stuff with her every where.  And she typically has 1-3 interns with her at any given time.  Well, her 10 year old Jetta, with the AC not working just wasn’t cutting it.  She was having to dig around through the trunk to find what she wanted, her interns were crammed in the back.  So, we made the choice to replace the car.  We ended up finding a killer deal on a recent model CX-5 (great car by the way) through Beepi (the company went belly up, so I’m guessing that’s why we got a great deal on it?).  But we got a loan for the car, because we could finance the used car at 1.75%.  We also used our Chase Reserve cards for the down payment to hit the spending limits.  WIN!  Again, we could cut a check and wipe out the loan, but why?

She Loves Her New (used) Car.  Yes, Beepi delivered it with a bow!

There are some other things that might be ok as well.

  1. Housing – We are not interested in owning property, at least anytime soon in our area.  But if you have read Set For Life, there are a couple different ways to go about “House Hacking”.  I don’t know if mortgaging your primary residence is a battle I want to get into here.  But, that being said, taking on a little debt to finance some real estate that might provide some cash flow might be worth while.  It’s a slippery slope, but the argument can be made that would be a reasonable debt to take on.

The Waffles General Rule of Thumb:

We typically look at debt this way.  If it’s under 4% just let it ride and pay it down.  We do over pay on all our loans, but we don’t make any additional effort to eradicate it before it’s time.  With the market, pushing ~7% over the long term you can use that to your advantage.  Now, if any debt is  greater than 4% I’d just kill that sucker ASAP!!  Yeah, you can possibly still be ok, especially with the way the market has gone recently.  But, again, this is why it’s a quick rule of thumb, not law of the land.

Just Be Smart

Debt can actually be a powerful tool to shift some cash flow around.  But, it’s a bit like opiates, good for what it’s intended for, bad for almost anything else.  If you are shifting cash flow to buy purses and garbage, then don’t bother.  If you are shifting it to invest or make an otherwise intelligent decision and can get good terms.  It’s not all bad.

Thoughts?  Anyone else carrying some debt?

7 Comments

  • Dad sdollars debts July 26, 2017 at 10:06 am

    We have a mortgage and my student loans. Both are near 3 percent but still make me itch. i have not jumped to pay them down for the reasons you mentioned above. We did have cars at 0 percent but I got rid of those suckers and was able to reduce my insurance coverage on them.

    Reply
    • Mr WoW July 26, 2017 at 7:57 pm

      Very nice on the debt reduction. Yeah, I mean there’s really no reason to pay it off extremely fast unless it’s a mental thing and you just aren’t comfortable having it on your books. 0% is great, but reducing the out lay is even better!

      Reply
  • Tonya@Budget and the Beach July 26, 2017 at 12:33 pm

    I have a car loan with just under 3k left that I’m always tempted to just pay off in one swoop, but at just under 2% why, right? It’s all about how you perceive it and what else is going on in your life. For the most part there are common ground rules, but not one size fits all!
    Tonya@Budget and the Beach recently posted…Real Money Stories: New House, New Baby, & Student LoansMy Profile

    Reply
    • Mr WoW July 26, 2017 at 8:00 pm

      Yeah, at 2% you might as well just let it go. It will be gone soon enough. Then you can just transfer that over to your investment accounts and keep making the payment. See, there’s another benefit. It makes those payments a habit, so you can simply continue them. That’s what we plan on doing.

      Reply
  • Mrs. Picky Pincher July 26, 2017 at 12:38 pm

    Good point. I still wouldn’t label it as “good debt;” it’s more like “tolerated debt.” We also still have a car payment. Since the interest rate is so low, it makes sense to pay off EVERYTHING else before the car. So yeah, we’ll just do the minimums until it’s paid off. We did get the student loans out of the way just because we want to go into retirement with zero debt (including a mortgage). But yeah, if you prefer to invest those funds, it’s entirely up to how the numbers work for ya. Sometimes it lands in favor of investing over rapid debt payoff.
    Mrs. Picky Pincher recently posted…I Conquered My Biggest Fear Without Peeing MyselfMy Profile

    Reply
    • Mr WoW July 26, 2017 at 8:03 pm

      I don’t know that any debt is “good” per say. But, it might not be the devil as most people in this community tend to look at it as. Exactly, you’re looking at the numbers and making a decision to whether it makes sense to pay it off. And, yes, there is a psychological aspect to paying of the debt and being free. I understand that, trust me, it takes a good amount of effort sometimes to not just pay it all off.

      Reply
  • Gwen @ Fiery Millennials July 27, 2017 at 6:11 am

    I have one mortgage, and more to come! I will also need to figure out what I will do when it comes time to replace my ’05 Vibe. He’s a great car but getting a little bit long in the tooth.
    Gwen @ Fiery Millennials recently posted…Blocks and BarriersMy Profile

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