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?

18 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

    Reply
    • Mr WoW July 28, 2017 at 7:15 am

      Mortgages aren’t all bad, especially since you are going for the cash flow off of it, and not making it your primary residence. I also seem to remember the houses where you are aren’t disgustingly over priced. Hey!! what are you saying about my ’02 with 175K miles on it? Are you calling him old? He’s still got some giddy up and I still love driving him.

      Reply
  • Dreamer in Chief July 28, 2017 at 8:30 am

    We’ve paid off our interest-laden debt except for the mortgage. Student loans and a car loan gone. But we just got a new AC/furnace and put it on a zero-percent interest credit card. I don’t feel bad about doing that because A) I know I’ll pay it all off before 18 months to avoid deferred interest, and B) it keeps me from getting uncomfortably low on my emergency fund. But I’m totally planning to buy the next car with cash. I’m going to try to avoid more debts that will cost me in interest.

    Reply
    • Mr WoW July 30, 2017 at 10:05 pm

      The zero interest thing is exactly the way to do that. Take advantage of the cash flow adjustments for a minimal/non-existent fee. This is the same way we’re look at the loans. A mortgage is one thing that’s a broader discussion for another day. We will have all the loans gone shortly, but for the time being there’s really no reason.

      Thanks for the comment and keep up the good stuff.

      Reply
  • Mr. Need2save August 1, 2017 at 6:44 pm

    We’ve done the 0% interest for 12 months thing in the past and there have been a few low-interest rate car loans too. Lately we haven’t taken on any debt and our mortgage is our last debt. So mostly for psychological reasons, we are paying that baby off fast.

    But given the current market conditions, I agree with your points. If (when) we stumble back into recession, I would potentially pay off some of those debts. That said, you could use your cash as a good buying opportunity in the market as well. So many decisions.
    Mr. Need2save recently posted…You Paid How Much For A Car?My Profile

    Reply
    • Mr WoW August 1, 2017 at 8:35 pm

      Well, if you want to start predicting the market, be my guest, when you find something that’s guaranteed, let me know. I’m all for it. HA!!! I imagine this will be the last debt we take on for quite some while. We don’t plan on buying a house. And we drive cars into the ground, and I don’t see us going back to school anytime soon. So who knows.

      Yeah if I need a guaranteed 2% return on my money, I’ll start paying everything down, but yeah… I mean I could do it in one swipe of the pen, I just think it’s smarter to put that money in the market now… I think it your article you talked about that.

      Reply
  • Turning Point Money August 2, 2017 at 12:17 pm

    Having debt is not all that bad. Especially if you are actively paying it down. We still have mortgage debt and I pay it down when there is nothing better to do with our funds.

    Continuously adding debt is a slippery slope, especially for consumer purchase like cars and furniture. I don’t think this is good debt for depreciating assets.

    I even stay away from 0% financing. This means I would incur yet another monthly expense. Might not be the best from a time value of money perspective, but in\t helps to maximize our monthly funds earmarked for investments.

    Reply
    • Mr WoW August 3, 2017 at 7:10 am

      0% financing isn’t bad, if you are looking to buy the thing regardless. I wouldn’t let 0% financing drive the decision. You are exactly right. Debt is a super slippery slope, and you can get yourself in trouble very quickly if you don’t pay attention. There’s also the psychological effects of having debt and paying it off. Which is an bonus, that I didn’t really discuss.

      Reply
  • Investment Hunting August 6, 2017 at 8:12 pm

    I agree with you on this. I usually set the bar at 3%. I can make more than 3% with many investing options. A mortgage however, is something I personally pay off as fast as possible. I do this because it represents a large monthly payment. I choose to get debts like this off my books, just in case I lose my job. Thanks for sharing.
    Investment Hunting recently posted…July Dividend and Options IncomeMy Profile

    Reply
    • Mr WoW August 6, 2017 at 8:18 pm

      It’s good to hear that someone agrees. And yes, there’s something to not being beholden to anyone should something happen. Luckily enough, if we need to we can wipe out the debt instantly. It’s just a matter of there’s better things to do with the money at the time being. Yeah, the contingency plan is definitely something worth investing in. Thanks for stopping by!

      Reply
  • wendy August 22, 2017 at 10:08 pm

    I had some stupid CC debt for a while (wince) but then I found MMM, had the punch to the face epiphany and paid those suckers off!
    When a family member had money issues related to divorce, I gave him my paid-off, safe, car and bought a new one (this is pre-MM). I at least had a 0% loan and after almost 5yrs still have less than 30k miles because I walk & bike.
    I’m paying the last of it off (early) this month, just to Get’Er Done and off my plate. I know that I should milk the 0%, but emotionally I just want to be clean with zero debt. Also, I’m seeing you all in Ecuador and I’m afraid I’ll be voted off the Hacienda for having debt!
    🙂

    Reply
    • Mr WoW August 22, 2017 at 10:32 pm

      There is a benefit to being completely debt free. There’s a freedom that comes with that. We carry debt, but nothing crazy, and it’s something we could wipe out with one pen stroke if we needed to. I just think there is something more valuable to do with the money at the moment.

      I’m sure you’ll be just fine in Ecuador. Seems like a pretty welcoming bunch. Just gotta have a valid reason for the debt, I’m sure.

      Reply

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