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).

 

[table id=3 /]

 

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?