Is it better to use debt or live debt free?

[jwest95]

I feel extremely lucky to be in the process of buying a house in cash (no mortgage). I am 27 and feel like I've been given a massive opportunity, partly from my own doing but mostly in this case from inheritance (I feel dirty even saying it).

I weighed up my options, I thought about using the money to get my business going - but ultimately I decided on purchasing a house because I personally see it as the ultimate security, a good investment (I'm in the UK) and so I can sleep well at night.

BUT... I know there tends to be two schools of thought when it comes to debt. Some would say "take out a mortgage, invest the rest" or "use that money to build a property portfolio" etc etc. And then there's of course the 'Dave Ramsey' mindset. But in this case, I will be able to live truly debt-free once I've got a small amount of student loan and some credit card debt paid off - and to me that sounds like the ultimate freedom, to never owe anyone anything ever again.

I am curious to know your thoughts on this? I need to reread Millionaire Fastlane as I can't recall MJ's teachings on this subject. But ultimately, do you think I'm making the right decision? Let me know below!

 

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[Mathuin]

I thought about using the money to get my business going

What business are you starting? How capital intensive do you think its going to be?

 

[jwest95]

What business are you starting? How capital intensive do you think its going to be?

Low capital intensive - will be fully online, coaching people on music production/songwriting, focusing on building an audience through YouTube. Already made some money with it, was just thinking about funding for ads etc

 

[Jobless]

Why do you think a house is the 'ultimate security' and 'a good investment?' If many people think so, does it make it so?

In my opinion, find a balance between the two extremes and get a small loan. Then you have money to deploy in your business in the future, if needed. It's hard to get a business loan when you need it.

 

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[jwest95]

Why do you think a house is the 'ultimate security' and 'a good investment?' If many people think so, does it make it so?

In my opinion, find a balance between the two extremes and get a small loan. Then you have money to deploy in your business in the future, if needed. It's hard to get a business loan when you need it.

Because a paid-for house cannot be taken away from you, and everyone needs somewhere to live first and foremost. And ultimately here I'm talking about living with zero debt. It's not about how many people believe it, I do my best to avoid groupthink. This just seems logical to me.

But yes, a small loan would be the only other thing I would consider in this case. Thank you for your contribution!

 

[Antifragile]

Business debt is typically ok, as it is productive. Meaning for every $1 borrowed, I expect to make $2.

Personal debt (even mortgage, yes I said it), is not productive. And I avoid it at much as I can.

People may tell me that I’m “an idiot” for having no car loans and yet I drive a luxury vehicle etc. some say “you could put that money to better use.” They may be right … but I sleep better at night this way.


That said, having a line or credit against my house, I have flexibility. Could you do the same? Get an LOC but don’t dip into it.

 

[jwest95]

Business debt is typically ok, as it is productive. Meaning for every $1 borrowed, I expect to make $2.

Personal debt (even mortgage, yes I said it), is not productive. And I avoid it at much as I can.

People may tell me that I’m “an idiot” for having no car loans and yet I drive a luxury vehicle etc. some say “you could put that money to better use.” They may be right … but I sleep better at night this way.


That said, having a line or credit against my house, I have flexibility. Could you do the same? Get an LOC but don’t dip into it.

Great reply, thank you! I'll consider looking into a LOC

 

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[Johnny boy]

replace "debt" with "multiplying my financial situation".

If you use money to make money then you should get more of it and pour it into what's making you money.

If you use money to buy gucci then you should probably not get more debt.

I use debt to pay for lawn care crews that make 70k a year in profit each. I love debt.

My girlfriend has no business, if she takes on debt that would be very silly.

dave ramsey is a pussy

 

[Mathuin]

dave ramsey is a pussy

Dave Ramsey's advice is for pussies.

Frankly, building an empire around his frugality bullshit and preaching "Rice, Beans & 401ks are the road to riches" from an 8 figure mansion is pretty gangster.

I'll give him credit for that. Game recognize game.

But yeah, in general, F*ck that guy

 

[Antifragile]

Dave Ramsey's advice is for pussies.

I guess I live under a rock, I had to google and this is what came up:

Plain and simple, here's Dave's investing philosophy:

• Get out of debt and save up a fully funded emergency fund first.
• Invest 15% of your income in tax-advantaged retirement accounts.
• Invest in good growth stock mutual funds.
• Keep a long-term perspective and invest consistently.
• Work with a financial advisor.

I agree to do some of what he suggests when I hit 10 figure net worth.

 

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[MJ DeMarco]

Big congrats on being able to buy a house, AND pay cash for it. Be proud of yourself, you deserve it,.

I need to reread Millionaire Fastlane as I can't recall MJ's teachings on this subject.

I talk about this in my new book, The Great Rat Race Escape .

Bottomline, there is nothing wrong with debt if the cost of money is cheap. These last few years, you can get millions on loan for < 2.5%. That is cheap money. During this time I took on debt simply because the cost of money was virtually free, and I saw it as an inflation hedge. That decision looks to be the right one.

 

[jwest95]

Big congrats on being able to buy a house, AND pay cash for it. Be proud of yourself, you deserve it,.



I talk about this in my new book, The Great Rat Race Escape .

Bottomline, there is nothing wrong with debt if the cost of money is cheap. These last few years, you can get millions on loan for < 2.5%. That is cheap money. During this time I took on debt simply because the cost of money was virtually free, and I saw it as an inflation hedge. That decision looks to be the right one.

Thanks MJ, appreciate your input! The Rat Race Escape is the only one of the trilogy I haven't read yet - I'll be sure to get myself a copy. My best to you and thank you for what you do

 

[David Fitz]

I think there is certain times to take on debt and depends on the economy and your finances.

The economy right now looks like it's going down the shitter so probably not a good time to take out loans as you may not be able to pay them back when times get bad very soon.

 

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[YearnForMe]

During this time I took on debt simply because the cost of money was virtually free, and I saw it as an inflation hedge

Hi @MJ DeMarco , can you please elaborate on this for newb? I'm assuming it's virtually free because your returns on using that money are greater - but can you please explain how you're using it as a hedge against inflation? Thank you!

 

[BizyDad]

Hi @MJ DeMarco , can you please elaborate on this for newb? I'm assuming it's virtually free because your returns on using that money are greater - but can you please explain how you're using it as a hedge against inflation? Thank you!

Historic inflation is 3%, officially. Current inflation is much more than that. Tough to quote exact numbers when there's debate, but even 3% is likely under reporting the inflation number. Let's just say, for illustrative purposes, that current inflation rate is 7%.

MJ took out loans for less than 3-7% (2.5% interest) which means he is preserving his purchasing power by paying back the loans in the future with cheaper dollars (because the dollars he uses in the future will be depreciated at 3-7%, aka worth 3-7% less than they are today).

 

[YearnForMe]

Historic inflation is 3%, officially. Current inflation is much more than that. Tough to quote exact numbers when there's debate, but even 3% is likely under reporting the inflation number. Let's just say, for illustrative purposes, that current inflation rate is 7%.

MJ took out loans for less than 3-7% (2.5% interest) which means he is preserving his purchasing power by paying back the loans in the future with cheaper dollars (because the dollars he uses in the future will be depreciated at 3-7%, aka worth 3-7% less than they are today).

Very clear explanation, @BizyDad - I understand now. Thanks for taking the time to answer my question!

 

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[jwest95]

The economy right now looks like it's going down the shitter

When do you predict that is going to happen? (though I guess no one can know for sure)

 

[Mikkel]

When do you predict that is going to happen? (though I guess no one can know for sure)

Most people are looking at US markets, but it appears a global financial downturn is in store. I don't know much about the UK financial outlook, but the US and European Union have both reported bad inflation numbers recently.

Most countries understate true inflation numbers by artificially adjusting their CPI(cosumer price index) via hedonics and substitution. I think the US is closer to 15-20% year-over-year inflation, but currently it is reported at 8.3%, currently is the US.

You ask when this all may occur. If I was a betting man, I would say we are currently experiencing it in the US. However, to be officially in a recession we need two quarters of negative GDP growth.

To be in a depression you need three consecutive years of negative 10%(or more) real GDP loss each year.

 

[NeoDialectic]

Debt is just a result multiplier. So naturally whether it was a good idea to use debt is going to be a post-hoc rationalization.

During the decision process of whether to use debt or not, things like the opportunity, your personal risk tolerance, and your personal financial situation should inform your decision. So these are some of the questions I would ask

• Can your financial situation handle absorbing the possible loss?
• Can you mentally handle losing that much?
• Is the upside and opportunity worth you taking the risk?

As an example, my friend and I made opposite decisions on the mortgage question for our new home purchases. Both of our answers to the first questions were YES, but the 3rd question one of us said YES but the other said It's not even worth me thinking about this (NO). No right or wrong personal answers for many of these situations.

 

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[jwest95]

Debt is just a result multiplier. So naturally whether it was a good idea to use debt is going to be a post-hoc rationalization.

During the decision process of whether to use debt or not, things like the opportunity, your personal risk tolerance, and your personal financial situation should inform your decision. So these are some of the questions I would ask

• Can your financial situation handle absorbing the possible loss?
• Can you mentally handle losing that much?
• Is the upside and opportunity worth you taking the risk?

As an example, my friend and I made opposite decisions on the mortgage question for our new home purchases. Both of our answers to the first questions were YES, but the 3rd question one of us said YES but the other said It's not even worth me thinking about this (NO). No right or wrong personal answers for many of these situations.

Great reply and example, thank you