Debt Aversion?
John aka Mighty Bargain Hunter wrote about Why is being debt-free so unpopular? a couple of days ago; as part of that, he’d written
I do know that there are good uses for debt. Leverage is powerful if you’re using it to buy something of great value that will give you a positive return on your investment. But buying something of great value is not a universal talent, and if you buy something with leverage that’s overpriced, you’re in trouble.
True; in general, debt is a double-edged sword, and you need to be extremely careful about taking on debt. Definitely, borrowing on a credit card, or taking out a HELOC are decisions that tend to compromise on financial prudence.
But is too much prudence also advisable? As Kiyosaki calls it, “good debt” - something that gives a boost to your cash flow and net worth - can make a lot of difference over the long term, to attain any long term goals. But does the process of being frugal take debt-aversion to the extent that you never take on debt?
I’m looking for feedback here, from anyone who reads this. If you are on the frugal path, do you have (or plan to have) any debt other than the mortgage on your primary home?
Written by 2cworth on March 7th, 2006 with
4 comments.
Read more articles on Opinions.
- [+] Digg: Feature this article
- [+] Del.icio.us: Bookmark this article
- [+] Furl: Bookmark this article
BlueDaze
#1. March 7th, 2006, at 8:07 PM.
I suspect that what Kiyosaki calls “good debt†is only “good” as long as it is generating more cash flow than it is eating. Personally, I am from the camp that you should limit leverage (beyond say, student loans and mortgages). Using margin as an example, I would only use it if I thought I saw a tremendous opportunity in the market. And even then, I would limit it to 5% or less of my portfolio. If you don’t have the ability to clean leveraged bets off your books in the event of hard times, you are assuming a lot more risk (since you are basically gambling all the assets you own).
My wife and I made a highly leveraged bet on a run-down condo in DC in 2002. As it turns out, things went great — we sold it for more than twice what we bought it for, or a 2,392% return on our downpayment (only 3% of the purchase price). But even so — it was a very cheap piece of property when we bought it, we needed somewhere to live, our payments were less than what we’d been paying in rent, and it was very unlikely that we would have had to sell it for less than we bought it for. So there was a lot of safety — it was just being in the right place at the right time that made it profitable. Would I go out and speculate on property (or commodities, or derivitatives, or Forex)? Not a chance.