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The surprising downside to being debt free

2014-05-28 09:11:12

We ve all done it. We ve all bitten off more debt than we can swallow:

borrowing to go to school, borrowing to buy a house, borrowing to pay for that

nice holiday to the Caribbean. As we move to a cashless society, it s even

easier these days to just pull out our credit card to pay for croissant and

coffee rather than digging around for change. In many ways, debt is all about

convenience.

But what happens if we always struggle to pay the bill at end of the month? We

turned to question-and-answer-site Quora for some advice on whether it is

really a worthy goal to be debt free. Here s what some respondents had to say

about borrowing.

What kind of debt?

That burning question is missing an important qualifier: the type of debt

incurred, said Konstantinos Boulis. Consumer debt must be avoided like the

plague. When you buy anything worth $100 and you pay it back in one year you

will pay on average about $120. This is just dumb. You not only bought

something that you probably didn't need but also paid 20% more.

Investment debt, he continued, is a whole different game and you should be

making controlled decisions on what to invest in and what not to. Getting a

mortgage in today's market with a 30-year APR [annual percentage rate] of 3.5%

is probably a very good move given the right circumstances.

If you still think that debt is evil then that's ok, you will be able to sleep

better at night, he added. It's just that the bed may not be that comfortable

and your house smaller than what you wanted.

A useful tool

In some cases, debt should be embraced as a way to create an awesome life,

according to Jeremy Karmel. For many people debt is an extremely useful tool

for achieving that goal.

Karmel cites the cost of education as one place where debt is justifiable. If

you want to be a doctor or a lawyer and you don't come from an extremely

wealthy family, good luck trying to do those things without borrowing money for

school.

Taking on a lot of debt is a HUGE commitment he continued. You should really

have a realistic plan for paying it back. That said, for many people borrowing

is extremely freeing, it lets them pursue their dreams years earlier than they

otherwise would have been able to.

Unmissed opportunity

You should buy things you need at the time you need them most, said Vivek

Nagarajan. I borrowed money to buy a motorbike, he said. I borrowed money to

go live in a faraway country to marry the person I loved. I borrowed for

various things that gave me great joy, like taking a month off and riding a

motorbike in Ladakh for 18 days. The list goes on.

All in all I have been in constant credit card debt since the past 10 years,

he continued.

But, my income has always been enough to cover my payments, and while I may

have paid a premium of 20% or so overall due to interest and fees, my income

has grown by a factor of 10 or 1000% since 2003, so the math works in favour of

buying now and not worrying later. Had I postponed my purchases until I had

saved up it would have been much too late and a huge waste of time.

Age appropriate?

Marc Bodnick made the point that the appropriateness of debt can depend on your

age. While you are young and just getting started in your career, debt is more

acceptable. But over time, once you have greater earning power, you should

avoid it. Debt is constraining. It keeps you from being able to make long-term

good choices about your life. You want to be able to take lots of risks and

fail (more than once) and debt keeps you from rolling the dice.

Running the numbers

It all depends on whether your return on the money is greater than your cost,

Gil Eyal said. Simply put, if you could borrow at a 2% rate and be guaranteed

to make 5%, you should strive to be in as much debt as possible, he said.

This actually isn't that far-fetched. If you are a great real estate investor

for example, you would always try to finance part of your deals with low cost

debt, knowing you are making money on other people s dime and spreading your

own over more deals.

A cultural view

Jett Fein offers a different perspective. It depends on how you think about

debt, he said. Different cultures have radically different views on debt. The

Tiv of West Africa have one of the most interesting perspectives on debt that

I've encountered: they view indebtedness as a good thing because it implies you

will have continuing and long lasting interpersonal relationships.

Becoming a slave

Some respondents take the higher moral ground, saying you should avoid debt at

all costs. Debt is slavery, said Brian Fey. It is better to die a free man

than to live as a slave.

Phil Bradford sums it up with a verse from the Bible: The rich rule over the

poor, and the borrower is servant to the lender.

And Amadasun Efe compares debt to climbing a mountain with a backpack full of

rocks. The bigger the debt gets, the bigger the rocks get, he wrote. Soon

enough the force pulling you down will be more than you can overcome, and then

it's all downhill from there.

Everybody else is moving up faster than you are because they don't have

anything holding them back. In a sense, they are free. You on the other hand

have become a physical and mental slave to the boulder of debt that is crushing

you. All you can think of is how to get rid of the weight on your back, because

it has become an unhealthy obsession.

Now freedom, Efe said, is another thing altogether. Suddenly [you are] in a

state of mind where everything seems possible. Obstacles are merely a

construct, not a reality; and you can think uninhibitedly. Clearly you are in a

better place. A worthy place. A place where you are truly in control.