You know what the problem with most personal finance advice is?
An obsession with scarcity.
Buy off-brand groceries. Shop at thrift stores and garage sales.* Never eat a meal that you didn’t prepare yourself. Wear clothes until they’re threadbare. Do all this and you’ll have slightly more money than you otherwise would, which you can then use to…
Pay off a portion of student loans that you were foolish to have incurred in the first place? Build an “emergency fund”, an account whose very purpose is to stay inert?
Unlearn everything. If you heed the standard and repeated advice, all you can hope for is to one day have a net worth of 0. Paying off debt becomes an end unto itself, as opposed to just one step in a lifelong goal of building as much wealth (which is to say, giving yourself as many options) as possible.
Maybe you think debt is uniformly bad, perhaps because of how ominous the word sounds (“Our national debt”, “I’m in your debt”, “How do you plan to pay this debt?”) If that describes you, join us as we journey back to your elementary school math class.
Question 1: Is 5.93% debt bad?
Let’s ask both a) a simpleton and b) someone who understands money.
Simpleton: “Of course. What a stupid question. If I borrow $1000 today, and owe $1059.30 a year from now, how can that be good?
Discerning Human: “Well, what kind of return can I get?”
Other acceptable answers include “What’s my alternative?” and “What would I forgo by not borrowing that money?”
According to Bankrate.com, the average $75,000 home equity loan goes for 5.93%. That’s up a staggering 75 basis points over last week.
What if you were to borrow that $50,000 and use it to…buy an interest in a commercial property? A million-dollar building with 19 partners? A building which you and your partners now own free and clear, and can begin renting out to tenants whose rent payments can cover the price of your home equity loan and then some?
You’d be turning a profit, setting up a system by which you’d receive monthly checks. A lot of work up front, for all-but-effortless money in the 2nd and subsequent months.
Question 2: Is 19% debt bad? Like, say, what you’d pay on a credit card balance?
Simpleton: (see above)
Discerning Human: Not unequivocally, but almost certainly. Unless I can find an investment that’ll pay me more than 19% – and the less I borrow at 19%, the greater the return on that hypothetical investment would have to be – borrowing money at that high a rate is only going to bury me.
Yet tens of millions of people do this every day. They don’t think of the shopping excursions and restaurant bills that comprise their MasterCard balances as “borrowing money”, even though that’s exactly what they are. And if you aren’t resetting your balance to 0 at the end of every month, you’ll never be anything but poor.
But cheap money, like the kind a responsible homeowner has access to, is one of the prerequisites for building wealth.
Everyone, no matter how successful, borrows money. Microsoft is not what you’d call a struggling company, given that it made $17 billion on revenues of $74 billion last year. Yet Microsoft has $12 billion in debt on its books. Almost all of it is long-term debt, and Microsoft gets to borrow at lower rates than you do, but the principle is the same: it takes (other people’s) money to make money.
But I can’t do that. I don’t have that kind of equity in my home. I don’t even have a home. I live with my parents, make very little money, and still have a bachelor’s degree I’m paying off.
Well, what do you want from us? Rousing applause for having made awful decisions? If you’re 80 pounds overweight and you smoke, you probably shouldn’t heed the fitness advice in Shape or Men’s Fitness, either. What’s your point?
This is why people, not all of them dumb, hold mortgages. Sure, you could wait until you’ve saved up enough money to pay cash for a house, holding yourself up as a paragon of debtlessness, but whatever for? It’ll take you decades to save that much money, and what would you be doing in the meantime? Renting. And renting pays -100%, every time.
Even the people who dispense narrow-minded personal finance advice hold mortgages, knowing that borrowing money at 3.6% for 30 years is better than paying cash for a house. Not only because it takes so long for most people to get their hands on the kind of equity that would enable them to pay cash for a house, but because of the other opportunities they’d be unable to put any cash toward while saving up for said house.
You want a tangible goal? One more beneficial than the goal of spending as little money as possible? Get the rate at which you can borrow as low as possible. When your credit rating enables you to borrow at lower rates than other people do, your potential spread increases. To the person who can borrow $1 million at 3%, a 4½% investment can be worthwhile. To the person who can’t borrow $1 million at less than 8%, the roster of possible worthwhile investments shrinks to almost none.
*Shopping at garage sales is a stupid idea anyway. You’re going out of your way to shop, i.e., spend money, despite not knowing what’s for sale. “Ooh, a lightly used bassinet! And only $15! This’ll be the impetus my husband needs to finally agree to having a child!”