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This is fantastic advice for 95% of people. If you one of the few that can manage debt responsibly, however, you'd be missing out on the opportunity for leverag

This is fantastic advice for 95% of people. If you one of the few that can manage debt responsibly, however, you'd be missing out on the opportunity for leverage. In many cases a person can effectively trade their good credit for additional returns. Of course, you need to fully understand the risk/return profile of any leveraged investment you make AND be careful not to be overleveraged at any point. It's a fine line to walk, but it can be a valuable part of your investment portfolio.

kobeya 10y ago
Leverage doesn't come without a cost -- it magnifies your losses too.
cortesoft 10y ago
I think the important thing to consider is what you are taking on debt for - are you using it for investment in something or for an expense? A house or an education is an investment - it can be a good or bad one, of course, but the idea of going into debt to obtain either of those should not be dismissed out of hand. Both can provide a return on those investments greater than the interest cost. However, if you are taking on debt for an expense (a vacation, a new car when you have a working one already, a new toy), then you are gaining nothing in return for the interest. You could easily wait until you have the money saved up, since those expenses have no extra return for purchasing early. The worst debt, of course, is when you are taking it on because you simply have more expenses than you do income. This is often the source of credit card debt. If you are growing in debt but not growing in investments, you need to take a hard look at your lifestyle.
- wtvanhest 10y ago
  IMO, student debt the way it is structured in the US cannot be classified as an investment because it cannot be discharged and has no collateral. You cannot get a return on student debt. You can get a return on an education, but the debt is much more like a cc then an investment, especially if any of the student debt is used to pay living expenses.
- chjohasbrouck 10y ago
  One caveat to this kind of thinking is that money is fungible. One can easily pay for a vacation or years of eating at nice restaurants every day all in cash, and also go into debt for an education. Also, one individual taking out an auto loan and a loan from Sallie Mae isn't 1 good loan and 1 bad loan. You could've foregone the high-interest loan on the big depreciating asset and used the savings to fund the education instead of the loan from Sallie Mae. In that scenario both loans were probably a bad idea, regardless of the return the education nets you. I think another key metric beyond interest rate and rate of return, is degree of necessity. That's harder to measure though.

kobeya 10y ago

Leverage doesn't come without a cost -- it magnifies your losses too.

cortesoft 10y ago

I think the important thing to consider is what you are taking on debt for - are you using it for investment in something or for an expense? A house or an education is an investment - it can be a good or bad one, of course, but the idea of going into debt to obtain either of those should not be dismissed out of hand. Both can provide a return on those investments greater than the interest cost. However, if you are taking on debt for an expense (a vacation, a new car when you have a working one already, a new toy), then you are gaining nothing in return for the interest. You could easily wait until you have the money saved up, since those expenses have no extra return for purchasing early. The worst debt, of course, is when you are taking it on because you simply have more expenses than you do income. This is often the source of credit card debt. If you are growing in debt but not growing in investments, you need to take a hard look at your lifestyle.

wtvanhest 10y ago
IMO, student debt the way it is structured in the US cannot be classified as an investment because it cannot be discharged and has no collateral. You cannot get a return on student debt. You can get a return on an education, but the debt is much more like a cc then an investment, especially if any of the student debt is used to pay living expenses.
chjohasbrouck 10y ago
One caveat to this kind of thinking is that money is fungible. One can easily pay for a vacation or years of eating at nice restaurants every day all in cash, and also go into debt for an education. Also, one individual taking out an auto loan and a loan from Sallie Mae isn't 1 good loan and 1 bad loan. You could've foregone the high-interest loan on the big depreciating asset and used the savings to fund the education instead of the loan from Sallie Mae. In that scenario both loans were probably a bad idea, regardless of the return the education nets you. I think another key metric beyond interest rate and rate of return, is degree of necessity. That's harder to measure though.