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Debt conversations always have these weird grandpa rules of thumb and words of wisdom, as you can see in the other comments. The proper use of debt is to match

Debt conversations always have these weird grandpa rules of thumb and words of wisdom, as you can see in the other comments. The proper use of debt is to match the debt with the asset. If you are buying a house, a 25-year mortgage matches the value of the house. If you are buying a car, a 5-year loan matches the value of the car. If you are buying a sandwich with a credit card, well... you should pay off your credit card at the end of the month because that sandwich is long gone.

piker 10y ago
Were you deliberately using the "match the debt with the asset" rule of thumb as an example of your first sentence?
- appleiigs 10y ago
  No, matching debt to assets is proper finance theory and practice. I was referring to "don't use any debt" and "debt is manifestation of risk" and "With great power comes great responsibility" and "use debt for investments, not expenses".
  - piker 10y ago
    And for banks that borrow short and lend long? They're just ignorant of "proper finance theory and practice"? Or have they properly understood that the risks involved in credit transactions have a bit more nuance than your rule allows for?
    - appleiigs 10y ago
      Banks are definitely measured on Asset Liability Management by policy and regulations. Deviations from being matched would be an active choice, while being matched would be the default/starting point.
tonyedgecombe 10y ago
It seems to me the people struggling with their finances don't have a problem matching debt to assets, it's they have a problem with too much house or too much car.
- appleiigs 10y ago
  Using the example of the car, you should be able to pay off the car after the 5-years. If you can't, then it's too much car. Oddly, debt is supposed to help with seeing that. It breaks down the lump sum payment into monthly payments where you can compare to your monthly income.
paganel 10y ago
> If you are buying a house, a 25-year mortgage matches the value of the house The exchange price of the house does not have any intrinsic value, while generally speaking the cash money you owe to some external entity like a bank tends to keep its value in most of the cases (the Venezuela- and Zimbabwe-like cases are few and far between). In other words, you're betting that a real-estate crash won't happen before you end up paying your debt.
- appleiigs 10y ago
  You have that same risk if you paid it for the house lumpsum at the beginning. You bought it at a set price and its value fluctuates. You still have the option to continue to pay the mortgage payments and pay off the loan, regardless of the current value of the house. I'm not in US, but I believe they can reduce their own risk by using debt to buy a house. They can put, say 10%, in equity. If the real estate market crashes, the lose that 10% and walk away, leaving the bank with the house.
CPLX 10y ago
The general rule, really, is more like borrow only for appreciating assets (often real estate, financing a new business) and not for consumables or depreciating assets. But both your idea and mine are still rules of thumb, notwithstanding how much you wish to elevate yours to a different status.
- runeks 10y ago
  > The general rule, really, is more like borrow only for appreciating assets (often real estate, financing a new business) and not for consumables or depreciating assets. Note the gotcha: if enough people borrow money and buy something because they think it will appreciate, it will. In other words, according to your rule, speculation can make itself appear worthwhile.
  - CPLX 10y ago
    That's not really true. If everyone buys golf trips or ice cream cones the chance they will turn into appreciatirng assets is zero. That's still basically true for most things that look sort of vaguely like assets, such as new cars, appliances, and whatnot. Very few of the things the average person chooses to incur debt to acquire are even remotely plausible as appreciating assets.
- appleiigs 10y ago
  If you pull out a corporate finance textbook, matching assets to liabilities will be covered. Matching cash flows will be covered. That is why I am elevating beyond being a rule of thumb. Using debt for appreciating assets vs consumables will not be mentioned. As an example, a car doesn't appreciate, but a loan for it is fine.
hammock 10y ago
So you are saying secured debt is good for lender AND debtor.
- Bartweiss 10y ago
  It's bizarre how much debt advice doesn't differentiate secured from unsecured. The two have commonalities on simple things like interest calculations, but they're very different in terms of risk and I get suspicious of advice that doesn't acknowledge that.

piker 10y ago

Were you deliberately using the "match the debt with the asset" rule of thumb as an example of your first sentence?

appleiigs 10y ago
No, matching debt to assets is proper finance theory and practice. I was referring to "don't use any debt" and "debt is manifestation of risk" and "With great power comes great responsibility" and "use debt for investments, not expenses".
- piker 10y ago
  And for banks that borrow short and lend long? They're just ignorant of "proper finance theory and practice"? Or have they properly understood that the risks involved in credit transactions have a bit more nuance than your rule allows for?
  - appleiigs 10y ago
    Banks are definitely measured on Asset Liability Management by policy and regulations. Deviations from being matched would be an active choice, while being matched would be the default/starting point.

tonyedgecombe 10y ago

It seems to me the people struggling with their finances don't have a problem matching debt to assets, it's they have a problem with too much house or too much car.

appleiigs 10y ago
Using the example of the car, you should be able to pay off the car after the 5-years. If you can't, then it's too much car. Oddly, debt is supposed to help with seeing that. It breaks down the lump sum payment into monthly payments where you can compare to your monthly income.

paganel 10y ago

> If you are buying a house, a 25-year mortgage matches the value of the house The exchange price of the house does not have any intrinsic value, while generally speaking the cash money you owe to some external entity like a bank tends to keep its value in most of the cases (the Venezuela- and Zimbabwe-like cases are few and far between). In other words, you're betting that a real-estate crash won't happen before you end up paying your debt.

appleiigs 10y ago
You have that same risk if you paid it for the house lumpsum at the beginning. You bought it at a set price and its value fluctuates. You still have the option to continue to pay the mortgage payments and pay off the loan, regardless of the current value of the house. I'm not in US, but I believe they can reduce their own risk by using debt to buy a house. They can put, say 10%, in equity. If the real estate market crashes, the lose that 10% and walk away, leaving the bank with the house.

CPLX 10y ago

The general rule, really, is more like borrow only for appreciating assets (often real estate, financing a new business) and not for consumables or depreciating assets. But both your idea and mine are still rules of thumb, notwithstanding how much you wish to elevate yours to a different status.

runeks 10y ago
> The general rule, really, is more like borrow only for appreciating assets (often real estate, financing a new business) and not for consumables or depreciating assets. Note the gotcha: if enough people borrow money and buy something because they think it will appreciate, it will. In other words, according to your rule, speculation can make itself appear worthwhile.
- CPLX 10y ago
  That's not really true. If everyone buys golf trips or ice cream cones the chance they will turn into appreciatirng assets is zero. That's still basically true for most things that look sort of vaguely like assets, such as new cars, appliances, and whatnot. Very few of the things the average person chooses to incur debt to acquire are even remotely plausible as appreciating assets.
appleiigs 10y ago
If you pull out a corporate finance textbook, matching assets to liabilities will be covered. Matching cash flows will be covered. That is why I am elevating beyond being a rule of thumb. Using debt for appreciating assets vs consumables will not be mentioned. As an example, a car doesn't appreciate, but a loan for it is fine.

hammock 10y ago

So you are saying secured debt is good for lender AND debtor.

Bartweiss 10y ago
It's bizarre how much debt advice doesn't differentiate secured from unsecured. The two have commonalities on simple things like interest calculations, but they're very different in terms of risk and I get suspicious of advice that doesn't acknowledge that.