Debt – Which Camp Are You In?

by Darwin on September 15, 2011

It’s pretty amazing what a substantial part of our everyday conversation revolves around debt.  Debt issues, deficits and creditworthiness have grabbed national headlines stemming from the downgrade of US debt by S&P and is now a key issue in the presidential candidate debates.  At the household level, virtually all of us incur debt of some sort.  There’s the notion of “good debt”, “bad debt”, long-term, short-term, the ability to build credit and then the mantra of being debt-free.  Everyone’s perspective and financial situation is different but there are some common “personality types” in the debt genre.

Seeking Out Debt -As counter-intuitive as this may seem, smart people and smart companies take on debt even when they don’t have to.  With interest rates at lows not seen since World War too, they’ve leveraging up!  Why would a company with Billions in cash on their balance sheet be issuing long-term bonds to raise even more capital?  For one, it’s free money!  With a positive NPV, they might as well issue all the debt they can as long as the market rewards them with an ultra-low interest rate (in many cases, as low as US Treasuries).  Next, interest payments are deductible.  I know many real estate investors going nuts trying to refinance, buy investment properties and unlock capital at negative real interest rates.  So, evidently, not all debt is bad.

Maintaining Current Debt Levels -For many, the prospect of “keeping a tab” is just fine by them.  Interestingly, Congress actually finds the notion of just decreasing our annual deficits which is nothing more than taking on “less” debt each year as opposed to actually paying it down seems like a step forward.  And even stranger, the market has been rewarding failed attempts to achieve even that with record low interest rates. Why?  Many believe that the US will never default on their loans because the economy is just so large and dynamic that within reasonable levels, deficits just don’t matter.  The thinking is that as long as we maintain our debt level relative to GDP, we’re fine.  Personally, I’m disturbed that the answer is to inflate our way out of it with easy money, but for now, the market’s buying it.

Consolidating -For some, the best way to get out from under the emotional and financial bondage they’ve been enduring for years is to Consolidate Debt.  After trying various approaches and seeing nothing put a dent in the barrage of bills, collections calls and mounting interest, this is often the option that changes the trajectory and gives them their lives back.  The debt snowball method is a very popular way of paying down debt these days as well.

Avoiding Debt at All Costs – This is the far end of the spectrum.  I’ve posted before about the ultra-debt-avoiders and I met another one today.  These are people who take a 30 year mortgage and try to pay it off in like 7 years with mortgage pre-payments.  Kudos to them – they have discipline!  But often times, it becomes kind of like a devout religion and they forsake vacations, social events, normal looking clothes and other things I don’t think I’d want to live without.  I guess with the economy being what it is, you can never take your salary or future income for granted.  But I also like to have balance in my life.  Granted, I think we spend more than we should, but we carry no high-interest debt and I’m saving plenty for retirement, college and a rainy day, so I sleep well at night.


Which Debt Camp Do You Fall Into?


{ 5 comments… read them below or add one }

Revanche September 16, 2011 at 12:31 am

I have been avoiding debt at all costs but that precludes something like a mortgage. So my “at all costs,” isn’t.

It allows for something relatively normal like a mortgage. I will still want to find a way to extra-minimize the interest we pay and accelerate payments if it’s not terribly painful (mostly because PiC wouldn’t stand for it because I am CLEARLY in the hair-shirt camp) but it won’t be the end-all be-all because I still do want to eat and travel to some small degree.

I do admit to eyeing the mortgage, though. And it’s not even mine yet.


Moneycone September 16, 2011 at 7:12 am

It all depends …

I normally try to pay in full for most of my purchases, but a few years back I was shopping for some furniture and had the option to pay it over time with no interest with a store credit card.

So I signed up and always paid what was required. When I sent in the final payment, it went in exactly one day late. Last payment, 1 day late and I was hit with all kind of fees! I thought what the heck, I’ve always paid on time and 1 day late payment would be excused.

Called the company and the rep refused to budge! He said leniency is not a policy for store credit cards and works only with the Visa or MC! Any benefit I had gotten by doing this was wiped out!

I’m not saying people shouldn’t use this option, just that unneeded debt is not for me. If you are disciplined enough, sure why not, but know thyself!


20's Finances September 16, 2011 at 7:50 am

I wouldn’t put myself in one category, but let me explain why… I don’t have any debt, but I am also not convinced that the best thing to do is to pay of your mortgage as fast as possible. Once I get one, I will probably try to pay it off a little early, but I also don’t plan on retiring early. I think any other debt (school, credit card, car, etc) is not healthy and can be avoided with a little discipline (not always, but often).


Krantcents September 16, 2011 at 2:59 pm

As I get old(er) and closer to retirement, I have become debt averse! I want my retirement to be simple and carefree.


retirebyforty September 16, 2011 at 3:07 pm

We just leveraged up with our 4plex investment! This is a great time to borrow money, but I think we’re about leveraged out now. Come by and let me know what you think about the 4 plex. It’s not as good as your rental investment, but we gotta start somewhere.


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