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Comment by nkozyra | Hacker News Reader

Debt is a manifestation of risk. As general financial advice, "don't take on debt" is akin to "don't take risks."

It depends. On a lot of things.

Risk is one of the things that debt can represent, sometimes, but there can be debt that doesn't involve any risk, and there are risks that don't involve debt.

What's risky about using a credit card to buy a kayak?

And how does investing money you already have in small cap equities represent a debt?

I think for the vast majority of individuals just trying to make good personal finance decisions, "don't take on debt" is (on average) great advice.

> What's risky about using a credit card to buy a kayak?

If you don't pay back the debt, in 72/(interest rate) (interest rate period) the kayak will cost twice the price.

http://www.investopedia.com/ask/answers/04/040104.asp

I think we're agreed on the core principle here though:

> I think for the vast majority of individuals just trying to make good personal finance decisions, "don't take on debt" is (on average) great advice.

100%

(I don't really agree with the simplification of debt = risk. Despite that...)

> What's risky about using a credit card to buy a kayak? If you unexpectedly lose your job or are otherwise unable to pay off the card on the schedule you expected, you'll incur significant interest on the debt and end up having to pay far more than you originally planned. Compared with saving up money and paying in cash, there are clearly additional risks incurred when using the card.

(If you had the money to pay off the card already and are just using the CC as a convenient method of payment, the risk is obviously far lower.)

>If you had the money to pay off the card already and are just using the CC as a convenient method of payment, the risk is obviously far lower

Right, but you're still taking on debt for the month and then paying it in full. What is the risk?

As with risks, so with debts. There are large ones and small ones. Paying down a balance on a credit card every month is pretty low risk, but not as low as paying with a debit card in the first place.

Also, a credit card you're paying down monthly isn't really 'debt', isn't it usually something you do for the air miles or cashback?

>Paying down a balance on a credit card every month is pretty low risk, but not as low as paying with a debit card in the first place.

Not when you account for the stolen card scenario. When someone steals your debit card and racks up charges, it locks up real money (your bank account balance) that you can't use until it's resolved. A stolen credit card just locks up a credit-line.

However, even if you ignore that, I'm still missing what risk you see with a credit card that results in it being higher risk than a debit card. What is the risk I'm missing?

>Also, a credit card you're paying down monthly isn't really 'debt', isn't it usually something you do for the air miles or cashback?

It's very short term debt. I do it for two reasons, air miles/cashback, and for better protection when things go south. In addition to the stolen card scenario above, some credit cards (e.g. an amex I have) will provide additional protection for things like rental cars (additional insurance) or even stolen goods (refunds for electronics stolen from your vehicle).

To some, debt is a hit to one's freedom, dignity, and privacy.

Most debt requires you to give a lot of personal information, tell a bank what you are buying, and then stick to a fairly arbitrary payment plan with various penlties for non-compliance.

So it's perfectly sensible to minimize your debt for non-financial reasons.

buying a house, car, going to school, university, having a baby also requires you to give a lot of personal information, it does not mean its a reason not to use those things...

>it does not mean its a reason not to use those things...

It is for people really sensitive to privacy that are distrustful of institutions.

Not having a baby because of the privacy implications is not a choice a mentally well person makes.

There is a non-trivial portion of the home birth movement that does it because of distrust of institutionalized medicine.

Does it mean their baby will live without paperwork and no health insurance?

Yes. Some have even made the argument that this makes voter identification requirements racist (due to the higher home birth participation of African Americans).

This would of course be one of many factors that would make voter identification requirements racially biased; far lower rates of possessing compliant ID would be the more important factor.

I think people don't consciously think in these terms. I once had debt in the form of student loans and a car loan. Becoming debt free was a great relief. It removed a ton of stress and provided me with freedom. The emotional well being from being debt free is not something that can easily be quantified in monetary terms. For the average person, I see it as "don't take on debt" being akin to "don't willingly get into a situation where you may have to worry".

Going into debt to vacation in the Caribbean (which is what he did) is not the same as using it to say start a business or get an education.

>Going into debt to vacation in the Caribbean (which is what he did) is not the same as using it to say start a business or get an education.

They differ only if the metric you choose to measure against the debt is "money". But some of us do things for other than money; happiness comes to mind.

Precisely. It would be totally sensible also to argue that a trip such as that one paid off even financially later in less obviously connected ways.

You're very right. If you need a vacation for mental health purposes (doesn't even have to be clinical) that's still an investment. But if it's your typical entertainment oriented vacation then that's a poor use of debt.

"As general financial advice"

Bordain is being very specific. This is about personal debt and being risk adverse, "I am fanatical about not owing anybody any money. I hate it. I don’t want to carry a balance, ever." The whole article is explaining his prior life as working chef.

Notice he has a lone but tries to avoid risky debt?

I sometimes wonder if the attitude of take on risks is somewhat of a survivorship bias. I'd assume that the expected return of the safe choice is always higher than that of risky ones.

Now you could make a ton of money by taking risk, but its kind of like playing the lotto. Few winners lots of losers.

Debt can reduce risk. Many corporations use leverage up a project, say 90%, so they only need to put in the 10%. If something goes wrong, they lose the 10% and they walk.

Risk is a component of debt.

Debt has risk, just as investment has risk.

The risk comes from the underlying reason to borrow.

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