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Comment by dom96 | Hacker News Reader

> Now a word of caution: beware of debt. Many of us are taught that owing money is normal, even desirable; indeed, for middle-class folks, some forms of indebtedness may be difficult to avoid.

I find that surprising. Perhaps this is the difference between growing up in a middle-class household vs. a working-class household, but personally I have seen first hand why debt is bad and been taught to avoid credit cards and debt like the plague.

Perhaps this does not fit the middle-class lifestyle and now that I am personally earning far more than my parents ever did I wonder if I should be less averse to debt, can anyone chime in with what the right balance is here?

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Did you buy your house with cash or a mortgage? In some countries, mostly developed ones, the policies in place almost always make it a silly choice not to take on a large amount of debt to buy your first house. Even if you have the cash, it's always wiser to invest your money elsewhere and use the investment income to pay for the interest part of the loan.

Avoiding debt is good advice for 90% of the population who can't plan or understand long term commitments relative to their income level. When you understand and internalize that debt is simply a trade of cash flows (you get money now, they get money over time) that can be beneficial to all parties involved, you treat debt as a tool. Sometimes it's useful, sometimes it's bad, depends on your situation. When your debt starts to accumulate, it means that your prediction of future cash flow was wrong.

Debt is a useful tool for investing in a business, or as leverage to afford a large purchase when the interest rate is particularly low (read: a mortgage).

If you want to own and grow a business that requires capital outlay or hiring people, there's practically no way to get started without taking on some debt. But if you're just working a W-2 job, have stable income, and live within your means, then the only "reasonable" debt to have is a mortgage and _maybe_ a car payment.

Plenty of people use debt wrong and that's why it gets a bad rep. Poor communities are often not taught proper financial management and may use credit card balances and payday loans because they believe that's what necessary to survive. Even though in the end, they are handing over a sizeable chunk of their modest income for no good reason.

Middle-class people wind up in bankruptcy because they use debt to fund luxury purchases that they didn't need and arguably couldn't afford. (Cars, boats, McMansions, etc).

Debt isn't purely good or bad, it is just another financial instrument. If used wisely, debt is a very powerful way of getting ahead financially. For example, the average person is likely never going to be able to save enough money to pay cash up front on a house, but they can very well pay it off while living in it. However, taking on a house payment you cannot afford is obviously bad. Likewise, using a credit card and paying it off every month is a smart thing to do, but carrying over balance is not. So, like everything else, there's a balance.

This is basically the opposite of prepping advice. If the world collapses, debts will all be wiped clean, you're going to feel like an idiot if you just paid off your loans and now we're all back to bartering. It would be much preferable to have a new and expensive car to barter away than nothing but the printout of a bank statement before the bank was liquidated by aliens.

I think this person just has a philosophy of debt and justifies it as "prepping" even though it's not prepping related at all.

I'm not a CPA or CFP etc etc. However, my personal belief is the right balance is borrowing money when the expected rate of return is greater than the interest rate on the loan.

Right now money is "cheap", whether it's a mortgage, or another type of loan interest rates are about as close to 0 as they can get.

There's a reason that wealthy don't call it "debt", they call it "leverage" because it can be a very useful means to an end.

Borrow to buy your house, aim for the monthly payments to be below a third of your income.

Apart from that, I’d avoid any other form of debt (unless it’s some weird game system like the US credit scores or cards, in which case play it if you want but be careful, if you ever trip up they’ll take you to the cleaners)

The right balance is what let’s you sleep at night. But I have seen people more averse to debt limit their economic growth. If your goal is to get rich, you need to be comfortable with levering up, because your competition will be.

Also, some debt is politically more favorable than others. Debt to purchase land is more easily bailed out and less risky than buying options on margin.

It’s also easier if you have supportive friends/family/spouse with high income so that you can at least have the basics in the worst case scenario.

> If your goal is to get rich, you need to be comfortable with levering up, because your competition will be

Or alternatively make something that doesn't have much competition. Here in Germany family business and artisanal work is still relatively widespread, and those businesses which have built particular expertise are very hard to outcompete, and many did so without significant debt, or sometimes debt at all. It just took them 30 years. They're private, often family owned, and don't have to answer to anyone, and they're not substantially threatened by globalisation (in fact they benefit from it) or competition because there is so much operational knowledge inside the company you just can't copy it.

If your goal is to get rich, you need to be comfortable with levering up

That really depends on the economic environment.

Pedantic.

If your goal is to get rich, you need to be comfortable with doing what it takes depending on the economic environment.

It’s not pedantry. There may be some circumstances where strategic use of debt contributes to making you rich, but leverage is not a necessary condition for building wealth. Stating that it is gives people the impression that debt instruments are the road to riches, when in fact they are often the exact opposite.

Debt to purchase productive and appreciating assets is the most common way to get rich that I have seen.

I don’t really know anyone who got rich (as in you don’t have to worry about working) with their labor. It’s buying something with 10% down that appreciates 2-3x+ and then taking those gains and investing it in something else that appreciates and so on and so forth that got the people I know rich.

For real estate in the US, you also get to take advantage of the 1031 tax exchange and basically build your wealth tax free.

Always looks at the interest rates. Credit card debt can go over 20% APR sometimes and should be strictly avoided. A mortgage is more like 3% and can work in your favor since its better to pay into that than rent. I would tolerate auto loans as well.

I would tolerate auto loans as well.

Tolerate, maybe, but I avoid going into debt to acquire depreciating assets. Even if the loan interest rate is zero, the rate of depreciation needs to be accounted for, even though I don't get a tax deduction for the depreciation of my personal car.

I assume by "some forms of indebtedness may be difficult to avoid" they mean a great many people have student loans and mortgages.

Personally, I'm with you: the people who taught me to manage my finances had lived through periods where inflation and annual loan interest rates were 15%-20% - their attitude was that getting a loan to buy a car was a fool's game, and a sure sign you were living beyond your means.

At 15% annual interest I'm sure they were right - but after a decade of near-zero interest rates, I can understand why people these days are a lot less worried about buying a car on finance.

> after a decade of near-zero interest rates, I can understand why people these days are a lot less worried about buying a car on finance.

In some ways not using these low interest loans is sub-optimal. I got a 0% financing offer on my last car and left my money in the market to grow.

All non-mortgage debt is bad. Credit card and car debt is especially bad and will limit the choices you can make and the trajectory of your life.

Consider a program like this to free yourself of debt: https://www.daveramsey.com/dave-ramsey-7-baby-steps

If you want a degree student loans are difficult to avoid unless someone else is subsidising your expenses or you decided to go to college after already becoming wealthy.

Mortgage is hard to avoid if you want to buy a house.

Some responsible use of car loans have their place.

I don't know you/your-situation but I've seen a hundred people talk about how they are debt-averse and give a bunch of credit card and maybe even auto loan related examples.

And they are all 2x+ their annual earnings deep into a mortgage.

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