Life at the Margin: How I got $25,000 in debt | Hacker News Reader

Life at the Margin: How I got $25,000 in debt

natecation.com

40 pointsadityaathalye55 comments

I mean no disrespect, but this reads a bit like an over-confident take of a person who never went through a financial calamity. A bit like leveraged house-flippers of 2006. The value of your margin loan collateral can plunge suddenly. The rates and the terms of your credit card debt can change overnight. You can get hit by unexpected and urgent expenses - adverse judgments, emergency home repairs, etc - and that's bad news when you're already maxing out your credit lines.

Debt is a useful tool, but it's also dangerous. It's one thing if you're using it to advance some important cause... you know, making a big bet on a business idea, making your dreams come true. But if you're taking risks for, as the author puts it, "consumption smoothing"... there's a good chance of ending in trouble for no good reason.

Plus, we're not hyper-rational robots. Spending money is habit-forming. It's often about gratification, about social standing, about competing with peers. Especially for younger folks, and especially for people in the Bay Area, where we often look up to people who essentially won the startup lottery or ended up getting lucky in some other way. Instead of "consumption smoothing", it's often better to ask if that consumption is useful to begin with.

> a person who never experienced an unexpected financial calamity.

That's what his parents are for

It all makes sense because he's going to make a lot more money later with his math degree. Very logical.

I 100% agree with this take, and I say this as someone who has great respect for the use of debt (and, full disclosure, has a pretty fair bit of it to my name). It seems completely obvious that this strategy is predicated on never having lived through a fully seized-up financial system for longer than 72 hours in March 2020 or the Weekend of SVB in March of ‘23. The use of leverage probably feels pretty great right now, but what happens when there’s another Great Financial Crisis and every credit card issuer cancels accounts or cuts credit limits all at once? Sure, there’s plenty on the asset side of the ledger, but how good is it going to feel liquidating those stocks that were worth $75k a few weeks ago for $35k? It’s gonna hurt, and all those people who were eager to provide cheap liquidity will have turned off the taps.

Even big corporations that have contractually committed credit facilities have had banks shut those down during times of crisis (basically saying “sue us” to the borrower) so no matter how solid the ability to borrow may appear, that kind of thing has a tendency to evaporate in a moment, just when it’s needed most.

I have credit cards with a ridiculous aggregate credit limit, but in another 2008 scenario, anyone want to take bets on how long those credit limits stay high while unemployment is on its way to 14%? I would prefer not to.

And regardless of earning potential or useful skills, the owners and managers of for-profit enterprises are going to be belt-tightening at the same time (out of necessity or caution or simply by never letting a crisis go to waste) and their appetite for bringing on a new entry level employee will be limited - just at the time the rest of the system is grinding to a halt.

Someone in their 20s without significant financial or familial obligations is generally going to be well situated to make it through one of those crunches, but it doesn’t take a whole lot to bring the edifice crashing down.

It’s really hard to continue reading it after “a lot saved in stocks” as if that value is fixed and won’t just disappear completely in a market crash or downturn.

This text is a pretty good example of the “smooth seas don’t make skillful sailors”.

It’s like how there’s literally a whole generation of financial professionals who had never been through a rate hike. Gather round, VPs, time to learn about the real world.

At various times I’ve seen a whole lot of people arguing for taking out HELOCs and buying stock with it. Which works sometimes until it doesn’t.

I've a friend that did that and got completely fucked because he was stock picking on Robinhood with the HELOC money. It worked for 2020 and 2021, once 2022 rolled around he learned he wasn't smart, just lucky.

The thing to always remember about debt - is that someone who is much more financially astute than you (the bank) would much rather loan you the money to do whatever it is you're going to do with it than do that thing themselves.

That's not a good argument, because it proves too much [1]. You could use the same reasoning to argue against pretty much any transaction:

* Don't buy bread, because someone who knows much more about bread (the baker) would much rather sell you the bread than eat it themselves.

* Don't buy a car, because someone who's much more familiar with the car's design (the manufacturer) would much rather sell you the car than drive it themselves.

* Don't buy the book, because someone who knows its content (the author) would much rather sell you the book than put it into their own shelf.

Specialization exists in all but the most primitive of economies, so while not every loan is a good idea (obviously), many loans benefit both sides. A bank doesn't make a profit from money just sitting in accounts, that's why they loan it out to someone who can use it to make profit – like a company that wants to buy a new machine to work more efficiently. The bank could buy such a machine as well, but it wouldn't be able to use it in a profitable way.

[1] https://en.wikipedia.org/wiki/Proving_too_much

It's a rule of thumb and I should have specified that it most particularly applies to borrowing to invest - you should be able to identify the secret sauce that you have (and others do NOT) that allows you to make money where others can't.

A bank won't use a machine to manufacture something, and perhaps you have the skills needed to do so.

But deceiving yourself that you can "borrow cheap, invest it in the stock market, and always come out ahead" - if it was always or even for the most part, why would anyone lend money and not do it themselves?

Because you're missing risk.

> why would anyone lend money and not do it themselves?

Because there are regulations that limit how banks can invest deposits.

> I have credit cards with a ridiculous aggregate credit limit, but in another 2008 scenario, anyone want to take bets on how long those credit limits stay high while unemployment is on its way to 14%? I would prefer not to.

My credit card limits were reduced like 90% during the 2008 crash.

We can read a thread of an econ grad student who decided to implement similar ideas in late 2007 and provides several years of updates.

A different approach to asset allocation https://www.bogleheads.org/forum/viewtopic.php?f=10&t=5934

> The rates and the terms of your credit card debt can change overnight.

That's not true for the promotional APRs he is relying on, they are fixed for a certain term and can't just be cancelled by the company.

Counterpoint - I wish someone had explained consumption smoothing to me when I was younger. One of my greatest regrets in life (literally) is not taking on more debt in college for exactly that reason.

People do it all the time and to far greater extremes. A mortgage to buy a house to raise a family at 30 instead of waiting until 60 is also a form of consumption smoothing.

It doesn't seem like they are being particularly risky. They have a large buffer, and a solid like of credit for more student debt. Who knows, maybe their student debt will even get forgiven.

This is all about risk, and the value of risk (which we seldom see or recognize, much less quantify.

In one sense there's risk in taking on debt. Risk of job loss etc. In another the lender is taking on risk - they're hoping you can repay. Part of interest is to cover inflation, part is to hedge the risk.

Many comments in this thread start with the writers attitude to risk. What if....

And there are definitely places where the strategy can turn bad. Holding stocks can be valuable (they're growing faster than the cost of money) but they can also lose value (sometimes quickly).

Real value in shares is in long-term positions (just ride out the dips) but margin borrowing can force sales inside a dip if you are over-leveraged. How much you lever depends on your appetite for risk.

In a recent exchange with a potential client I explained that I get paid up front. He normally pays 90 days. He complained that my approach meant he'd "take all the risk".

"Exactly."

I offered to requote, where I take the risk, but I warned him it would be substantially more -because I put a high value on risk-. He trusted me enough to pay up front, and his risk paid off.

It's hard to quantify risk, but it really helps to at least understand it exists, and what the risks are. "Seeing" risk takes some practice.

I think you have an excellent analogy. The thing I like about it is it includes the fact that there is often a large cost for not taking risk. I feel like a lot of otherwise smart people get caught up in avoiding risk buy overlooking the cost to do so.

In my opinion there's a hierarchy of understanding but I've gone through. The first is not understanding risk, followed by understanding risk and avoiding it, followed by understanding the cost of avoiding risk and trying to find the right level.

Like you point out, the cost of avoidance can be quite substantial.

Yes, because risk has value, there are substantial gains yo be made taking on risk (and it working out), not to mention substantial losses by both avoiding risk or taking the risk on and it not working out.

From a purely business perspective its ideal to make the other guy take the risk, without financial penalty. More often both parties understand risk and can figure out who wants the value/risk and who prefers the less value/less risk.

I dont disagree. My point is mainly that if you are always avoiding risk and incurring the cost, you probably aren't doing it right, and probably don't understand the costs you are paying.

Not all losses are substantial, and not all substantial losses are greater the cost to avoid it. don't pay $20 for insurance on a $1 package.

> People do it all the time and to far greater extremes. A mortgage to buy a house to raise a family at 30 instead of waiting until 60 is also a form of consumption smoothing.

I wasn't advocating against risk-taking. I was advocating for doing it purposefully. Homeownership offers compelling and long-lasting quality-of-life benefits, and it's arguably not even pure "consumption" due to the acquisition of home equity.

Borrowing to buy a "status" car in your 20s, on the other hand, is probably a bad plan. Fleeting gratification and most of the money goes down the drain within 2-3 years. And if you get in the mode of living on credit day-to-day, you're probably gonna be making a lot of purchases of that sort.

In my reading the author has a pretty good head on their shoulder and an understanding of risk. They aren't going on buying a status car. It sounds like maybe you have a good understanding too if you're not doing the same. So why the concerned reaction to the post? Do you think they're actually making a mistake or are you more worried that someone might read it and get the wrong idea?

> A mortgage to buy a house to raise a family at 30 instead of waiting until 60 is also a form of consumption smoothing.

FWIW I think that's nuts too. Maybe it makes sense for people with a well defined, stable, secure career track (eg. civil servants, academics with tenure, etc.), but for those whose job could be severely disrupted by various shocks (which IMHO should include the majority of people), this taking out a mortgage under the assumption that your earnings would rise as your career progresses is really nuts.

Of course, the idea that a person takes out a mortgage at 30 is baked into modern society, so there are massive social structures to ensure that the average person is actually able to pay off their debt eventually. This includes shaming corporations for firing people or reducing wages for underperforming employees, government subsidies for business that should have just failed, underpaying juniors because otherwise who got money to raise your wages when you have 10 years of experience, etc. etc...

I don't think it's nuts. I think there are huge costs to not taking risk that are often greater than the actual risk people take on. And it's a balance and you're not going to get it right by avoiding risk entirely.

Very thorough finance-bro autofellatio

The part where he complained that his lawyer couldn't game his FAFSA to get him government-subsidized loans was particularly odious

If you read the footnote it says he filled out the FAFSA himself

How delightfully prole

> borrowing to finance my spending is more tax-advantaged than selling stocks, since there is no realization of capital gains

This already told me all the short-sighted kind of stupid I needed to know. Author will need to make the gain one way or another to pay off the debt. Making it in their early years while being a student and in the probable lowest tax bracket of their life would actually be the tax-advantageous thing to do.

Moreover financial gains are usually (and shamefully) less taxed than income.

So, weird way to put it.

Maintaining your estate rather than liquidating in the hopes that your return beats the interest rate is a "why not" (and that's still dubious given that part of the debt is on credit cards that are probably several digits of interest). Putting it out as a clever tax play is idiotic.

> that part of the debt is on credit cards that are probably several digits of interest

Author says credit card debt is 0% in the first year or so. Which is fine, unless you hit a market crash right when the interest free period is over, at which point you have the choice of selling your assets at a huge loss at the dip, or you take on high interest rate debt in the hopes that the market recovers shortly.

Or take out another student loan, and hope it gets forgiven.

I remember receiving similar advice (take student loans, invest in stocks) from my high school accounting teacher. If "call your parents and humbly beg for $25k" is a valid "plan of last resort", then it's a lot less risky.

A lot of people definitely should not try this. The levered gains quickly fall apart if you're not completely on top of deadlines for interest-free periods expiring and start owing 24.99%+ APY on five figure balances. If there's _any_ risk of that happening I'd stay the hell away from levered investments and reach for the automatic-monthly-credit-card-payments of Ramit Sethi's "I Will Teach You to be Rich".

Another risk is the hedonic treadmill -- if you're used to an elevated standard of living in your early 20s, it can be hard to get out of levered spending later in life. Probably would need to choose friends carefully, and budget meticulously.

But to the author's initial point -- I also do agree, in hindsight, that $25k of added consumption in my first years out of college would have materially made my life MUCH better -- a bit more travel/meals with friends that I "responsibly" chose to miss out on is not time that I will ever get back.

> start owing 24.99%+ APY

Why that specific number in your example. That looks like a supermarket price tag. Is that common in the US?

Yep; tons of credit cards do usurious bait-and-switch stuff like that, under the express hope to make it up on people who have occasional "slippages" where they miss it by one pay period.

The "siren song" on those is the whole "if you're careful you can cancel" trick the users think they're pulling off. They may individually, but not in aggregate.

These cards are often much easier to get approved for.

25k of added consumption saved would be 43k of interest gains in 15 years in his "line always go up" world view. 43k is over 6 month living expense for me, and I get to keep the initial 25k.

I wish I would have spent more money in my 20s, but not 25k worth.

> I know that if I really needed to, I could pay all my debt off in a couple of months (e.g. by getting a full-time software job). Instead of seeing the debt as $25,000, I think of it as a few months of work in tech

The assumption that the jobs will always be there, and always pay this well

I assumed something similar about a far smaller amount of debt, then I got laid off. The market has been brutal. Although I’ve been finding awesome consulting work, I haven’t come close to finding something stable with the income I’m accustomed to.

I felt pretty stupid (well, I still do), but I was dealing with a fraction of this debt, in Canuckian tokens no less.

Shrugging at 25k USD of debt and calling it a few months of work seems out of touch given the state of the global economy. I feel like 1.8% better about myself now.

The flawed basic premise of this article assumes the person is a "going concern" so as to speak, will continue to earn constantly in order to fund this "smoothing" and whatever.

As someone who does not live on a stable paycheck, it does NOT make sense to take on debt when you are not sure if next month you'll get to earn anything let alone enough to service loans.

All the people in finance think "debt is cool" because they talk about theories "metcalfe life theory" like the article regarding going into debt to buy an air ticket to see an old friend. That's stupid as hell. Why not "save" money and go the next month? Sure you are an impusive debt addict but yeah, you can explain it off by theories.

No thank you.

Devil is in the details, which are most likely missing from this post.

I could see myself writing a similar blog post 2 years ago, omitting the fact that 60& of my net worth was invested in 3x leveraged ETFs.

No matter how many articles I read about leveraged ETF decay, I couldn't bring myself to believe it until I actually experienced it. "Why tbe hell would I buy SPY when I can buy SPXL and UPRO?????"

Luckily, I was never really borrowing or investing (gambling) more than I could afford to lose. And luckily I HODL'd long enough to regain (nearly) the original investment.

I'm supportive of people who want take these kinds of risks (they can pay off), as long as they take these risks with a solid understanding of what will happen if shit suddenly hits the fan without notice.

I have a very high risk tolerance. Sounds like the author does, too. High risk tolerances are fine as long as you're comfortable with the worst case scenario and not convincing yourself that the worst case will never happen. It eventually will, in time.

This definitely warrants criticism, but these comments are way over the top. If you want to use margin as an instrument for whatever you're doing, that's fine. It's not a terrible advice.

There's a lot of useful stuff you can do with these sort of loans, just like you can with borrowing against your 401k, using things like HELOCs and even bouncing around credit card debt using balance transfers.

Think of debt as a power tool - learn how to use it, rely on common sense it, use plenty of PPE, and don't get unnecessarily hurt.

The comments seem way over the top because we're in a bull market. Things would be quite different if it was a 2008 crash situation. That's all the comments are saying.

> rely on common sense

What does that mean here?

> If you want to use margin as an instrument for whatever you're doing, that's fine. It's not a terrible advice.

The author is effectively buying GOOG on a margin through various cute tricks. That's all to it. With the volatility of GOOG and its current P/E I personally wouldn't do it, but I could be wrong about this, and I don't think anyone who buys GOOG on margin is necessarily stupid.

But the parts about "consumptions smoothing", the assumptions about the stock market returning 7-9%, and the confidence of being able to pay the debt back in a couple months of work is just self-rationalization bullshit. Not because they're necessarily wrong, but they aren't even remotely connected to the fact that he's just very simply buying GOOG on margin.

The only real concern about buying stocks on margin is what happens when the price of your assets drop and you get a "margin call" (not in the usual form since he borrowed money in various ways). When you get a margin call, it doesn't matter whether you think you can earn more money in the future or whether stocks have outperformed interest rates by 3% in the past couple decades, or whether you've been living frugally or not.

I totally get it that the author is just some random dude figuring out life, and I shouldn't be too harsh on him (the person). But the "advice" is honestly terrible, the worry is not that he might ruin his life (as others have mentioned, he's probably privileged enough to be fine), but the audience here on HN might actually be misled and the advice might end up ruining more lives..

This blog post takes a lot of words to say “look at how smart I am! there’s no way this could possibly go wrong!”

Maybe it makes me an asshole but I’m rooting for a rates hike or something to give this guy a dose of reality. But I think we all know mummy and daddy would get him out of it.

$360 for eight people in San Francisco? I would be a sucker to believe that.

"It's only money that I'll have to pay in the future, it's not real yet."

This article did not adequately cover the risks of margin loans.

Even assuming you don't hold anything that gets removed from the marginable securities list and you don't get caught off guard by changes in margin requirements (they probably change at the worst possible time, during high volatility), the Interactive Brokers agreement appears to state that they can just immediately liquidate your margined securities if you fall below their margin requirements -- there might be no margin call or opportunity to add funds.

I'm sure there are other risks that I haven't even considered, but the above are enough to steer me away.

You're unemployed and have $25,000 in credit card debt. This is some impressive post-hoc rationalization, but it would have more credibility if you wrote about it before you went into significant personal debt. Otherwise it just reads like cope.

And btw, I've been where the author is, so I recognize the signs. Let's check back in three years.

My advice: get a job. (I see the author is currently an intern in college. So I'll amend that advice to be: line up a job for after graduation.)

YMMV, but I often advise my friends up north:

1. open a First Home Savings Account (FHSA) as it doesn't trigger a tax event when matured [tax free income capture]

2. open a Tax-Free Savings Account (TFSA) [tax free capital gains] when a Registered Retirement Savings Plan (RRSP) [deferred income tax] event can hit you harder later

3. The returns on Guaranteed Investment Certificates (GICs) are now well over 5.4%/18 months. Some report these near zero-risk products hitting over 6.2% in some places. Highest we've seen these in several decades, and a good choice to hold in a tax-efficient account if you don't have time to manage portfolios.

4. Chartered Banks have depositors insurance limits. If you are stuck with cash around for various reasons, than you will end up having accounts in each of these banks eventually. (lending institutions are a different risk, as they usually focus on insurance sales.)

If you have the cash issue burning value due to inflation, than you may want to consider these options till you figure out a safer plan.

If you have under $1m in a registered self-directed RRSP trading account (stocks/bond purchases), than the stock-market statistics are simply not in your favor. A legally bonded fiduciary financial advisor is the only people who are obligated to be honest with you, and can help match ETF/index-funds to your risk exposure profile. After many years, one will determine evil and or stupid people often affect your pocket book in pretty much the same manner.

Always talk with a few people before triggering a financial commitment: your lawyer, commercial accountant, and __bonded__ __fiduciary__ financial advisor.

It would be crass to suggest all banks externalize risky garbage-products on customers, but I have yet to meet one that didn't try.

Best of luck, =)

> so getting into debt wasn’t the only way I could’ve funded my current lifestyle

entitlement

All the smartest college students I know have flashy blogs, shiny new cars, fiveor six figures of unsecured high-interest debt and zero income. Looks like Nate is a real winner!

tl;dr: borrowed money to live because asset rich

Even better might have been to borrow $25k more to buy the assets in the first place, then the interest is tax deductible possibly

Well, yeah, if he’s a corporation.

Not sure how US tax works but in Australia an individual can borrow to invest and deduct interest.

I believe from the facts that are known, he’s quite obviously not Australian, so alas, probably no deductibility for personal debt.

The U.S. also has an “investment interest expense” deduction[1]. Normally this is used with margin interest, but if any other type of loan (e.g. credit card advance) is taken out specifically to invest in securities, interest on said loan becomes deductible investment interest as well.

[1] https://www.irs.gov/pub/irs-pdf/p550.pdf

The concept of borrowing against your investments is new to me, but it reminded me of debt recycling against your home. In principle, I can see the advantage, but like all debt it requires great discipline. With "only" $75k in assets, I agree with you that he'd be wiser to purchase more stocks than fund his lifestyle.

Reply on news.ycombinator.com