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Comment by dheera | Hacker News Reader

Why is avoiding debt a risk averse strategy?

I actually do a lot of high risk investments with a small percentage of my net worth -- bitcoin, options, you name it. But I do it with hard cash to my name. If I lose a chunk of that I don't owe anyone anything.

I just never thought spending someone else's money and then owing them was even anywhere close to my moral radar of things I would do.

The only one time I took a debt is for a car when I had the cash to buy it but it was 2022 and I took a loan at 2% and put the balance of the car in treasury and municipal bonds at ~5% and paying back the loan slowly while selling off the bonds. I wouldn't take a loan if I didn't have the money. Before I could afford a car I just rented cars.

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> Why is avoiding debt a risk averse strategy?

Note that they said avoiding ALL debt.

For example, my student loan collects interest at a rate of 2.9%. Therefore, it makes sense to maintain that debt if I believe (and accept the risk) of making an investment that pays back a rate of 10%.

Financially it might make sense to keep that debt, pay the minimum and invest cash into let's say an index fund.

If you have a hardline stance that you NEVER want any debt, then you are basically saying you're highly risk averse (at least when it comes to ending up in the negative).

because the risk with debt is not being able to pay it back - and you are paying the lender for their side of that risk (generally paying less the more of that risk falls on your side, like secured debt). It's a service they are freely offering (and in fact benefits them disproportionately on average), I don't see how it's a moral issue at all.

The moral issue I have is that simply put, if I don't have the money for something, I wasn't meant to have that something. I need to earn the money for it, after which I deserve to have that something.

However, the most basic clean-and-functional versions of basic necessities (food, water, shelter, and transportation) should be accessible to everyone working a full-time job, in my opinion, without having to spend other peoples' money.

3 out of those 4 are attainable even with a low-paying job, it's really just shelter that is the problem.

Do you believe that taking investment is immoral as well, then? That access to resources should be entirely based on past work/achievements, with no judgement applied to anything to be done in the future? That does seem to be the standard you are applying to yourself, at least.

(And again, I do agree that housing is incredibly overpriced in much of the world, it's just that debt vs not doesn't have much to do with it. The high price of mortgages is the same reason the rent is high, and the rent being too high is a problem even if it doesn't involve debt)

Investment is different. In the worst case scenario business goes bankrupt, which usually means you shut down the entity, sell off the assets, and everyone including the owners just go off and gets new jobs and live happily ever after.

Personally going bankrupt means you're now facing the possibility of actually being homeless on the streets.

    > housing is incredibly overpriced in much of the world

Can we please stop this on HN? No, it isn't -- "much of the world". It is overpriced in tiny areas (with incredibly vibrant local economies) of very wealthy countries. Even if you leave Paris, 25+km outside of the city, the property is suddenly reasonably priced. Same for Berlin. (Forget London!) Same for Tokyo. Same for Milan. Also, mostly we have our parents' generation to blame for outrageous house prices in these tiny areas -- they consistently supported and voted for NIMBY-friendly policies. The solution is "simple", but, politically, very difficult to implement: Make housing a human right, not a casino.

> The moral issue I have is that simply put, if I don't have the money for something, I wasn't meant to have that something. I need to earn the money for it, after which I deserve to have that something.

There's a difference between having money and earning money. If you find $20, are you therefore $20 more deserving? If you are mugged and the thief gets $100, does that make you $100 less deserving?

There are plenty of people who have lots of money through no good deed, and plenty who have little through no evil deed, and I think confusing monetary holdings with morality is a very poor road to go down.

Just to throw in a thought on this..

I agree that "meant to have" and "deserve" are the wrong concepts here. But reality and practicality are what they are.

If I work hard and save my earnings, with the intention to buy something which we agree is a "valid" need/want (whatever that something is), and then lose the money through some circumstance that we we agree is "not my fault", that really sucks and I don't claim that it affects how much I "deserve" the thing (whatever deserve means), but the reality is that I now don't have the money to buy that thing. Am I going to now borrow money because "I worked hard and I deserve it"? Some would, others wouldn't.

> The moral issue I have is that simply put, if I don't have the money for something, I wasn't meant to have that something.

You're thinking of debt as a consumer. Like, take a personal loan or credit card debt and buy a big screen TV. Yes, that's dumb.

Not all debt is like that. Picture this scenario: Your bank pays 5% interest on deposits. You're offered a loan from somewhere for an interest rate of 4.9%. It is a no-brainer to take that loan, go into debt, for as much as possible! Deposit it into your bank account and profit each month. If the rates change such that the bank pays less, just pay off the loan.

Now, sure, that's a simplistic scenario since nobody will offer you a loan for less than the banks are paying interest right now. But with time being another variable, you can manouver yourself into that situation. Right now my bank pays more interest than the percentage I pay on my mortgage balance. I'm literally making money every month by having debt. It would be very dumb to pay off that mortgage debt even though I have the cash to do so.

No brainer may be pushing it... At a minimum there is duration risk and other various terms in the note where this breaks down quickly.

Banks do this all the time and some often fail.

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