I would argue yes, there are occasions when debt is very helpful...maybe even good. One example would be when debt is used to help produce income.
The 4% Rule thread linked
here got me thinking about debt, credit and income. Debt is formed when credit is transacted instead of cash. The longer we wait to fully settle our debt transactions, the greater the burden we place on our cash (income) due to interest charges and inflation. Reducing the time we are indebted is almost always a good thing, but as one approaches retirement, debt can serve a role in lowering income needs.
Just prior to retirement in 2010 I refinanced my debt free home. This debt allowed me to lock in my housing costs for the next 30 years. Aside from future property tax and insurance premium increases, my housing costs would remain fixed (mortgage and Interest). One could argue that being debt free from a mortgage is also zero fixed cost and I have no problem with this line of thinking. For me, I was willing to take an assets (my home) and free up capital to further my retirement plans. In 2012, after a two year search, I used some of this capital to purchase a condo in a retirement friendly state. I used additional capital to make repairs to my 30 year "old home" and my "new condo". I have some remaining cash that is equal to 1 year of retirement income. My original "old home" will be rented for an amount that is greater than the mortgage, insurance, taxes, and maintenance costs for both properties. I kinda had to get myself further into debt to get myself further out of debt by creating an income stream that didn't exist (rental property income)
Managing property isn't for everyone and in a sense isn't really what I would call retirement. For me its a new stage in my life that has moved the needle away from full time employment towards part time enjoyment. Becoming debt free sometimes requires servicing additional debt that helps to produces additional income.
Are there any other good debt stories out there?
Comments
Household debt for depreciating assets like cars, furniture, etc is to be avoided for obvious reasons.
Debt/leverage for income producing streams can in fact a great way to build wealth on a personal or private level. Just like anything, it needs to be managed and reasonable in its aggressiveness, but it can be overall a good thing.
All debt brings some risk, but there is no way to take risk out of life, unless you're born into great wealth.
11 Great Reasons to Carry a Big, Long Mortgage
And here's the other:
Should you get a mortgage when you're retired?"
(Choose either the audio version or the transcript at that location.)
This latter link makes the point that it's possible to be "house poor", a situation where an older person may own a valuable house outright, but not be able to finance the required maintenance. His "solution" is to take out a large mortgage, out of which you both pay for the maintenance and the mortgage. He cheerfully suggests that this otherwise impoverished person take the remaining mortgage money and invest it at a rate so as to be able to pay for the whole thing. The word "magic" does not actually appear, but is certainly strongly implied.
Unless this older person has a very astute financial manager who charges next to nothing, the scenario is theoretically possible, but actually rather implausible.
I suppose you could go further and talk about "comfort level", legacy/estate issues, tax ramifications, and whether or not one's assets are appreciating at a higher rate than the interest paid on the debt. All important considerations.
Keep in mind the term and associated math regarding "debt to income ratio".
Securing a home mortgage while still working (with presumably a higher income) allows the borrower to finance a higher loan amount with respect to meeting debt to income ratios. Banks like to see the ratio no higher than 33% (debt to income). A retiree on a low fixed income in a equity rich home might not qualify for much a loan due to their debt to income ratio.