How I think about debt(collabfund.com)
collabfund.com
How I think about debt
https://collabfund.com/blog/how-i-think-about-debt/
444 comments
I think the article still holds up. A financial crisis where you lose your job, a war causing deflation, a housing bubble bursting are all events that could lead to you paying _much_ more than rent. If you can't pay, they'll take your house and everything else until they decide that the debt is paid. In case of a bubble bursting this can mean that you _still_ owe money after they took your house. This has happened to people.
I also have a mortgage on my apartment and I also think it's a decent choice, especially considering that I'll have less income after retirement. But most people are only a couple of bad turns in life away of losing everything they own.
All in all, I'd say the way to think this article presents does hold up to mortgage as well.
I also have a mortgage on my apartment and I also think it's a decent choice, especially considering that I'll have less income after retirement. But most people are only a couple of bad turns in life away of losing everything they own.
All in all, I'd say the way to think this article presents does hold up to mortgage as well.
> and everything else
Unless you live in a no-recourse state, where they can't take everything else.
In AZ, CA, TX, WA, and a handful of other states, banks can't go after your other assets, just the house that's mortgaged.
Unless you live in a no-recourse state, where they can't take everything else.
In AZ, CA, TX, WA, and a handful of other states, banks can't go after your other assets, just the house that's mortgaged.
In CA, only the original mortgage used to buy your residence is non-recourse. If you refinance, the new mortgage is almost certainly recourse.
There is also a similar process, non-judicial foreclosure[0], which is similar to non-recourse in some ways, but not for tax purposes (e.g. cancelation of debt income).
[0]https://www.nolo.com/legal-encyclopedia/how-foreclosure-work...
There is also a similar process, non-judicial foreclosure[0], which is similar to non-recourse in some ways, but not for tax purposes (e.g. cancelation of debt income).
[0]https://www.nolo.com/legal-encyclopedia/how-foreclosure-work...
Interesting. Do you know if mortgage rates in those states are higher, to compensate lenders for the increased risk?
I think it matters a lot more for commercial mortgages. In any event, it's like 20-30bps or less according to the Fed. So higher, but not that much higher even for commercial mortgages, and even less for residential where there's a lot more federal protection going on.
The bigger impact, I believe, is that housing prices can go more crazy. People will take more risk if they know they can walk and leave the bank holding the bag, so there isn't that limiting factor on prices.
(Though I suspect, but obviously can't confirm, that the effect from non-recourse mortgage is absolutely dwarfed by other factors, especially out here on the west coast where we have very restrictive zoning policies, weaponized environmental policies inside urban areas, etc)
The bigger impact, I believe, is that housing prices can go more crazy. People will take more risk if they know they can walk and leave the bank holding the bag, so there isn't that limiting factor on prices.
(Though I suspect, but obviously can't confirm, that the effect from non-recourse mortgage is absolutely dwarfed by other factors, especially out here on the west coast where we have very restrictive zoning policies, weaponized environmental policies inside urban areas, etc)
WA resident: our mortgage is 2.5% from the credit union. I've not noticed that current rates are any worse than other states I've checked. OTOH, in 25 years of living here, I've never seen house prices go down, only stay steady.
Home prices definitely went down during the great recession.
So did the wages, and those went down more. If you lost a job during that time, you're pretty screwed.
> they'll take your house
Yes, and they'll sell the house to cover the debt. But the amount they receive from selling the house in excess of the debt goes to you.
I.e. you'll get the equity portion.
It's in your mortgage contract. Worth reading.
Yes, and they'll sell the house to cover the debt. But the amount they receive from selling the house in excess of the debt goes to you.
I.e. you'll get the equity portion.
It's in your mortgage contract. Worth reading.
Unless you're backpaid enough so that they take equity in a penalty.
And now you're homeless and with your equity you cannot acquire capital. Your credit is also tanked due to the default...
Remember, most people do not own multiple houses and having no stable address can really mess you up legally even.
And now you're homeless and with your equity you cannot acquire capital. Your credit is also tanked due to the default...
Remember, most people do not own multiple houses and having no stable address can really mess you up legally even.
What would be different in this situation if the person were renting? Usually costs are similar per month for comparable places. I guess the down payment is a difference? But if you’re that far in arrears on rent you’re really still bad off…
I don’t feel convinced that having a mortgage debt is that much worse than not having one, if you lose your job and war and other bad things.
I don’t feel convinced that having a mortgage debt is that much worse than not having one, if you lose your job and war and other bad things.
If your house is still worth enough to cover the debt. If the sale of your house is not enough to cover it (which can happen if you bought during a bubble that burst), will your whole debt at least be forgiven?
It's not forgiven, even in a non-recourse mortgage. So it can still e.g. hurt your credit score. They just legally can't pursue you for it.
With a recourse mortgage, they can go through normal debt channels (including wage garnishment, etc).
With a recourse mortgage, they can go through normal debt channels (including wage garnishment, etc).
[deleted]
"[R]ecourse mortgage": It would be better to say "recourse loan". Mortgages are specific to properties. Loans are generic for anything. In my personal experience, non-recourse loans are basically payday loans with horribly high rates. You would never do it, if given the choice. I guess that 100% of home mortgages (in highly developed countries) are recourse by legal requirements.
> I guess that 100% of home mortgages (in highly developed countries) are recourse by legal requirements.
Not necessarily so in the US. In several states (including the biggest ones like CA and TX), non-recourse mortgages are the default. In other states, sometimes non-recourse mortgages exist too.
E.g. right now I'm sitting on a 2.5% fixed 30 year non-recourse mortgage.
Not necessarily so in the US. In several states (including the biggest ones like CA and TX), non-recourse mortgages are the default. In other states, sometimes non-recourse mortgages exist too.
E.g. right now I'm sitting on a 2.5% fixed 30 year non-recourse mortgage.
In short: yes. Imagine you bought a home using a mortgage in the year 2000 in Silicon Valley. Then you go bankrupt in 2007. Your home will probably have appreciated 100-200% during this crazy period. It is very possible you will receive money back from the bank after they sell your home.
My question was specifically about the opposite case, so I'm not sure what your point is.
Specifically, I'm asking if the mortgage deals the poster above was discussing would help if the house is now worth less than the mortgage.
Specifically, I'm asking if the mortgage deals the poster above was discussing would help if the house is now worth less than the mortgage.
Yes but I think they're referring to negative equity.
No snark, but posting with genuine concern for any homebuyers who didn’t experience the pain of 2008, please read and grok this: https://www.investopedia.com/terms/u/underwater.asp
If there is a war you leave your house behind. If you rent you can save the difference in a foreign savings account.
the point is there is alway risk and many different situations. depending on details there are different results.
the point is there is alway risk and many different situations. depending on details there are different results.
>> If you can't pay, they'll take your house and everything else until they decide that the debt is paid.
This is new. Mortgages in the US traditionally took just the home as collateral. Thanks for the reminder that this is now a thing to look out for, as I may need to borrow one more time than I ever expected.
This is new. Mortgages in the US traditionally took just the home as collateral. Thanks for the reminder that this is now a thing to look out for, as I may need to borrow one more time than I ever expected.
I think it's actually the reverse. The house is the only collateral, but traditionally you would still owe the deficit if the collateral couldn't be sold to pay off the whole loan. This is what's changed in recent decades. A lot (most? all?) primary-residence home loans in the US are non-recourse, meaning that you aren't liable for the deficit - you only lose the house.
> A lot (most? all?) primary-residence home loans in the US are non-recourse, meaning that you aren't liable for the deficit - you only lose the house.
This is wild. In Canada not only do we all take interest rate risk every 5 years maximum as we can’t lock in for longer (which seems to make our whole society less robust), we can’t refinance early if rates drop without massive penalties eliminating any incentive to do so, but all of our mortgages are full recourse.
I can’t believe how much worse this seems, on a societal level, than the US.
This is wild. In Canada not only do we all take interest rate risk every 5 years maximum as we can’t lock in for longer (which seems to make our whole society less robust), we can’t refinance early if rates drop without massive penalties eliminating any incentive to do so, but all of our mortgages are full recourse.
I can’t believe how much worse this seems, on a societal level, than the US.
A couple of other good points vs Canada: most fixed-rate US mortgages don’t have a prepayment penalty, and many offer the option to “recast”, which means you can make a lump-sum payment and reamortize your loan while keeping the rate and end date the same. This has the effect of lowering your monthly payment and is often used as an alternative to refinancing if you’re buying and selling a home in sequence.
In Canada, it's actually worse than stated. You do have a prepayment penalty as long as current interest rates are lower than your loan's interest rate.
Now that interest rates are higher than they were a couple of years ago, TD Canada Trust waived all my prepayment penalties. They were happy to let me prepay as much as I wanted.
It's incredible how one-sided the Canadian system is. Prepayment is acceptable as long as the bank benefits. Prepayment is not ok when the person taking out the loan benefits.
Now that interest rates are higher than they were a couple of years ago, TD Canada Trust waived all my prepayment penalties. They were happy to let me prepay as much as I wanted.
It's incredible how one-sided the Canadian system is. Prepayment is acceptable as long as the bank benefits. Prepayment is not ok when the person taking out the loan benefits.
Thanks for this. I’d never heard of this option and once again I am shocked at how much better Americans have it than Canadians when it comes to mortgages.
> In Canada ... all of our mortgages are full recourse.
Except in Saskatchewan and Alberta [1].
[1]: https://financialpost.com/personal-finance/mortgages-real-es...
Except in Saskatchewan and Alberta [1].
[1]: https://financialpost.com/personal-finance/mortgages-real-es...
Wow thanks for sharing. I had no idea.
I mean, manufacturing 30-year fixed rate fully pre-payable non-recourse mortgages does not happen in a free market. It takes a lot of government subsidies to make that happen—in particular the government assumes the credit risk on something like 85% of US mortgages. The United States government is very into the idea of spending its resources to subsidize homeownership. Canada has made different policy decisions, like single-payer healthcare. If the societal choice was between universal healthcare and extremely borrower-friendly mortgages (and I don’t think that it really works that way, at least not in such stark terms) I’m not sure I’d pick the mortgages.
It can happen. There is risk, but the reward is very high and so it is worth it.
However the government often will not allow you to get the full reward and so while the numbers work out for everhone in a free market it doesn't happen. adjustable rate mortgages in the us are lower interest rate. Often in the us they are a better deal - we are just looking at one case where everyone in a fixed rate two years ago is better off than those with adjustable rates.
However the government often will not allow you to get the full reward and so while the numbers work out for everhone in a free market it doesn't happen. adjustable rate mortgages in the us are lower interest rate. Often in the us they are a better deal - we are just looking at one case where everyone in a fixed rate two years ago is better off than those with adjustable rates.
> It takes a lot of government subsidies to make that happen
No doubt, but the upside is a populace not especially at risk to interest rates which is absolutely crushing and systemically risky currently.
> in particular the government assumes the credit risk on something like 85% of US mortgages.
In Canada, CMHC does something similar so I am not sure we get away with anything special that the Americans are not.
No doubt, but the upside is a populace not especially at risk to interest rates which is absolutely crushing and systemically risky currently.
> in particular the government assumes the credit risk on something like 85% of US mortgages.
In Canada, CMHC does something similar so I am not sure we get away with anything special that the Americans are not.
You should ask your parliament to create the equivalent of Fannie Mae and Freddie Mac in your country. Gov't backed and buys loans from retail/commercial banks under strict guidelines. This helps to create a huge fixed rate mortgage market in the United States. I agree: Fixed rate mortgages are terrific for increasing home ownership. Plus, it moves the interest rate risk from retail people (less sophisticated) to institutions (banks, etc.) (more sophisticated).
I read my mortgage papers carefully before signing. I made sure there was no early payoff penalty.
This worked out fine when interest rates dropped and I refi'd. I've refi'd many times whenever the interest rate dips :-/
This worked out fine when interest rates dropped and I refi'd. I've refi'd many times whenever the interest rate dips :-/
In Canada? Who was your lender? I did an exhaustive (I thought!) search when I last got a mortgage and could not find a fixed rate option that did not have a large prepayment penalty.
In the US. I don't know much of anything about Canada.
That is just the mortgage. I assume that you also defaulted on media and anything else you had on credit, such as student loans.
And those do not have such nice terms either.
And those do not have such nice terms either.
The way I think about this is:
You already are in "debt" by being alive. You have the huge liabilities of needing food and housing and maybe sometimes some healthcare, in order to stay alive.
By buying a perpetual source of one of those you aren't investing or expanding your liabilities-- just the opposite, you are hedging against and closing out your liability by prepaying for it. To take this idea further, this is why I think buying a little bit of stock in energy and agriculture companies is "risk free" because while they could go down if those things get cheaper, you would then win out as a consumer. You will need food and energy down the line anyway, so a modest investment in those closes out that hedge rather than expanding liability
You already are in "debt" by being alive. You have the huge liabilities of needing food and housing and maybe sometimes some healthcare, in order to stay alive.
By buying a perpetual source of one of those you aren't investing or expanding your liabilities-- just the opposite, you are hedging against and closing out your liability by prepaying for it. To take this idea further, this is why I think buying a little bit of stock in energy and agriculture companies is "risk free" because while they could go down if those things get cheaper, you would then win out as a consumer. You will need food and energy down the line anyway, so a modest investment in those closes out that hedge rather than expanding liability
There are lots of ways that stock in food and energy companies could go down while prices go up. A drought or pipeline disruption come to mind.
Absolutely. And I think the same is true for the commodities market correlates there; if memory serves correctly, crude commodity futures went negative for a break period during the supply chain volatility spike during the beginning of the pandemic.
You are correct, for oil contracts near expiration. All oil containers (in certain areas) were full, so anyone taking delivery would need a place to store the oil.
The market needed a way to transfer this risk (risk of delivery) so prices went negative meaning you were paid to find a place for the oil.
It's really neat actually and shows how almost all of the financial system is really a big "risk transfer" mechanism.
The market needed a way to transfer this risk (risk of delivery) so prices went negative meaning you were paid to find a place for the oil.
It's really neat actually and shows how almost all of the financial system is really a big "risk transfer" mechanism.
Besides taxes, there is another sense in which outside circumstances can break your "rent control" model of home ownership with 30 year mortgage. Here in Oklahoma, insurance rates have skyrocketed in the last couple years. I now pay more in homeowner's insurance monthly than either my principle or interest payment (though perhaps not both together - yet). And I have a 4.something% mortgage.
I suspect it has or will soon reach the point where the Kelly criterion says mathematically I'd be better off to self-insure - if I didn't have a bank loan.
It's not just insurance (which is likely also weather-related); after a fluke super-cold Winter we had, our natural gas companies incurred a huge wholesale market bill which they've passed on to customers. I have a family member who owns his house free and clear whose gas bill went up so much he could no longer afford to heat his house. The gas company still tried / is trying to assess a one-time very large retroactive fixed fee even though he turned off his gas.
My point, I guess, being even homeowners are not totally insulated from being screwed over by outside market forces.
I suspect it has or will soon reach the point where the Kelly criterion says mathematically I'd be better off to self-insure - if I didn't have a bank loan.
It's not just insurance (which is likely also weather-related); after a fluke super-cold Winter we had, our natural gas companies incurred a huge wholesale market bill which they've passed on to customers. I have a family member who owns his house free and clear whose gas bill went up so much he could no longer afford to heat his house. The gas company still tried / is trying to assess a one-time very large retroactive fixed fee even though he turned off his gas.
My point, I guess, being even homeowners are not totally insulated from being screwed over by outside market forces.
Assuming it's market condition based and not specific to your house, rents would easily pass along insurance rate hikes to you as well. I don't see much difference in insulation from that for renting vs. buying.
>I suspect it has or will soon reach the point where the Kelly criterion says mathematically I'd be better off to self-insure
Heh wait till you go to replace the property/damage. Unless you're doing yourself you'd absolutely crap on the floor once you see how high prices have got for this work.
Add to this the increasing incidence of weather/climate related damages to homes and the situation isn't looking good for many states.
Heh wait till you go to replace the property/damage. Unless you're doing yourself you'd absolutely crap on the floor once you see how high prices have got for this work.
Add to this the increasing incidence of weather/climate related damages to homes and the situation isn't looking good for many states.
> Here in Oklahoma, insurance rates have skyrocketed in the last couple years.
Insurance company profiteering is a disaster but that's a whole different topic.
But remember that rental properties are also insured. And the renter is paying for that insurance, it's just bundled in the rental price. So renters are also paying the wild insurance hikes.
And utilities like gas are generally directly paid by renters, so no difference.
Insurance company profiteering is a disaster but that's a whole different topic.
But remember that rental properties are also insured. And the renter is paying for that insurance, it's just bundled in the rental price. So renters are also paying the wild insurance hikes.
And utilities like gas are generally directly paid by renters, so no difference.
In Berlin, only a small percentage of landlords beat inflation. It's a lot of work and a low return for an illiquid investment. Depending on the timing, many qualify housing as a lifestyle decision instead of an investment.
Aside from what you've mentioned, the state can raise the efficiency standard to protect the environment, raise the cost of services, or make you pay to rebuild the street or sidewalk in front of your home. Then come the maintenance: new roof, new windows, new kitchen and so on.
If your country has good tenant rights, there are not so many reasons to buy. It's better to invest the money for a while.
Aside from what you've mentioned, the state can raise the efficiency standard to protect the environment, raise the cost of services, or make you pay to rebuild the street or sidewalk in front of your home. Then come the maintenance: new roof, new windows, new kitchen and so on.
If your country has good tenant rights, there are not so many reasons to buy. It's better to invest the money for a while.
> Here in Oklahoma, insurance rates have skyrocketed in the last couple years.
I thought this was only a problem in CA or FL. I wonder if this is nationwide or specific to states with disaster prone areas.
I thought this was only a problem in CA or FL. I wonder if this is nationwide or specific to states with disaster prone areas.
You don't HAVE to carry home insurance do you? You can also change policies for different levels of insurance at any time. It's not exactly a debt, but an ongoing service
If you have a mortgage, you are required to insure the building at the least.
I am pretty sure that at least in NY you are required to have insurance if you have a mortgage.
I guess once the mortgage is paid off for whatever reason you’re welcome to not get insurance.
I guess once the mortgage is paid off for whatever reason you’re welcome to not get insurance.
Banks want to insure the collateral.
To the point where if they're notified that your insurance has lapsed, they will warn you to get replacement coverage, or they will and then bill you for it.
I had a not so fun experience with switching insurance providers at about the same time that my bank was about to make the insurance payment out of escrow.
I had a not so fun experience with switching insurance providers at about the same time that my bank was about to make the insurance payment out of escrow.
That was something we had to worry about when buying our house.
The house I have is pretty old and the roof had some issues. I obviously was planning on fixing those, but it became a bit of a catch-22 problem; the insurance I was planning on using (cuz I had a discount from my employer) said that they wouldn't insure me until the roof was thoroughly fixed and/or replaced, but I couldn't fix the roof until the deal closed, and the mortgage company wouldn't close the deal until we had insurance. We were afraid we'd have to pay the insane insurance rates from the mortgage company.
Fortunately, after multiple days of shopping, I found one insurance company that agreed to insure me as long as I fixed the roof within 30 days of closing, which I did.
The house I have is pretty old and the roof had some issues. I obviously was planning on fixing those, but it became a bit of a catch-22 problem; the insurance I was planning on using (cuz I had a discount from my employer) said that they wouldn't insure me until the roof was thoroughly fixed and/or replaced, but I couldn't fix the roof until the deal closed, and the mortgage company wouldn't close the deal until we had insurance. We were afraid we'd have to pay the insane insurance rates from the mortgage company.
Fortunately, after multiple days of shopping, I found one insurance company that agreed to insure me as long as I fixed the roof within 30 days of closing, which I did.
I had a similar issue with buying a house. In the end we just wrote the roof replacement into the contingency of the contract and adjusted the price a bit so both sides paid a little bit into the cost of the new roof. The roof was replaced, we got our insurance, and the house was sold.
People don't realize how risky housing is compared to other investments. It is risky because it is SO MUCH MONEY and it is not diversified at all. If your house loses half its value, that represents hundreds of thousands in losses. And don't think that can't happen. You buy a penny stock for $2K and lose half, no big deal compared to your house.
BUT, we need housing, we need a stable school for our kids, or a comfortable place for our partner, etc. So we have to take this risk.
But your primary home isn't an investment, it's a necessity. You're going to live somewhere. The only choice you have is whether to buy or rent the place you live in. So that's the comparison that should be made. Comparing your primary home to your stock portfolio is pointless because you can't live in your stock portfolio.
The GP is pointing out a key advantage of buying your primary home vs. renting: you're not exposed to the risk of rising rents. Others have pointed out disadvantages, such as being exposed to the risk of rising property taxes and rising insurance costs. How those things balance out is going to depend a lot on where your home is.
The GP is pointing out a key advantage of buying your primary home vs. renting: you're not exposed to the risk of rising rents. Others have pointed out disadvantages, such as being exposed to the risk of rising property taxes and rising insurance costs. How those things balance out is going to depend a lot on where your home is.
If you ask a financial advisor for advice on investing half your net worth on 5x leverage in an liquid asset with one customer and one location, they'd think you're crazy.
But most of them would not think you’re crazy once it’s specified to real estate. This means either financial professionals are blind to the similarities or there is something critical missing from your description.
It's that people have an irrational emotional attachment to homes and financial advisors know they wouldn't be in business if they told prospective homeowner to put the money in an index fund. Where owning a home wins is it forces people to set aside income and put it in an asset rather than spend it, but there are other ways to do this.
I think it’s a lot more nuanced than that. Leverage is great, being able to do what you want to your living space has value. It also locks in your housing costs. There are tax advantages.
It’s not just a forced savings plan. That isn’t to say it’s for everyone, but it’s important to get the nuance.
(Also, it’s not really fair to say an “irrational” emotional attachment - that attachment can generate great joy and a sense of ownership, those are real things and not irrational even if they don’t make someone more money. It’s totally rational to optimize for things outside of money!)
It’s not just a forced savings plan. That isn’t to say it’s for everyone, but it’s important to get the nuance.
(Also, it’s not really fair to say an “irrational” emotional attachment - that attachment can generate great joy and a sense of ownership, those are real things and not irrational even if they don’t make someone more money. It’s totally rational to optimize for things outside of money!)
When that one customer is "your family", it's a little bit different, though.
PS: From context, I suspect you meant to say "illiquid asset".
PS: From context, I suspect you meant to say "illiquid asset".
> If your house loses half its value, that represents hundreds of thousands in losses.
I never understood that part. Barring actual damage that would necessarily affect its worth it's still the same house.
Or in other words: why should I care what others think my house is worth when I'm not selling, as I currently live there?
I never understood that part. Barring actual damage that would necessarily affect its worth it's still the same house.
Or in other words: why should I care what others think my house is worth when I'm not selling, as I currently live there?
Well, you don't always know if you're going to want to sell later. Maybe you lost your job, maybe you need to move to another city, maybe you just hate the neighborhood.
Right, all it takes is for the large local employer to suddenly downsize, causing both the loss of job, and the crash of the local housing market simultaneously.
Shouldn't this be priced into the house value in this local market?
it usually isn't because banks are not all-seeing and cannot tell which local employer or industry is likelier to go bust. in that sense all metro areas are often equally risky.
Not just one employer, sometimes the entire industry goes down! Just look at the housing market in Detroit or Youngstown
You care if you have a mortgage and you live in a non-US country where interest rates can actually go up to price you out of it.
You mean a situation where I could not afford the installments and therefore would be forced to sell it?
In my corner of the world banks are required to assume a 2,5-5 percentage point buffer when calculating mortgage eligibility - the upper bracket is for variable interest rate mortgages. An unlikely scenario, but keeps the risk of what you mentioned low.
In my corner of the world banks are required to assume a 2,5-5 percentage point buffer when calculating mortgage eligibility - the upper bracket is for variable interest rate mortgages. An unlikely scenario, but keeps the risk of what you mentioned low.
> it's still the same house
What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.
What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.
A house has intrinsic worth. It is a house, people live in it, it provides shelter by it's nature as a house.
How many dollars it's worth to others is extrinsic, but it certainly has intrinsic value.
> A house has intrinsic worth
It's value is only what people will pay for it.
For example, a relative of mine died some years ago. She had a house full of expensive furniture. You couldn't give that furniture away, even though it was in perfect condition. It had no value.
The average estate value, excluding land, houses, and cars, is about $900. I have friends who ran an estate liquidation service. You'd net something like 5 cents on the dollar.
This is one reason why I buy stuff at the thrift store. I bought a perfectly good chainsaw there for $10.
It's value is only what people will pay for it.
For example, a relative of mine died some years ago. She had a house full of expensive furniture. You couldn't give that furniture away, even though it was in perfect condition. It had no value.
The average estate value, excluding land, houses, and cars, is about $900. I have friends who ran an estate liquidation service. You'd net something like 5 cents on the dollar.
This is one reason why I buy stuff at the thrift store. I bought a perfectly good chainsaw there for $10.
You are thinking of worth and value only in the monetary sense, and the person you are responding to is referring to a house's ability to be valuable to individuals, even if nobody else will pay for it, because it provides them shelter, satisfying a basic necessity.
This is most of where its monetary value comes from (obviously not universally true, many properties have simply become investments), and its monetary value would probably only completely evaporate if the house were so degraded that it could not function as a shelter.
The monetary value of most houses is rooted in their ability fulfill a basic human need, as opposed to the monetary value of some other things, like gold or bitcoin, which are valuable primarily because of what they are worth to other people. Even if you disagree with using terms like 'worth' and 'value', you must agree that a house has utility that is not affected by its market price.
This is most of where its monetary value comes from (obviously not universally true, many properties have simply become investments), and its monetary value would probably only completely evaporate if the house were so degraded that it could not function as a shelter.
The monetary value of most houses is rooted in their ability fulfill a basic human need, as opposed to the monetary value of some other things, like gold or bitcoin, which are valuable primarily because of what they are worth to other people. Even if you disagree with using terms like 'worth' and 'value', you must agree that a house has utility that is not affected by its market price.
> you must agree that a house has utility that is not affected by its market price
The market price is determined by how much people want it, of which utility is a large component.
The market price is determined by how much people want it, of which utility is a large component.
Agreed, but it is the utility that is the root of the value, and the relationship from utility as shelter -> market value is one way.
> It's value is only what people will pay for it.
If that is how you define it then by definition that is true. It is not the only possible definition though.
In my world I prefer to sleep in a place where the rain doesn’t fall on me. Having a place with a roof over me is value to me. If this meaning of the word “value” does not work for you then simply we are talking different languages.
Perhaps try thinking about “how much would i need to pay to provide the same neccesity if I wouldn’t own this place”. Maybe that puts it into economic terms what we are talking here.
If that is how you define it then by definition that is true. It is not the only possible definition though.
In my world I prefer to sleep in a place where the rain doesn’t fall on me. Having a place with a roof over me is value to me. If this meaning of the word “value” does not work for you then simply we are talking different languages.
Perhaps try thinking about “how much would i need to pay to provide the same neccesity if I wouldn’t own this place”. Maybe that puts it into economic terms what we are talking here.
The value of it to you is how much you're willing to pay for it. There really isn't much getting away from that.
That's furniture and not a house though. I'd guess that the average estate being that low value is not including outright-owned property/land. It's old people with a 20 year old car they've nursed through retirement, antiques that aren't in fashion, and bric a brac.
At least where I live, there would be a gulf between the estates of people who bought into the property market and those that rented their entire lives. Latter will have some furniture no one wants and scraps. The owners will have a $2m property and then investment property that get split up between their kids.
At least where I live, there would be a gulf between the estates of people who bought into the property market and those that rented their entire lives. Latter will have some furniture no one wants and scraps. The owners will have a $2m property and then investment property that get split up between their kids.
That isn't true.
The marketplace valuation is just where individual suppliers' and demanders' valuations cross.
The individual valuations are the foundational reality, or the market wouldn't work.
Every time you buy, sell, or decline to sell or buy something, you are operating based on your own valuation. So there is nothing theoretical about it.
The marketplace valuation is just where individual suppliers' and demanders' valuations cross.
The individual valuations are the foundational reality, or the market wouldn't work.
Every time you buy, sell, or decline to sell or buy something, you are operating based on your own valuation. So there is nothing theoretical about it.
> That isn't true.
People find out it is true when they try to sell something.
> If you wouldn't sell your house for $1M, then it is worth $1M to you
If you're willing to pay $1M for it, then it's worth that to you.
People find out it is true when they try to sell something.
> If you wouldn't sell your house for $1M, then it is worth $1M to you
If you're willing to pay $1M for it, then it's worth that to you.
>> If you wouldn't sell your house for $1M, then it is worth $1M to you
(Sorry, deleted that phrase after getting distracted while making my comment. In my mind the edit was instant!)
> What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.
> People find out it is true when they try to sell something.
Of course there is intrinsic value. A buyer has to pay you what you want for your house.
You are setting the market price.
If someone wants it, thats what they will need to give you.
We often use the word “worth” to mean “what would be the best offer I might get. But you won’t sell it if it is “worth” more than that to you. Which “worth” is usually obvious from context.
Valuations happen on both sides of every trade, and most often both participants end up with surplus value. The seller getting more than their minimum price, the buyer paying less than their maximum price.
Even market makers commonly post prices with surplus relative to their neutral trade valuation, and typically move their price if their are no takers. They want a trade at X, but will try for as much surplus as they can before settling for X if they have to.
(Sorry, deleted that phrase after getting distracted while making my comment. In my mind the edit was instant!)
> What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.
> People find out it is true when they try to sell something.
Of course there is intrinsic value. A buyer has to pay you what you want for your house.
You are setting the market price.
If someone wants it, thats what they will need to give you.
We often use the word “worth” to mean “what would be the best offer I might get. But you won’t sell it if it is “worth” more than that to you. Which “worth” is usually obvious from context.
Valuations happen on both sides of every trade, and most often both participants end up with surplus value. The seller getting more than their minimum price, the buyer paying less than their maximum price.
Even market makers commonly post prices with surplus relative to their neutral trade valuation, and typically move their price if their are no takers. They want a trade at X, but will try for as much surplus as they can before settling for X if they have to.
> A buyer has to pay you what you want for your house. You are setting the market price.
A buyer offers what he wants to pay for it. You negotiate until reaching an agreement. That is the market price.
I.e. The Law of Supply and Demand.
If you think the seller sets the market price, try selling your car for $10 million.
A buyer offers what he wants to pay for it. You negotiate until reaching an agreement. That is the market price.
I.e. The Law of Supply and Demand.
If you think the seller sets the market price, try selling your car for $10 million.
Don't you think that your take is a little bit reductionist?
There are plenty of things which are valuable or bring value, but are never sold or bought.
Case in point: how much is the Sun worth according to you?
There are plenty of things which are valuable or bring value, but are never sold or bought.
Case in point: how much is the Sun worth according to you?
I don’t have any ability to make choices about it that depend on any conscious valuation.
But do you doubt I value it because I am not buying or selling it?
I suppose near infinite, in that I would certainly sacrifice everything I have to protect it - given it represents the survival of all of us - which for me at least would be the apex of value.
It is worth noting that value can often be measured in currency, but not always. It is ultimately an ordering of everything, by kind and quantity.
In the end, even money is just another “thing” which we value on a gradient and relative to context (what we need to survive, we value a lot. To live Without stress, a lot, but less. More than that, even less, even if we are ambitious.)
Market value comes directly from each of our personal, “intrinsic” as another commenter called it, valuations. There is no market value where there are no personal valuations. But there can be personal valuations where there is no market.
Each of us still prioritizes what we have against what we want, and the costs to us of that, even if we were hermits. Each of spends our time, the ultimate resource, based on our relative values of things.
That is the source of all “value” or “worth”. Individual or (and before) collective.
But do you doubt I value it because I am not buying or selling it?
I suppose near infinite, in that I would certainly sacrifice everything I have to protect it - given it represents the survival of all of us - which for me at least would be the apex of value.
It is worth noting that value can often be measured in currency, but not always. It is ultimately an ordering of everything, by kind and quantity.
In the end, even money is just another “thing” which we value on a gradient and relative to context (what we need to survive, we value a lot. To live Without stress, a lot, but less. More than that, even less, even if we are ambitious.)
Market value comes directly from each of our personal, “intrinsic” as another commenter called it, valuations. There is no market value where there are no personal valuations. But there can be personal valuations where there is no market.
Each of us still prioritizes what we have against what we want, and the costs to us of that, even if we were hermits. Each of spends our time, the ultimate resource, based on our relative values of things.
That is the source of all “value” or “worth”. Individual or (and before) collective.
Houses have always been a lousy investment for me. Once you factor in all the costs (property tax, insurance, repairs, 6% real estate commissions, the time the house sits empty waiting for a buyer, etc.) the returns are not that good at all.
Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.
Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.
Anyone buying a house with a mortgage generally is taking a 5:1 leverage (a 5% down loan is 20:1 leverage) position on the house. Making $100k on a $200k investment, with 5:1 leverage means making 100k on a 40k investment, which isn't a 50% return... it's a 250% return. And it's tax free, assuming it's your primary residence (up to 250k cap gains). You have to spend an obnoxious amount on costs to not have it make sense.
Remember, leverage works both ways.
Obviously. Which is why 20:1 leverage (5% down) is kind of foolish, since you can quickly become underwater on a house purchase if the value shifts. At 5:1 leverage though, you still maintain enough equity to weather any valuation swings if you have a need to leave and sell the house.
This post is somewhat misleading. If you put 0% down (yes, it is possible in many places), effectively you have infinite leverage. But let's use your 5% example. If you house price falls by 50%, nothing happens to you -- even with huge negative equity. You keep making monthly payments. There is no "weathering" to be done. Sure, at the end, you might have a giant paper loss, but you still have a roof over your head -- that you own.
I agree mortgages cannot be called in, unlike margin trading on stocks, but if you’re wildly upside down on a house then it literally traps you in the house unless you take those losses. If housing prices fall 50% it is also likely that economic conditions may mean you cannot afford the same house anymore. In a situation of missed payment, they can certainly foreclose on your house.
While there is some "leverage" in mortgage, you actually need to pay the whole sum, and with interest too, so taking a $200k loan means you pay usually something like $250k for it in the end, and this means you have to make $50k profit to not lose. And houses age too. If the location is superb you can justify it as an investment, otherwise it's pure nonsense in every way. Thinking normal housing as an investment is one of those reasons why we can't have nice things.
What do you think leverage means?
If I take a leveraged position on a stock via margin trading and the stock goes to $0 (or, more realistically, it dips in value enough that I get a margin call) then I owe the whole balance, not just what I put up as capital. This is true of literally any leverage. And on top of that, I pay a margin rate in the form of an interest payment based on the amount of money I have outstanding beyond my capital. Sounds familiar, right? Because it's exactly identical. The only difference between a mortgage and a margin interest payment is that a mortage is amoritized across the term and is a fixed period, whereas margin interest is indefinite and acts more like a HELOC (i.e., you only pay interest on the amount that you have outstanding... and that amount can vary over time).
I absolutely hate the idea that "paying X in interest means that's money you have to earn in addition to make it worthwhile". No, it's not. It's money you are paying to free up extra capital elsewhere that can be invested more efficiently. Unless you're spending well beyond your means (which, admittedly, some people do), then paying interest on a mortgage payment should mean making much much more elsewhere by investing money you would have spent on buying a house in cash.
If I take a leveraged position on a stock via margin trading and the stock goes to $0 (or, more realistically, it dips in value enough that I get a margin call) then I owe the whole balance, not just what I put up as capital. This is true of literally any leverage. And on top of that, I pay a margin rate in the form of an interest payment based on the amount of money I have outstanding beyond my capital. Sounds familiar, right? Because it's exactly identical. The only difference between a mortgage and a margin interest payment is that a mortage is amoritized across the term and is a fixed period, whereas margin interest is indefinite and acts more like a HELOC (i.e., you only pay interest on the amount that you have outstanding... and that amount can vary over time).
I absolutely hate the idea that "paying X in interest means that's money you have to earn in addition to make it worthwhile". No, it's not. It's money you are paying to free up extra capital elsewhere that can be invested more efficiently. Unless you're spending well beyond your means (which, admittedly, some people do), then paying interest on a mortgage payment should mean making much much more elsewhere by investing money you would have spent on buying a house in cash.
You HAVE to pay back your debt if you want to pocket all your profits. If your down payment is 25k and you buy 250k house, you need to borrow 225k for your "leverage". Now you get lucky and years later, AFTER you have paid 25k + 225k + interest + fees which amounts to at least 300k, prices have gone up and you can sell that house for 400k. Nice you think! I will make 375k profit just by investing 25k! NO, that's not how "leverage" works at all. At that point you have paid at least 300k to get 400k which makes not that great considering it's been 20 years or so.
The logic you are using is flawed beyond all reasoning to be honest. People who are in a position to both pay back their mortgages AND invest heavily elsewhere are already rich.
The logic you are using is flawed beyond all reasoning to be honest. People who are in a position to both pay back their mortgages AND invest heavily elsewhere are already rich.
You don't make 375k in profit off a 25k investment (in your example) if you sell a house for 400k. You would make 125k in profit using your numbers (minus fees, interest, etc). It's exactly how leverage works, and the equivalent in margin trading is 100% identical. The only difference with a mortgage is that you slowly deleverage yourself over time as a consequence of paying off the loan (principal that goes to value of the loan).
As an example, if you sold a house 5 years into owning it, at current interest rates, you would only have paid down approximately 6% of the 30 year loan, so the 'leverage' of a 20% down loan would still be ~4.8:1.
As an example, if you sold a house 5 years into owning it, at current interest rates, you would only have paid down approximately 6% of the 30 year loan, so the 'leverage' of a 20% down loan would still be ~4.8:1.
What you're skipping in this equation is that the amount of leverage drops every month when you make your payment. The average leverage is a lot lower than the starting leverage. That's what makes a mortgage pretty different from a leveraged trade.
> Unless you're spending well beyond your means (which, admittedly, some people do), then paying interest on a mortgage payment should mean making much much more elsewhere by investing money you would have spent on buying a house in cash.
There's no free lunch. Often, investments will get you a better return than your interest fees. Often they won't. And "much much more" is downright wrong.
> Unless you're spending well beyond your means (which, admittedly, some people do), then paying interest on a mortgage payment should mean making much much more elsewhere by investing money you would have spent on buying a house in cash.
There's no free lunch. Often, investments will get you a better return than your interest fees. Often they won't. And "much much more" is downright wrong.
In today's 7% interest rates, yeah it's potentially a wash. In the era of 3-4% rates, it's free money. 'much much more' is absolutely correct at 3-4%, which a lot of people currently have mortgages at today.
> and this means you have to make $50k profit to not lose
No, it doesn't. Because the alternative was renting, which isn't free.
Even if you end up losing 50K on the home, all told, but if renting for the same number of years would've cost you 100K, you're ahead by 50K.
No, it doesn't. Because the alternative was renting, which isn't free.
Even if you end up losing 50K on the home, all told, but if renting for the same number of years would've cost you 100K, you're ahead by 50K.
The returns might look better if you factor in imputed rent (assuming this is your primary residence). There are definitely investments with higher growth, but the (untaxed!) imputed rent is solid income over the lifetime of the house.
> Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.
Most people might not do the proper accounting, but not in the direction you suggest.
Maybe they made 100K gross profit but after deducting all the expenses they only made $1000. Ok, was that bad? No, it's great because the comparison is to renting where they would've lost tens of thousands of dollars.
Most people might not do the proper accounting, but not in the direction you suggest.
Maybe they made 100K gross profit but after deducting all the expenses they only made $1000. Ok, was that bad? No, it's great because the comparison is to renting where they would've lost tens of thousands of dollars.
It depends on where you live. In CA renting is usually cheaper than a mortgage for the same property. Here in New Mexico my mortgage (2.6%) is cheaper than renting the same thing. With higher mortgage rates it’s not that clear but it still looks favorable knowing that mortgage stays stable for the next 15 years vs rents constantly increasing.
To be clear, no one is getting a 2.6% mortgage these days. Your post isn't a very good comparison. It is better to compare renting today vs taking a new mortgage today.
Where I live, rents have gone up a lot in the last two years so even with the higher interest rates owning is still competitive with renting.
> rents have gone up a lot in the last two years
if you don't live there long term houses are a bad investment. Live in the same place for 20 years and it becomes much better.
Generally, to break even you've gotta stay at least 5 years. The transaction costs of selling a house are enormous.
Meanwhile, Microsoft stock is about 10x over the last 10 years. Transaction costs are minimal. I can sell it on a moment's notice. I was paid dividends. No insurance costs, no property tax, no maintenance.
I just had to replace the roof on my house. Wow, that was a whopping bill. The roofer told me if I'd delayed another year, the bill would have been a lot higher, as he would charge $150 per sheet of plywood replaced. As it was, only one was water damaged bad enough.
Meanwhile, Microsoft stock is about 10x over the last 10 years. Transaction costs are minimal. I can sell it on a moment's notice. I was paid dividends. No insurance costs, no property tax, no maintenance.
I just had to replace the roof on my house. Wow, that was a whopping bill. The roofer told me if I'd delayed another year, the bill would have been a lot higher, as he would charge $150 per sheet of plywood replaced. As it was, only one was water damaged bad enough.
"Meanwhile, Microsoft stock is about 10x over the last 10 years. Transaction costs are minimal. I can sell it on a moment's notice. I was paid dividends. No insurance costs, no property tax, no maintenance."
If you manage to pick Microsoft in 2014, Apple in 2000, Tesla in 2015 and BTC in 2010, you are definitely way better off not buying a house but keep renting.
If you manage to pick Microsoft in 2014, Apple in 2000, Tesla in 2015 and BTC in 2010, you are definitely way better off not buying a house but keep renting.
There are a lot of stocks that pay off better than housing. The 10 year return on the S&P 500 is 167%. It would be higher if you leveraged it with margin.
On QQQ it's 450%.
On QQQ it's 450%.
you have to live someplace though. Over the 30 year life of that roof it is cheap enogh but that is a large one time cost if you only are there for 5 years.
Roofs are so expensive they factor heavily into what you can sell the house for.
Asphalt shingle roofs are lucky to get 20 years, cedar shingles are even worse.
Asphalt shingle roofs are lucky to get 20 years, cedar shingles are even worse.
In Australia, some houses have a tiled roof but most have Colorbond (galvanised, pre-painted iron). Life expectancy 70 years. Warrantied for 30 years.
https://www.google.com/search?sca_esv=d265e0c6ccb16526&q=col...
Not that expensive given the life of it. Mine is 15 years old and you couldn't tell it wasn't new.
https://www.google.com/search?sca_esv=d265e0c6ccb16526&q=col...
Not that expensive given the life of it. Mine is 15 years old and you couldn't tell it wasn't new.
I wanted that kind of metal roof, but the pitch of the roof would make it very dangerous to walk on to clean. See my other post for what I did pick.
Too bad metal roofs don't look great on traditional houses... I would love to install that
I bought a metal replacement roof. I was sold because there's a new kind of metal shingle. It's stamped to have the shape of asphalt shingles, and it has a coating of grit on it to match the color and make it safer to walk on. It's lighter and fireproof, too. (Lighter makes the house more earthquake resistant.)
I'm picky and it looks great.
I'm picky and it looks great.
No, it's far less risky to invest in housing. These two graphs over long term illustrate the difference in risk:
Average home price since 1965: https://fred.stlouisfed.org/series/ASPUS
Average Dow Jones index since 1919 [adjust scale to ~1965]: https://www.macrotrends.net/1319/dow-jones-100-year-historic...
Average home price since 1965: https://fred.stlouisfed.org/series/ASPUS
Average Dow Jones index since 1919 [adjust scale to ~1965]: https://www.macrotrends.net/1319/dow-jones-100-year-historic...
Though it helps to keep in mind that returns there are because the US housing market has been distorted beyond all recognition by under-building that goes back to the civil rights era.
You could also argue that there was population growth, and we might not see that in future.
So under-building in the future will be harder, as houses exist.
Of course, it's hard to know how population growth will work out in the future. And even harder to know how it'll work out in your neighborhood :D
So under-building in the future will be harder, as houses exist.
Of course, it's hard to know how population growth will work out in the future. And even harder to know how it'll work out in your neighborhood :D
even without population growth, household size decline means that there will be more demand for housing, since the same amount of people divided by smaller household size = more households.
> People don't realize how risky housing is compared to other investments.
Do not compare your house to other investments, that's as apple to oranges as it gets.
Compare it to renting, since you have to live somewhere.
Do not compare your house to other investments, that's as apple to oranges as it gets.
Compare it to renting, since you have to live somewhere.
> outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars
And home insurance, too. But generally, yes: over the course of decades an American fixed-rate mortgage really is a wonderful thing.
There is also the possibility of deflation to worry about, although deflation comes with many other problems. I personally think that worrying about deflation is like worrying about a meteor, or the collapse of the local government: if it happens, so many other bad things will also happen that my mortgage will be the least of my concerns.
And home insurance, too. But generally, yes: over the course of decades an American fixed-rate mortgage really is a wonderful thing.
There is also the possibility of deflation to worry about, although deflation comes with many other problems. I personally think that worrying about deflation is like worrying about a meteor, or the collapse of the local government: if it happens, so many other bad things will also happen that my mortgage will be the least of my concerns.
You probably paid more for the house due to the government intervention in the mortgage market, although that likely raised the rents similarly.
I tend to agree with Dave Ramsey on this point. A home loan is just about the only “good” type of debt for an individual to have. Because it tends to retain or gain value with little risk. He also recommends a 15 year loan instead of 30, which has been amazing for me.
While I think Dave can be helpful for some, having 30 year old loan makes more financial sense if you are financed at 3%. You can pay it off sooner if you want.
The further you get from the initial purchase date the dollar will have a lower value, and in theory you should be making more money.
Plus, even tbills are returning over 5% and are state tax exempt.
The further you get from the initial purchase date the dollar will have a lower value, and in theory you should be making more money.
Plus, even tbills are returning over 5% and are state tax exempt.
That's not always the case if you have a prepayment penalty on a mortgage (which isn't always the case but certainly something to watch for).
Very uncommon in the US but one needs to do their due diligence.
I thought Dave Ramsey was pretty much completely wrong about student loan debt, at least if I remember his position on it being "you shouldn't have student loans".
But I agree that most debt is probably bad to have.
But I agree that most debt is probably bad to have.
It might be extreme but 15 years ago he was telling people not to be so flippant about taking on enormous amounts of debt for degrees with a questionable payback and I think he was right.
I always thought the snowball method was dumb but as time goes on I can see how it makes sense psychologically, even if not mathematically.
I always thought the snowball method was dumb but as time goes on I can see how it makes sense psychologically, even if not mathematically.
Sure, I've said a few negative things about Ivy Leagues being overpriced here in the last few weeks, so I'm not saying you should necessarily get into $400,000 of student loan debt.
What I didn't like about his take was that it also kind of also excluded getting into like $20,000-$40,000 of debt to go to a decent state school. That's a bad take; getting a degree (at least in a technical field) substantially increases your earning potential, and while $40,000 is a lot of money, it's not out of reach for virtually anyone working in tech or engineering or something adjacent, at least not in the US.
I guess my frustration with his perspective is that it felt extremely reductive; he acts like the only student loan debt you can get into is Harvard-level stuff, but I think that's just not true, and not even the average case. Most people don't get into Harvard, (I think) most people who go to college end up at a state or local university, and as such they're not getting into the obscene levels of debt that you'd get from these yuppie private schools, particularly if they state within state.
What I didn't like about his take was that it also kind of also excluded getting into like $20,000-$40,000 of debt to go to a decent state school. That's a bad take; getting a degree (at least in a technical field) substantially increases your earning potential, and while $40,000 is a lot of money, it's not out of reach for virtually anyone working in tech or engineering or something adjacent, at least not in the US.
I guess my frustration with his perspective is that it felt extremely reductive; he acts like the only student loan debt you can get into is Harvard-level stuff, but I think that's just not true, and not even the average case. Most people don't get into Harvard, (I think) most people who go to college end up at a state or local university, and as such they're not getting into the obscene levels of debt that you'd get from these yuppie private schools, particularly if they state within state.
You age is showing a bit with your post. Randomly picking Penn State you get annual costs of $60k+ for out-of-state and $40k+ for in-state. [1] The cost listed on the page is only for tuition/housing. Use the calculator to get estimates for everything else. And that's an anti-cherry picked example, as I wanted to avoid absurdly expensive places like California, but while also going for a well regarded school.
You can easily get well into the 6 figures of debt even at state schools now. You'll find even rando state universities are hitting $30k+/year. Education costs have done exactly what you'd expect them to do when you convince people something is priceless and then give them unlimited and near unconditional loans to buy it.
I don't really see the point in this when you can instead attend English language programs in e.g. Europe or Asia and pay less for your entire education than you'd pay for a semester at rando state school in the US. Do a work-study program and you could graduate with a tidy chunk of change saved up, instead of graduating buried in enough debt to buy a house.
The ironic part is that this advice is even more pertinent for those coming from low income backgrounds, or from parents with limited education. But they're probably the people most unlikely to take advantage of such options, if not only because they probably just don't consider it.
[1] - https://admissions.psu.edu/costs-aid/tuition/
You can easily get well into the 6 figures of debt even at state schools now. You'll find even rando state universities are hitting $30k+/year. Education costs have done exactly what you'd expect them to do when you convince people something is priceless and then give them unlimited and near unconditional loans to buy it.
I don't really see the point in this when you can instead attend English language programs in e.g. Europe or Asia and pay less for your entire education than you'd pay for a semester at rando state school in the US. Do a work-study program and you could graduate with a tidy chunk of change saved up, instead of graduating buried in enough debt to buy a house.
The ironic part is that this advice is even more pertinent for those coming from low income backgrounds, or from parents with limited education. But they're probably the people most unlikely to take advantage of such options, if not only because they probably just don't consider it.
[1] - https://admissions.psu.edu/costs-aid/tuition/
Fair enough, but in fairness not all state schools are created equal. For example, at least one SUNY college (SUNY Empire) is only about $3,535 per semester (at least for tuition) for in-state [1], so assuming eight semesters roughly $30,000. I grew up in Florida, and the first college I went to was Florida State, and tuition is roughly $5,500 as of last year for in-state [2]. I feel like there are plenty of options for perfectly decent universities that fall roughly into that price range I specified in most states, so I think my point still stands.
That said, I'm a huge fan of European/UK universities. I do graduate school in the UK, it's a lot cheaper than a comparable program in a lot of American universities. I've been trying to get my considerably-younger brother in law to consider applying to European schools.
[1] https://catalog.sunyempire.edu/undergraduate/tuition-fees/#t...
[2] https://admissions.fsu.edu/first-year/finances/
ETA:
Sorry, I didn't see the "housing" part of your first sentence. That certainly does make the costs add up, particularly if you stay in the dorms, which I think are kind of a scam in most schools. I think to save money, a lot of people would benefit from trying to stay with their parents a bit longer instead of partaking in the dorms.
That said, I'm a huge fan of European/UK universities. I do graduate school in the UK, it's a lot cheaper than a comparable program in a lot of American universities. I've been trying to get my considerably-younger brother in law to consider applying to European schools.
[1] https://catalog.sunyempire.edu/undergraduate/tuition-fees/#t...
[2] https://admissions.fsu.edu/first-year/finances/
ETA:
Sorry, I didn't see the "housing" part of your first sentence. That certainly does make the costs add up, particularly if you stay in the dorms, which I think are kind of a scam in most schools. I think to save money, a lot of people would benefit from trying to stay with their parents a bit longer instead of partaking in the dorms.
State schools are not ivy league expensive, but they are not cheap anymore.
of course the degree matters. You pay about the same for art and engineering degrees but one will earn far more than the other.
of course the degree matters. You pay about the same for art and engineering degrees but one will earn far more than the other.
> I can see how it makes sense psychologically, even if not mathematically
He acknowledges this. It's about the psychological effect of seeing your list of debts grow smaller. I think a big part of his audience are people who have historically been very bad with money, which is why some of his advice seems strange to people who are already financially responsible. People with a bunch of maxed out credit cards and loans on ATVs and crap.
He acknowledges this. It's about the psychological effect of seeing your list of debts grow smaller. I think a big part of his audience are people who have historically been very bad with money, which is why some of his advice seems strange to people who are already financially responsible. People with a bunch of maxed out credit cards and loans on ATVs and crap.
I do think the snowball method also makes sense mathematically, depending on the loan terms and what you're optimizing for.
If your loans have a minimum payment and a penalty for missing a payment above and beyond interest (which seems to be common for loans in the US), the snowball method gives you more flexibility. Paying off a loan completely eliminates that part of your monthly minimum payment.
If in 2 or 5 years your income decreases unexpectedly (layoff, etc.), but by that point you've completely eliminated 1 or more loans, you're more likely to be able to continue making minimum payments.
If your loans have a minimum payment and a penalty for missing a payment above and beyond interest (which seems to be common for loans in the US), the snowball method gives you more flexibility. Paying off a loan completely eliminates that part of your monthly minimum payment.
If in 2 or 5 years your income decreases unexpectedly (layoff, etc.), but by that point you've completely eliminated 1 or more loans, you're more likely to be able to continue making minimum payments.
You know, that's a fair point I hadn't considered much before. Thanks for sharing the perspective.
> I have a 30 year mortgage on my house with a 2.75% interest rate.
The author on paying down his mortgage:
> It just increased our independence, even if it made no sense on paper. So that's another element of debt that I think goes misunderstood. And a lot of that for both of those points is this idea that people don't make financial decisions on a spreadsheet. They don't make them in Excel. They make financial decisions at the dinner table. That's where they're talking about their goals and their own different personalities and their own unique fears and their own unique skills and whatnot. So that's why I kind of push people to say like, it's okay to make financial decisions that don't make any sense on paper if they work for you, if they check the boxes of your psychology and your goals that makes sense for you. And for me, extreme aversion, what looks like an irrational aversion today, and I would say is an irrational aversion to debt, is what works for me and what makes me happy, so that's why I've done it.
* https://rationalreminder.ca/podcast/128
* https://www.youtube.com/watch?v=NSaRb-iFwPA
The author on paying down his mortgage:
> It just increased our independence, even if it made no sense on paper. So that's another element of debt that I think goes misunderstood. And a lot of that for both of those points is this idea that people don't make financial decisions on a spreadsheet. They don't make them in Excel. They make financial decisions at the dinner table. That's where they're talking about their goals and their own different personalities and their own unique fears and their own unique skills and whatnot. So that's why I kind of push people to say like, it's okay to make financial decisions that don't make any sense on paper if they work for you, if they check the boxes of your psychology and your goals that makes sense for you. And for me, extreme aversion, what looks like an irrational aversion today, and I would say is an irrational aversion to debt, is what works for me and what makes me happy, so that's why I've done it.
* https://rationalreminder.ca/podcast/128
* https://www.youtube.com/watch?v=NSaRb-iFwPA
> I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"
This only works in places with fixed property tax. When I lived in Texas my property tax went up hand over fist every year as my property increased in value and automatic reassessments occurred. If your salary remains relatively stagnant and does not increase with cost of living (most salaries are subject to this) then you can certainly find yourself being subject to nuevo rent rates as a long time mortgage holder.
I do agree with you that different types of debt should be classified differently.
This only works in places with fixed property tax. When I lived in Texas my property tax went up hand over fist every year as my property increased in value and automatic reassessments occurred. If your salary remains relatively stagnant and does not increase with cost of living (most salaries are subject to this) then you can certainly find yourself being subject to nuevo rent rates as a long time mortgage holder.
I do agree with you that different types of debt should be classified differently.
I've experienced this. My property taxes have gone up maybe 30% in the past few years. My income has increased pretty substantially, so it's not like I'm unable to pay for the increases. Compared to rent though, and having a mortgage where every month the amount of principle paid off increases, it still seems like the better option.
Rent has increased 30-50% where I live over the same time period. At least when my property tax increases, it's because I have an asset that has increased in value. If I am at some point forced to sell because I can no longer afford the property taxes, then I'll walk away with more money than if I had been paying rent for those same years.
Property taxes can force the same type of relocation that rent increases cause, but I think the typical outcome from someone being forced out by rising property taxes will be better than the person forced out by rising rents.
Rent has increased 30-50% where I live over the same time period. At least when my property tax increases, it's because I have an asset that has increased in value. If I am at some point forced to sell because I can no longer afford the property taxes, then I'll walk away with more money than if I had been paying rent for those same years.
Property taxes can force the same type of relocation that rent increases cause, but I think the typical outcome from someone being forced out by rising property taxes will be better than the person forced out by rising rents.
>This only works in places with fixed property tax
Critically, this also only works in places that offer fixed-rate mortgages. In my country (and most of Europe I believe) they are relatively expensive and the rate is fixed for only ~5 years (after which you either change to floating or update the rate). So basically nobody considers them long-term. Damn, I envy Americans.
Critically, this also only works in places that offer fixed-rate mortgages. In my country (and most of Europe I believe) they are relatively expensive and the rate is fixed for only ~5 years (after which you either change to floating or update the rate). So basically nobody considers them long-term. Damn, I envy Americans.
Are your mortgages cheaper than ours on average? I couldn't imagine doing a variable rate loan in the US. You can literally be had in a single year with a variable rate.
Fair enough, there’s a maximum that they are allowed to raise property taxes in NYC (6% in a year, 20% over five years); my rates will eventually go up, but not super fast.
Yeap! We're subject to a similar maximum in Portland. It was one of the aspects of government I specifically shopped for before we relocated. I did wish I'd looked more into the ever-expanding income tax we have at the city, county, and state levels but that's a different cost structure that's only significantly worse when factoring in Trump era tax reform.
debt for housing, which is a depreciating asset in normal times (housing wears out, land may become more expensive) is not a great idea, but it has been normalized and when you have negative real rates & inflationary policies, as we had for over a decade, it can make a lot of sense
debt for productive activity in general makes sense if it isn't compounding (mortgages act like simple interest, btw, although it's complicated since you pay more interest at the start of the loan and so if you move within the first five years you've paid almost entirely interest on the home)
debt for consumption is always parasitic
that's why it's insane how hard it is to get a business loan and how easy it is to get a credit card: usurers want suckers, not shared risk on productive investments
debt for productive activity in general makes sense if it isn't compounding (mortgages act like simple interest, btw, although it's complicated since you pay more interest at the start of the loan and so if you move within the first five years you've paid almost entirely interest on the home)
debt for consumption is always parasitic
that's why it's insane how hard it is to get a business loan and how easy it is to get a credit card: usurers want suckers, not shared risk on productive investments
> debt for housing, which is a depreciating asset in normal times (housing wears out, land may become more expensive) is not a great idea, but it has been normalized and when you have negative real rates & inflationary policies, as we had for over a decade, it can make a lot of sense
Has there been a 20 year stretch of time in the US in which housing is broadly a depreciating asset?
Seems that land is definitely, and housing for the most part, an appreciating asset over time due to scarcity.
Has there been a 20 year stretch of time in the US in which housing is broadly a depreciating asset?
Seems that land is definitely, and housing for the most part, an appreciating asset over time due to scarcity.
I'm not answering your direct question but for reasons, I'm interested in Indiana farm land in the 1920s and 1930s. From a peak in 1920, price per acre was down 2/3rds and didn't fully recover until 1948.
The Great Depression started early for farmers...
https://ag.purdue.edu/commercialag/home/resource/2023/08/the...
The Great Depression started early for farmers...
https://ag.purdue.edu/commercialag/home/resource/2023/08/the...
Not sure if farmland to housing land is a 1:1 comparison in many places. Where you can dig well (and hopefully get safe water) and use septic it may be as you can get power almost anywhere, but some places require utilities which increases prices significantly
Depends where you live! There are plenty of cities that have gone downhill. I could easily see some big sun belt cities getting too hot in 2044..
housing is, by definition, a depreciating asset: it wears out
you are asking if real estate prices have fallen over a 20 year period in the US and the answer is not in the modern inflationary era:
https://fred.stlouisfed.org/series/QUSR628BIS
but that mixes land & housing prices together of course
prices have fallen over 10 year periods (sometimes dramatically) however, and the average length of ownership is 8 years, so timing can make a huge difference in outcomes of home ownership, particularly with the leverage involved.
you are asking if real estate prices have fallen over a 20 year period in the US and the answer is not in the modern inflationary era:
https://fred.stlouisfed.org/series/QUSR628BIS
but that mixes land & housing prices together of course
prices have fallen over 10 year periods (sometimes dramatically) however, and the average length of ownership is 8 years, so timing can make a huge difference in outcomes of home ownership, particularly with the leverage involved.
Covid is one example. The PPP loans provided by the federal government to businesses were forgiven. That sort of stimulus, combined with massive inflation, is favorable to a debtor, not a saver.
For many, taking on debt in 2018 to buy a house for 200k would have paid off greatly by selling in 2022 for 500k. In an inflationary environment, you should grab as much cheap debt as possible.
For many, taking on debt in 2018 to buy a house for 200k would have paid off greatly by selling in 2022 for 500k. In an inflationary environment, you should grab as much cheap debt as possible.
Are you going to live in that house for 30 years? What’s your plan when you need to move?
The purpose of a 30-year fixed mortgage is to build up equity in a home you otherwise couldn't afford. If OP moves, they now only have to take on a smaller mortgage for their new home and then keep paying that new mortgage off.
The goal is that by the time you reach retirement age, you have paid off the mortgage and own your home free and clear. Thus, you only have to pay the property taxes and have more financial security than someone who never built up equity because they always paid rent.
Furthermore, if you have children, that home is potentially a source of generational wealth. They can sell it after you pass and invest the proceeds, or live in it themselves if they want. Worst case, if you find you didn't save enough for retirement, you can tap into the home equity to keep food on the table, although this is not optimal.
The goal is that by the time you reach retirement age, you have paid off the mortgage and own your home free and clear. Thus, you only have to pay the property taxes and have more financial security than someone who never built up equity because they always paid rent.
Furthermore, if you have children, that home is potentially a source of generational wealth. They can sell it after you pass and invest the proceeds, or live in it themselves if they want. Worst case, if you find you didn't save enough for retirement, you can tap into the home equity to keep food on the table, although this is not optimal.
Even if I don't stay in the house for thirty years, it's still better as long as I stay for awhile. When I'm paying my mortgage payments, I'm building some degree of equity into the house, so the only "wasted" money is whatever I pay to interest.
So my plan if I move is exactly what it sounds like: I sell the house and then buy a new one wherever I'm moving to. As long as I'm staying for like 5+ years at that location I think it's still worth it.
So my plan if I move is exactly what it sounds like: I sell the house and then buy a new one wherever I'm moving to. As long as I'm staying for like 5+ years at that location I think it's still worth it.
Sure, why not? I can't speak for OP specifically, but generally living in the same house for decades is very common. I'm coming up on 15 years in my house with no plans to move, and most of my neighbors have been there even longer. My parents lived in the house I grew up in for 40 years until my father passed away and my mom needed to downsize.
In any case, if they move, then the price of the home they are selling will have gone up (or down) more or less the same as everyone else's, so it basically works out to a wash.
In any case, if they move, then the price of the home they are selling will have gone up (or down) more or less the same as everyone else's, so it basically works out to a wash.
I might. I've lived in it for pretty damn close to 20 years at this point.
Australia is practically all variable rates after 3 years, so not much is really "locked in"
You are overlooking the scenario where home prices fall. Yes, your monthly payments will be fixed, but your asset will be falling in value.
I have a paid off house and zero debt. Sure I might be ahead if I had used some of the cash to buy stocks instead of paying down the house early, but I’m completely happy with my decision. There is no peace of mind like not owing anyone a cent and keeping your living expenses low. Having debt was incredibly stressful and no longer worrying about making payments is the best thing that’s ever happened to my mental health.
Owning a house does not mean not owing anyone a cent. You still owe multiple types of taxes to the government. You still need to get insurance. You still need to make repairs.
I actually find piece of mind in renting. I can always say screw it and move to the cheapest part of the country as I am getting closer to retirement age.
I actually find piece of mind in renting. I can always say screw it and move to the cheapest part of the country as I am getting closer to retirement age.
Rent can increase faster than your income. Owning, even with higher carrying costs, derisks housing both from an expense and sourcing perspective.
> Owning… derisks housing both from an expense and sourcing perspective
Except if property taxes increase beyond affordability as they have for many folks in some states recently.
Except if property taxes increase beyond affordability as they have for many folks in some states recently.
California limits increases in property taxes to 2% for this reason. More generally, property owners vote at a high rate, so governments will usually be less aggressive in increasing property taxes. Of course, they still go up, but it's generally less of a risk.
California’s approach privileges people who have lived in California in the past over the affordability of housing for people working today. It’s got its own popularity issues.
It’s very similar to rent control in that way.
Wouldn't their rent go up at a similar rate since the home owner would be copping those tax hikes anyway?
not necessarily. rent and market value are related, obviously, but they don't have to increase at the same rate. in some markets, property values can increase much faster than rent.
https://www.investopedia.com/terms/p/price-to-rent-ratio.asp
https://www.investopedia.com/terms/p/price-to-rent-ratio.asp
Yeah, I agree. Rent is essentially capped by median income. If mortgage rates are cheap enough, housing prices will skyrocket, but median rent will barely budge.
Profit
> as they have for many folks in some states recently.
Rent can do that. But in renting you can more easily move to a better paying job.
I'm not sure you're derisking as owning is also subject to local taxes of whatever sort. Those too can increase faster than income.
I'm not sure you're derisking as owning is also subject to local taxes of whatever sort. Those too can increase faster than income.
And if you can’t find a job because you’re older or the employer market is raking you over the coals, you’re screwed, while your housing is mostly locked in.
But that's the point,
rent === mobility
own === 10x less so
Sure. It's nice to want roots, have a home, etc. But given how the financial system works - and the economic and sociopolitical systems that sit on top of it - an RV might be the smartest way to go.
Sure there's always the American Dream narrative but (leadership) actions speak louder than words. Seeing Santa Claus or the Easter Bunny is 100x more likely than the now mythical Anerican Dream.
rent === mobility
own === 10x less so
Sure. It's nice to want roots, have a home, etc. But given how the financial system works - and the economic and sociopolitical systems that sit on top of it - an RV might be the smartest way to go.
Sure there's always the American Dream narrative but (leadership) actions speak louder than words. Seeing Santa Claus or the Easter Bunny is 100x more likely than the now mythical Anerican Dream.
The ongoing expenses of owning a house are still there, taxes, insurance, maintenance, electricity, garbage disposal, water, gas etc. if you can't cover these, you're not debt free.
As you get over retirement age medical expenses could dwarf all these. you need to be more than debt-free you need to be debt-free and a good cashflow and emergency funds you can call on.
Just as you get to the top of the hill there is always another one to climb.
As you get over retirement age medical expenses could dwarf all these. you need to be more than debt-free you need to be debt-free and a good cashflow and emergency funds you can call on.
Just as you get to the top of the hill there is always another one to climb.
Those expenses are not "debt" in the traditional sense. I've got two paid-off houses, and my annual combined expenses for them come to something around $20k/year.
While what you’re saying sorta makes sense I think you’re missing that money spent on a mortgage goes into an appreciating asset that you own.
Money on rent goes to pay for someone else’s appreciating asset you don’t own.
Insurance isn’t that much and you have to pay taxes multiple times on all your money anyway but at least property has a chance to fight back a bit or hopefully outpace inflation.
The money you earn today and sits in your bank is going to be worth very little in terms of spending power by the time you want to move somewhere cheap if you’re not keeping it in investments or property.
We’re entering a dark time financially and there will be a significant quality of life difference in 20 years of those who have money in the right places today.
Money on rent goes to pay for someone else’s appreciating asset you don’t own.
Insurance isn’t that much and you have to pay taxes multiple times on all your money anyway but at least property has a chance to fight back a bit or hopefully outpace inflation.
The money you earn today and sits in your bank is going to be worth very little in terms of spending power by the time you want to move somewhere cheap if you’re not keeping it in investments or property.
We’re entering a dark time financially and there will be a significant quality of life difference in 20 years of those who have money in the right places today.
>goes into an appreciating asset that you own
Like any asset, it _could_ appreciate, but is not guaranteed. Where I live you can buy a house for 15-40K where normal prices in the country are 100-200K. It didn't use to be that way, last decade was all downhill for the city.
Like any asset, it _could_ appreciate, but is not guaranteed. Where I live you can buy a house for 15-40K where normal prices in the country are 100-200K. It didn't use to be that way, last decade was all downhill for the city.
If the housing market crashed in any meaningfully impactful wait there would be way bigger issues to worry about and you’d still only be in the same situation as a renter, maybe even still more well off.
Selling that house before moving to the country side is surely amount to something
> I can always say screw it and move to the cheapest part of the country as I am getting closer to retirement age.
reply
Something similar to this is why I prefer renting and why anyone who unshakeably believes renting is “throwing money away” is immediately suspicious to me.
I’ve always tried to rent the cheapest (some would say crappiest) apartment in an area that I’ve really wanted to live. I’ve done quite well financially and in terms of lifestyle as a result. I would’ve done better financially by buying a home somewhere I don’t want to live, but what’s the point?
Something similar to this is why I prefer renting and why anyone who unshakeably believes renting is “throwing money away” is immediately suspicious to me.
I’ve always tried to rent the cheapest (some would say crappiest) apartment in an area that I’ve really wanted to live. I’ve done quite well financially and in terms of lifestyle as a result. I would’ve done better financially by buying a home somewhere I don’t want to live, but what’s the point?
It’s just a numbers thing. Applying emotion and trust (in your words) to a numerical financial decision is naive at best. I would try to change your mind with numbers and facts, but I can tell it would fall on deaf ears/eyes.
Yeah I don’t deny there are ways to make more money than the choice I made. How would you answer the question I asked?
> I would’ve done better financially by buying a home somewhere I don’t want to live, but what’s the point?
Few decisions are purely numerical to most people. Or rather there are many decisions people claim are purely numerical and then make suboptimal numerical decisions on.
It doesn’t make my choice a bad choice and doesn’t mean that I threw my money away on rent anymore than a homeowner threw their money away on a refrigerator, property taxes, etc.
I exchanged a small amount of money for a place to live and had money left over to spend/invest in other ways and I got to live in an area I really love.
I guess that’s what I get for being naive at best.
> I would’ve done better financially by buying a home somewhere I don’t want to live, but what’s the point?
Few decisions are purely numerical to most people. Or rather there are many decisions people claim are purely numerical and then make suboptimal numerical decisions on.
It doesn’t make my choice a bad choice and doesn’t mean that I threw my money away on rent anymore than a homeowner threw their money away on a refrigerator, property taxes, etc.
I exchanged a small amount of money for a place to live and had money left over to spend/invest in other ways and I got to live in an area I really love.
I guess that’s what I get for being naive at best.
It was this comment:
> Something similar to this is why I prefer renting and why anyone who unshakeably believes renting is “throwing money away” is immediately suspicious to me.
That doesn't seem like a rational take. Renting IS throwing money away if your goal is to maximize wealth. Paying off a mortgage early when you can get a higher % return in the market than the interest rate of your loan is ALSO throwing money away.
To try and claim you're generating more wealth by renting just isn't true. To claim you're living the lifestyle you prefer, great.
To be suspicious of everyone who makes such a mild claim is a microchasm of why the world is going to hell in a handbasket.
> Something similar to this is why I prefer renting and why anyone who unshakeably believes renting is “throwing money away” is immediately suspicious to me.
That doesn't seem like a rational take. Renting IS throwing money away if your goal is to maximize wealth. Paying off a mortgage early when you can get a higher % return in the market than the interest rate of your loan is ALSO throwing money away.
To try and claim you're generating more wealth by renting just isn't true. To claim you're living the lifestyle you prefer, great.
To be suspicious of everyone who makes such a mild claim is a microchasm of why the world is going to hell in a handbasket.
> Renting IS throwing money away if your goal is to maximize wealth
I never said that was my goal.
> To try and claim you're generating more wealth by renting just isn't true.
I never claimed this. I have rented and I have generated wealth, however.
> To be suspicious of everyone who makes such a mild claim is a microchasm of why the world is going to hell in a handbasket.
It's usually because these people refuse to believe there's any benefit to renting and jump to conclusions and claim I said things I never said.
I wonder if I can find an example of such a situation?
I never said that was my goal.
> To try and claim you're generating more wealth by renting just isn't true.
I never claimed this. I have rented and I have generated wealth, however.
> To be suspicious of everyone who makes such a mild claim is a microchasm of why the world is going to hell in a handbasket.
It's usually because these people refuse to believe there's any benefit to renting and jump to conclusions and claim I said things I never said.
I wonder if I can find an example of such a situation?
Ignored this line by me huh? Convenient. Or, to you your word, suspicious.
> To claim you're living the lifestyle you prefer, great.
> To claim you're living the lifestyle you prefer, great.
I own several houses, and even with taxes, maintenance and insurance, it's cheaper to own two than renting in the same area..
You can buy better neighbors with a house, and less crime.
> You can buy better neighbors with a house, and less crime.
I wish!
I built a fancy house in a fancy neighborhood, and then a real a-hole bought the house next to me as his retirement home.
I wish!
I built a fancy house in a fancy neighborhood, and then a real a-hole bought the house next to me as his retirement home.
Might be some selection bias happening. It's usually not the fancy neighborhoods that get a reputation for being humble and down to earth.
A-hole neighbors have nothing to do with income level. I've also had a-hole neighbors who were dirt poor.
In my case, the advantage is that I don't have to share a wall with my bad neighbor.
Edit: I should add that the rest of my neighbors are awesome, Just like every other place I've lived.
In my case, the advantage is that I don't have to share a wall with my bad neighbor.
Edit: I should add that the rest of my neighbors are awesome, Just like every other place I've lived.
I feel this.
Unfortunately the only surefire way to avoid this situation is to be the bigger asshole.
Unfortunately the only surefire way to avoid this situation is to be the bigger asshole.
Yup: After my a-hole neighbor yelled at me because he thought I was mowing his lawn, I got the property line surveyed and had him remove all the shrubs he planted on my land.
To each his own, but I get more peace of mind with a larger retirement account due to the low fixed rates we had in the US from 2009 to around 2022.
I can't liquidate my house piecemeal when I need money like I can my brokerage assets.
I can't liquidate my house piecemeal when I need money like I can my brokerage assets.
This is one of those areas the Australian government has done ok in. Mandatory superannuation retirement funds. 11% (?) of all pay goes into this fund to be invested. Thus you can pay off the house and have an investment fund at the same time.
You can withdraw from your fund if you have a hardship but it is generally considered best to not touch it.
You can withdraw from your fund if you have a hardship but it is generally considered best to not touch it.
I have a house and a brokerage account that’s worth a few times my what my house is (it’s rather modest). Nothing is stopping an American from doing both other than their own priorities (and I’ve neglected areas that other people find important - I rarely travel and drive a beater car for instance; to each their own).
Pretty much. While it is mandated here, there is nothing stopping others form doing the same.
On my end it is just a manner of optics. The money being put aside, I never see week to week thus it just seems like an added bonus even though it is really just a part of the pay cycle.
On my end it is just a manner of optics. The money being put aside, I never see week to week thus it just seems like an added bonus even though it is really just a part of the pay cycle.
We have private tax-advantaged plans that work essentially like that, but they are totally optional. Interestingly the only system that is mandatory is our “Social Security” - you are obligated to pay in but the money is pooled; you get something akin to shares in the system, but it only entitles you to a specific payout after a certain age; your contributions are not privately owned.
Unusually for these types of discussions, it seems like the US system is more socialized than the alternative in your country.
Unusually for these types of discussions, it seems like the US system is more socialized than the alternative in your country.
But can’t those all go to zero overnight, leaving you with nothing? The same could happen with a home, but that’s what insurance is for. So I guess the gamble is between a natural or fire disaster or our financial system collapsing.
If the stock market all goes to zero overnight assuming you're working with indexes or reasonably balanced portfolio then we're all so fucked it won't matter whether you have a house or not.
No they cannot anymore than a house? Unless you purport that Intel truly does not own those giant facilities in Hillsboro, Oregon. Which, you can also have with a house if title falls through.
I never understood buying things that I can't afford. I always thought you earn money and when you earn enough money to buy something you can buy that something. That is always how I have lived life.
For that reason I also find it ridiculous that it's the social norm to take debt to buy a roof to put over your head. A (simple, clean, functional) house is a basic need, not a luxury item. I always assumed that if I don't have the cash for a house, I can't afford a house. In those terms, I can't afford a house right now, so I've been renting the whole time.
I think it should be the social norm for the median income to be able to buy a house with cash. For that to happen either people need to be making $1M/year median, or house prices need to come down to 1/5 of what they are.
For that reason I also find it ridiculous that it's the social norm to take debt to buy a roof to put over your head. A (simple, clean, functional) house is a basic need, not a luxury item. I always assumed that if I don't have the cash for a house, I can't afford a house. In those terms, I can't afford a house right now, so I've been renting the whole time.
I think it should be the social norm for the median income to be able to buy a house with cash. For that to happen either people need to be making $1M/year median, or house prices need to come down to 1/5 of what they are.
I agree that house prices should come down.
But given that you need a home, what's the difference between $1000 in rent+fees and $1000 in mortgage+taxes+fees?
Normally the biggest difference between renting and buying with debt is that you can stop renting. But you're not going to stop having a home.
But given that you need a home, what's the difference between $1000 in rent+fees and $1000 in mortgage+taxes+fees?
Normally the biggest difference between renting and buying with debt is that you can stop renting. But you're not going to stop having a home.
My view has always been that buying gives me price stability. $1000 in mortgage + taxes + fees is only going to change by a hike in taxes but rent changes at the whim of the market.
Here in my west coast city, the mortgage on a 4 bedroom house purchased 10 years ago is the same as a 2 bedroom apartment today.
my landlord friend told me, many of her tenants earn decent salary, definitely more than her income, they can even spend $8000 or more to remodel a car or things like that, but can never save up to the 20% down payment ever.
This truth has come up quite a lot lately in conversations. It's not just the down payment though, it's like ok first I get together $120k for the down payment, then I'm on the hook for potentially double the already obscene amount the same place would cost to rent for the mortgage payment, then utils, then repairs, taxes (almost like one would need to be a landlord to afford it). Like, pass, ~$4k+ a month is more than I'd prefer to be on the hook for, and that's just a mediocre 1 bedroom condo. Doesn't help that there are no viable jobs or enough stability to ride out any volatility now that you've drained your savings on the mortgage.
Instead, a modest trip and a few gadgets is wildly less compromising and stressful.
Instead, a modest trip and a few gadgets is wildly less compromising and stressful.
> then utils, then repairs, taxes
Remember you're paying for all these costs (+ landlord profit) when you rent.
Remember you're paying for all these costs (+ landlord profit) when you rent.
Right now in many places we're in a bit of an inversion where you can rent for less than the cost to buy - because some owners have old properties with low mortgage rates, etc.
But the main deal is people are still in "appreciation mode" where they don't really care if on paper they're losing money, because the house is appreciating faster than that.
Once appreciation slows or dries up (or prices start going back down) then things will get suddenly interesting.
But the main deal is people are still in "appreciation mode" where they don't really care if on paper they're losing money, because the house is appreciating faster than that.
Once appreciation slows or dries up (or prices start going back down) then things will get suddenly interesting.
We pay whatever they can get away with charging or increasing it to, and often have the standard utilities rolled into the number, which generally seems favorable. I pay rent, insurance, and Internet, rhe rest is rolled into to a max 2% increase per year. If they tried something excessive we'd start looking elsewhere.
> spend $8000 or more to remodel a car
> can never save up to the 20% down payment
something tells me those two things are connected
> can never save up to the 20% down payment
something tells me those two things are connected
Well, at that rate, one could not remodel 15 cars and maybe have enough for the down payment on a studio in some markets.
Or one could remodel a car and give up on home ownership, because it seems like a losing idea atm, and they'll have pursued something they find fruitful for the time being. At least they'll have the car in common with their boomer neighbors.
Or one could remodel a car and give up on home ownership, because it seems like a losing idea atm, and they'll have pursued something they find fruitful for the time being. At least they'll have the car in common with their boomer neighbors.
> remodel a car
Restore a classic or like high performance (or other) customizations.
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Sadly the case in a lot of places is the difference is control over your environment, or simply stability. In a lot of places your rights as a renter are so bad you can basically do nothing to improve the place you live, and even if you were allowed you would be foolish to do so because then your landlord could just kick you out or hike up the rent (and might just do that anyway). (where I live even multi-year tenants are frequently forbidden from putting up pictures on the walls, let alone repainting them, FFS). In places with proper rental rights, rent vs buy is a lot less clear-cut, especially if prices don't have much room to go up any further (buying only looks like a non-brainer financially in the past decade's environment of extreme price increases, or if you fail to consider opportunity costs. Even if you can afford to buy a house, it's not necessarily the best use of your money, but the non-financial side can be a really big part of why people go for it anyway).
Where is anyone forbidden from putting up pictures on the walls? 99.9% of residential rental contracts just state that the dwelling has to be returned in the condition rented. Go ahead and paint and put holes in the walls, just be sure it’s repainted and patched when you move out.
Right, I was talking about the financial aspect, not the quality of life.
Just a minor nit pick, but important: When comparing the costs of renting vs owning, you need to compare rent+fees to mortgage_interest+property_taxes+fees, minus any real estate tax deductions (if you itemize). The principal portion of your mortgage payment is not an expense, it turns into your own home equity so it's money coming out of one pocket and going into the other. The interest portion is generally federal tax deductible, and your property taxes as well (unless you hit the SALT cap which hopefully expires after 2025).
> Just a minor nit pick, but important: When comparing the costs of renting vs owning, you need to compare rent+fees to mortgage_interest+property_taxes+fees, minus any real estate tax deductions (if you itemize). The principal portion of your mortgage payment is not an expense, it turns into your own home equity so it's money coming out of one pocket and going into the other.
You need to compare both numbers, because that equity doesn't do much to help you make your payments.
You need to compare both numbers, because that equity doesn't do much to help you make your payments.
> it turns into your own home equity so it's money coming out of one pocket and going into the other
Your home equity = your property's value minus your loan balance. So even if that value is currently negative, every dollar you pay towards principal increases it. It's not an expense.
Your expense is that you've hitched yourself to an oversized loan, so you're putting money from one pocket to another, except the latter has a hole in it and you have an obligation to keep feeding it.
If your cost was only mortgage interest, you'd be happier with 600k outstanding at 1% than 300k at 4% for the same house.
> I never understood buying things that I can't afford.
I think even if you choose not to use debt as a mechanism, you should understand why it's used as a mechanism, much like the parent comment has. Debt as a mechanism is not a bad thing - there's ample proof out there that availability of credit is an extremely strong indicator of future economic activity at the macro level.
I think even if you choose not to use debt as a mechanism, you should understand why it's used as a mechanism, much like the parent comment has. Debt as a mechanism is not a bad thing - there's ample proof out there that availability of credit is an extremely strong indicator of future economic activity at the macro level.
I think halal mortgages are instructive on this point. To be clear, I’m not Muslim nor a lending expert, I just think it’s a really interesting setup.
As I understand it, sharia law forbids paying interest, so a conventional mortgage is not an option for adherents. However, several different mechanisms are allowed by which the purchaser gradually gains full ownership of the home. E.g. one is roughly equivalent to a rent-to-own agreement. The financier still gains a profit that reflects the risk their upfront investment is subject to.
What I find interesting is a recognition that some people need a lot of time to attain homeownership, and it may be valuable to let them live in the home before they fully achieve it, despite the outright rejection of lending as the mechanism.
As I understand it, sharia law forbids paying interest, so a conventional mortgage is not an option for adherents. However, several different mechanisms are allowed by which the purchaser gradually gains full ownership of the home. E.g. one is roughly equivalent to a rent-to-own agreement. The financier still gains a profit that reflects the risk their upfront investment is subject to.
What I find interesting is a recognition that some people need a lot of time to attain homeownership, and it may be valuable to let them live in the home before they fully achieve it, despite the outright rejection of lending as the mechanism.
It's more typical to think of 'affording' in terms of your expected lifetime income, and this is generally a good predictor of people's spending habits. Lending generally enables this. Avoiding debt entirely is a very risk-averse strategy. As ridiculous as house prices are, they are still generally affordable for many (and whether renting or buying is a better overall financial decision is dependent on many factors which depend on your location, how long you expect to own the house, and your risk profile for real estate vs any other kind of investment. Factors like rental rights can also factor pretty heavily).
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.
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.
> 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).
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.
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)
(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.
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
> 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.
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.
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.
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.
Banks do this all the time and some often fail.
>As ridiculous as house prices are, they are still generally affordable for many
What? Technically this is true because “many” people already own homes and can use that wealth towards another. However, when talking about the unafordability of homes the target market being discussed should be first-time home buyers (unless you have an investment podcast or something).
In my HCoL bubble the only people I know that can afford their first house are high-income DINKs, or living 30mins outside of the city, or have a high-paying remote job and can relocate to a LCoL area with its own drawbacks.
What? Technically this is true because “many” people already own homes and can use that wealth towards another. However, when talking about the unafordability of homes the target market being discussed should be first-time home buyers (unless you have an investment podcast or something).
In my HCoL bubble the only people I know that can afford their first house are high-income DINKs, or living 30mins outside of the city, or have a high-paying remote job and can relocate to a LCoL area with its own drawbacks.
Yes, you do live in a bubble. 65% of US families own a home.
https://www.statista.com/statistics/184902/homeownership-rat...
Most cities aren’t San Francisco and New York City. Even in both California and New York, there are many areas with affordable homes for single income families.
https://www.statista.com/statistics/184902/homeownership-rat...
Most cities aren’t San Francisco and New York City. Even in both California and New York, there are many areas with affordable homes for single income families.
I did mostly mean it in that weasly-way. My main point is that if you can afford the mortgage, you can afford the house, you don't need to be able to make a cash payment for it to afford it. Housing is for sure becoming very difficult to afford even by that definition in a lot of places (and it's not particularly reasonable that even if you can, that housing should take up such a large fraction of your lifetime earnings).
I agree. I think current economical "norm" of having debt is made for purpose by states and banks. Because when you have debt, you will be more obedient citizen, always voting in favor of system that gives "benefits" of using money that you don't own. With price of loosing our freedom with every new regulations.
> I never understood buying things that I can't afford.
For most things, that's a wise philosophy. Going into debt for something that depreciates like cars or furniture or electronics, is not wise.
Housing is different though for several reasons. One is that you must live somewhere. So (unless being homeless in an option) you have to pay for housing one way or the other. So you either buy (build equity) or rent (a pure expense). Another reason is that a house may (often does) appreciate in value so you're leveraging that debt to make money. Even if it depreciates, it hardly ever depreciates faster than paying rent. Another reason is that rents always go up, a mortgage locks in your cost for the next 30 years.
For most things, that's a wise philosophy. Going into debt for something that depreciates like cars or furniture or electronics, is not wise.
Housing is different though for several reasons. One is that you must live somewhere. So (unless being homeless in an option) you have to pay for housing one way or the other. So you either buy (build equity) or rent (a pure expense). Another reason is that a house may (often does) appreciate in value so you're leveraging that debt to make money. Even if it depreciates, it hardly ever depreciates faster than paying rent. Another reason is that rents always go up, a mortgage locks in your cost for the next 30 years.
You can think of a mortgage like renting a house from your bank.
Or a bit more precisely, for the time the mortgage is running, you and the bank are essentially co-owners, and you rent the share you don't own from the bank (that would be the interests) while at the same time, you buy the bank share bit by bit (that would be the principal). At the end, you become a full owner and stop paying "rent" to the bank.
Or a bit more precisely, for the time the mortgage is running, you and the bank are essentially co-owners, and you rent the share you don't own from the bank (that would be the interests) while at the same time, you buy the bank share bit by bit (that would be the principal). At the end, you become a full owner and stop paying "rent" to the bank.
It's fine to expect some people to buy a house with cash. I don't think that precludes saving for many years to do so (meaning the median income doesn't need to be $1M/yr).
Unfortunately housing prices are rising so fast that saving for years doesn't necessarily get you there, unless median income is close to ~1M by my back-of-envelope calculations, which include:
- taxes (1M is close to 500K after taxes)
- money that you need to cut out and put into retirement to sustain yourself from age 65-100
- living expenses and rent until you buy
- real estate prices rising the whole time
- taxes (1M is close to 500K after taxes)
- money that you need to cut out and put into retirement to sustain yourself from age 65-100
- living expenses and rent until you buy
- real estate prices rising the whole time
Which is why taking on debt to buy property is often a good option - you lock in prices, then they rise. Where I live, house prices double in value every ten years, quite reliably. Recently, it's been faster. In ten years, you're paying rent on a $2m property while someone else is paying down a $500-800k loan (using your example figure).
> Unfortunately housing prices are rising so fast that saving for years doesn't necessarily get you there
> 1M is close to 500K after taxes
In San Francisco if you make $1M as a W-2 employee your marginal tax rate is ~53% and your effective tax rate is ~47%.
If you make $1M on your own the rates are even higher.
(That's not including the 10% sales tax you pay on almost everything you buy with the money you have left, property taxes on property you thought you owned, property taxes landlords financially pass onto you as a renter, etc.)
If you make $1M on your own the rates are even higher.
(That's not including the 10% sales tax you pay on almost everything you buy with the money you have left, property taxes on property you thought you owned, property taxes landlords financially pass onto you as a renter, etc.)
Property taxes are the only thing in California that are pretty mellow given prop 13. Well, unless the property was just turned over.
Don't worry, the home prices in SF are still much cheaper than Sydney or Hongkong.
> living expenses and rent until you buy
Which will of course be stratospheric in a world where median labor costs $500 per hour.
Which will of course be stratospheric in a world where median labor costs $500 per hour.
> sustain yourself from age 65-100
Fortunately my life expectancy has dropped in the past few years!
Fortunately my life expectancy has dropped in the past few years!
I'm in the same spot. I'm in the middle class, I've been renting for years, and I refuse to go into debt by taking out a loan for a house. This is a societal failure.
A mortgage as a tool is available to you. If you refuse to go into debt, is that societal failure? Affordability of housing is a serious issue, but I'm not sure expecting to buy property without debt is necessarily so.
It seems like a self-defeating position to take?
It seems like a self-defeating position to take?
> I refuse to go into debt by taking out a loan for a house
But you are renting.
While renting isn't debt, it can be helpful to think of it as debt you have to pay every month (unless you plan to be homeless).
So you have 12N (where N is the number of years you think you might still live) of rent debt payments that you are committed to pay. If you transform that into mortgage payments, at least you're building equity. And it will only be 1230 payments (given a 30 year mortgage) so it is a bounded number unlike 12*N.
But you are renting.
While renting isn't debt, it can be helpful to think of it as debt you have to pay every month (unless you plan to be homeless).
So you have 12N (where N is the number of years you think you might still live) of rent debt payments that you are committed to pay. If you transform that into mortgage payments, at least you're building equity. And it will only be 1230 payments (given a 30 year mortgage) so it is a bounded number unlike 12*N.
Not really, you can get out of paying rent easily, usually the maximum penalty is one extra month of rent, which won't break most middle class people.
It's not that simple to sell a house, and if real estate prices crash you're still on the hook for the several hundred thousand dollar difference.
It's not that simple to sell a house, and if real estate prices crash you're still on the hook for the several hundred thousand dollar difference.
> Not really, you can get out of paying rent easily
And then, what?
Unless you have a backup plan which allows you to live for free somewhere, you can't get out of paying someone for it. Whether rent or a mortgage.
For housing, it is most useful to plan long term and consider you have a lifetime of housing payments coming up. How can you minimize that lifetime total?
And then, what?
Unless you have a backup plan which allows you to live for free somewhere, you can't get out of paying someone for it. Whether rent or a mortgage.
For housing, it is most useful to plan long term and consider you have a lifetime of housing payments coming up. How can you minimize that lifetime total?
A house is not a zero-risk investment. Any number of reasons from Natural disaster on down could cause it to lose much of it's value or even become uninhabitable. Possibly in a way that insurance wouldn't cover.
Think of people who owned houses in declining industrial cities. The local economy went bad, their house value went down and they faced a barrier to moving since they couldn't sell, move, and get a comparable house in a city with better prospects.
Think of people who owned houses in declining industrial cities. The local economy went bad, their house value went down and they faced a barrier to moving since they couldn't sell, move, and get a comparable house in a city with better prospects.
it's still not a high risk, owning a house (that is, having paid for it, not owing any money to the bank) still leaves you in a better position than a renter, as you can basically let it burn and will still be in an easier position to get a loan for a new house in another place if you really need to
So you are saying somebody with $500k of investments is worse off than somebody whose house just went from $500k to to $200k ?
The author of the article, Morgan Housel, is also the author of the book The Psychology of Money. This thoughts on, e.g., paying down his mortgage:
> It just increased our independence, even if it made no sense on paper. So that's another element of debt that I think goes misunderstood. And a lot of that for both of those points is this idea that people don't make financial decisions on a spreadsheet. They don't make them in Excel. They make financial decisions at the dinner table. That's where they're talking about their goals and their own different personalities and their own unique fears and their own unique skills and whatnot. So that's why I kind of push people to say like, it's okay to make financial decisions that don't make any sense on paper if they work for you, if they check the boxes of your psychology and your goals that makes sense for you. And for me, extreme aversion, what looks like an irrational aversion today, and I would say is an irrational aversion to debt, is what works for me and what makes me happy, so that's why I've done it.
* https://rationalreminder.ca/podcast/128
* https://www.youtube.com/watch?v=NSaRb-iFwPA
> It just increased our independence, even if it made no sense on paper. So that's another element of debt that I think goes misunderstood. And a lot of that for both of those points is this idea that people don't make financial decisions on a spreadsheet. They don't make them in Excel. They make financial decisions at the dinner table. That's where they're talking about their goals and their own different personalities and their own unique fears and their own unique skills and whatnot. So that's why I kind of push people to say like, it's okay to make financial decisions that don't make any sense on paper if they work for you, if they check the boxes of your psychology and your goals that makes sense for you. And for me, extreme aversion, what looks like an irrational aversion today, and I would say is an irrational aversion to debt, is what works for me and what makes me happy, so that's why I've done it.
* https://rationalreminder.ca/podcast/128
* https://www.youtube.com/watch?v=NSaRb-iFwPA
> > it's okay to make financial decisions that don't make any sense on paper if they work for you
I consider that to be (mostly) pernicious nonsense, like ‘it’s okay to walk off of a cliff, if that works for you.’ To a very great degree, finances are a mathematical/legal reality: the path of wisdom is to adjust one’s emotions to that reality rather than to imagine that reality matches one’s emotions.
There is some degree of truth to it, of course: at the end of the day, life is not about maximising one’s finances, and one’s emotions definitely have a role to play in one’s happiness. But the sooner one learns to defer immediate gratification, save for the future and build up a nest egg, the happier one is likely to be.
I consider that to be (mostly) pernicious nonsense, like ‘it’s okay to walk off of a cliff, if that works for you.’ To a very great degree, finances are a mathematical/legal reality: the path of wisdom is to adjust one’s emotions to that reality rather than to imagine that reality matches one’s emotions.
There is some degree of truth to it, of course: at the end of the day, life is not about maximising one’s finances, and one’s emotions definitely have a role to play in one’s happiness. But the sooner one learns to defer immediate gratification, save for the future and build up a nest egg, the happier one is likely to be.
I know someone who recently retired, sold his expensive home, and bought a new home in a cheaper area outright with cash.
He had a fixed income that would easily cover his living expenses. He had an investment portfolio that he is planning to pass on to his family.
By investing his cash and getting a mortgage on his home- he certainly would have made enough money to cover his mortgage on interest. But, he'd be at risk of going cash flow negative, and having to liquidate some of his investments to cover his mortgage + lifestyle.
He knew that having to liquidate investments would bother him- it'd be a lot harder to justify that vacation if he'd have to sell some stocks. Those stocks are for his family in his mind.
By buying that home outright, he now knows that he's going to be cash flow positive for as long as he's alive. He'll never have to dip into his stocks. And he'll never have to stretch a dollar.
It's not a strategy that you'd come up with on a spreadsheet, but he's one of the happiest guys I know
He had a fixed income that would easily cover his living expenses. He had an investment portfolio that he is planning to pass on to his family.
By investing his cash and getting a mortgage on his home- he certainly would have made enough money to cover his mortgage on interest. But, he'd be at risk of going cash flow negative, and having to liquidate some of his investments to cover his mortgage + lifestyle.
He knew that having to liquidate investments would bother him- it'd be a lot harder to justify that vacation if he'd have to sell some stocks. Those stocks are for his family in his mind.
By buying that home outright, he now knows that he's going to be cash flow positive for as long as he's alive. He'll never have to dip into his stocks. And he'll never have to stretch a dollar.
It's not a strategy that you'd come up with on a spreadsheet, but he's one of the happiest guys I know
The math equations play out differently based on the physiology.
When I got my home I went crazy trying to pay it off as fast as possible. I did it in 30 months and it was the best feeling in the world. I deferred my immediate happiness on many things for almost 3 years to hit that goal and it was euphoric. Since doing that, I’ve been able to increase my savings rate dramatically. I save much more now than I would be saving if I still had a mortgage and made minimum payments. My net worth jumped up considerably during that period, since I had a clearly defined goal just around the corner it was easy to give up more for it. Now it’s easy to give more to investments because I don’t really want for anything and my expenses are low. When nothing is competing for your dollars it is easy to start stacking them up. I was also maxing out my 401k while paying off the home, so it’s not like I wasn’t investing or completely out of the market.
Most people paying the minimum on their “good debt” aren’t aggressively investing what they otherwise would have applied. They’re spending the money and have nothing to show for it at the end of the day. The potential investment is the justification to not pay the debt, but it’s not the reality of what they’re doing.
I find a lot of peace knowing that if something happens to my job, I can probably get a job just about anywhere and still make ends meet. My emergency fund also went from 6 months of expenses to 12 months without adding another dime, but by eliminating my biggest expense.
Another thing I thought about a lot was the 2008 crash. If I were to not pay down my house, and invest instead, I could still end up in a situation where I lost my job and with the markets down, couldn’t afford to stay in or get out of my house if needed. Paying it off eliminates that risk. Property taxes for the whole year are about equal to 2 months of rent in most places around me.
I love businesses that are 100s of years old. They may not be the biggest, but they don’t need to be huge to weather the storms of life, they just need deep roots. That’s what I want for my life. Stability. Investments can buy some flexibility when times are good, but a paid off home will give me a place to rest easy when times are bad.
When I got my home I went crazy trying to pay it off as fast as possible. I did it in 30 months and it was the best feeling in the world. I deferred my immediate happiness on many things for almost 3 years to hit that goal and it was euphoric. Since doing that, I’ve been able to increase my savings rate dramatically. I save much more now than I would be saving if I still had a mortgage and made minimum payments. My net worth jumped up considerably during that period, since I had a clearly defined goal just around the corner it was easy to give up more for it. Now it’s easy to give more to investments because I don’t really want for anything and my expenses are low. When nothing is competing for your dollars it is easy to start stacking them up. I was also maxing out my 401k while paying off the home, so it’s not like I wasn’t investing or completely out of the market.
Most people paying the minimum on their “good debt” aren’t aggressively investing what they otherwise would have applied. They’re spending the money and have nothing to show for it at the end of the day. The potential investment is the justification to not pay the debt, but it’s not the reality of what they’re doing.
I find a lot of peace knowing that if something happens to my job, I can probably get a job just about anywhere and still make ends meet. My emergency fund also went from 6 months of expenses to 12 months without adding another dime, but by eliminating my biggest expense.
Another thing I thought about a lot was the 2008 crash. If I were to not pay down my house, and invest instead, I could still end up in a situation where I lost my job and with the markets down, couldn’t afford to stay in or get out of my house if needed. Paying it off eliminates that risk. Property taxes for the whole year are about equal to 2 months of rent in most places around me.
I love businesses that are 100s of years old. They may not be the biggest, but they don’t need to be huge to weather the storms of life, they just need deep roots. That’s what I want for my life. Stability. Investments can buy some flexibility when times are good, but a paid off home will give me a place to rest easy when times are bad.
A financial strategy is worthless if you don't follow it. If the most optimal strategy isn't going to work for your situation for one reason or another, there is no point in trying to force it. Picking a sub-optimal approach that is sustainable makes more sense.
Walking off a cliff doesn't work for anyone, that's why you're missing the point. The "some" degree of truth to it is the entire point. Nobody is suggesting to "do whatever feels right or good when it comes to financial decisions."
Rational Reminder is one of the _best_ podcasts I listen to right now. Love the polite Canadian vibe
I watched some of the videos on their YouTube playlist about blockchain and crypto, and while there was some good information, there was not a lot of interaction. The hosts just seemed to read from a list of questions, and they did not seem to have any follow-up questions.
> I watched some of the videos on their YouTube playlist about blockchain and crypto […]
That was a special series on the topic.
Quite often they do have a list of prepared questions, and send them to guests ahead of time so they are somewhat prepared: depending on the answers they may delve more deeply into some answers.
The hosts (Ben and Cameron) also do prep ahead of time: they read the books—and more often research papers—of the guests, and so already know to a certain extent what they're going to say before they ask. The guests' answers are more for the viewers/listeners, and give the guest an opportunity to perhaps comment more 'free-style' than what can be written down.
That was a special series on the topic.
Quite often they do have a list of prepared questions, and send them to guests ahead of time so they are somewhat prepared: depending on the answers they may delve more deeply into some answers.
The hosts (Ben and Cameron) also do prep ahead of time: they read the books—and more often research papers—of the guests, and so already know to a certain extent what they're going to say before they ask. The guests' answers are more for the viewers/listeners, and give the guest an opportunity to perhaps comment more 'free-style' than what can be written down.
Today, I started picking up what I started some time back -- the book “Debt: The First 5,000 Years” by David Graeber goes deep into the details of Debt. I've heard good reviews and I hope this is a good book as they say.
https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years
https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years
Graeber's book is about how debts work in different societies and cultures and what they mean. i finished the book being more confused about debt and money than when i started. that said, it was an interesting read, i don't regret reading it.
in contrast, this brief blog post by Morgan Housel gives a small visual metophor and a rule of thumb about how too much debt might be fatal when operating a business. arguably it teaches you something actionable, but doesn't tell you anything about your society.
Graeber's book is not at all concerned with giving you actionable advice on how to best use (or avoid) debt to run a business within your society.
that said, Graeber's book may give you some actionable advice on how to get along better with your neighbours, family and community. the tip would be: try to have everyone in the village owe each other debts. the idea is everyone should feel they have some obligation to others that they can never fully repay, but maybe they can return some other incomparable favour or assistance in future. this encourages cooperation.
trying to fully repay or balance these debts would be frowned upon -- such behaviour is what one might do if one were seeking to not participate in society any more. not pro-social.
in contrast, this brief blog post by Morgan Housel gives a small visual metophor and a rule of thumb about how too much debt might be fatal when operating a business. arguably it teaches you something actionable, but doesn't tell you anything about your society.
Graeber's book is not at all concerned with giving you actionable advice on how to best use (or avoid) debt to run a business within your society.
that said, Graeber's book may give you some actionable advice on how to get along better with your neighbours, family and community. the tip would be: try to have everyone in the village owe each other debts. the idea is everyone should feel they have some obligation to others that they can never fully repay, but maybe they can return some other incomparable favour or assistance in future. this encourages cooperation.
trying to fully repay or balance these debts would be frowned upon -- such behaviour is what one might do if one were seeking to not participate in society any more. not pro-social.
I feel like Graeber's book is another (left leaning) fad to glom on to, like Piketty's book some years back.
I found this book, The Price of Time by Edward Chancellor [1], very useful for understanding the development of money and debt over history. It's so detailed and clearly extensively researched.
[1]: https://www.harvard.com/book/the_price_of_time/
I found this book, The Price of Time by Edward Chancellor [1], very useful for understanding the development of money and debt over history. It's so detailed and clearly extensively researched.
[1]: https://www.harvard.com/book/the_price_of_time/
Piketty's book (Capital in the Twenty-First Century) is most definitely not a fad. It is a result of serious research into historical economic data and anyone intellectually honest ought take it seriously. As anything in the social science of economics, it is subject to debate, but to call it a 'fad' is odd, to put it mildly.
I think it's popularity among layfolk, like myself, was a fad. I'd be incredibly surprised if it's flying off the shelves now like it was right after release.
But popularity doesn't validate or invalidate its content.
But popularity doesn't validate or invalidate its content.
serious? sure, yet wrong
they made a few mistakes, and after correctiona their findings are not reproducible
https://www.vox.com/future-perfect/2024/1/11/23984135/inequa...
https://marginalrevolution.com/marginalrevolution/2023/12/th...
they made a few mistakes, and after correctiona their findings are not reproducible
https://www.vox.com/future-perfect/2024/1/11/23984135/inequa...
https://marginalrevolution.com/marginalrevolution/2023/12/th...
It's strange that you would trust a fund manager like Edward Chancellor over a trained anthropologist like Graeber on historical research. The price of time looks a at a small sliver of debt through the eye of interest rates and their impacts.
Chancellor's axe to grind is clear, that manipulation of interest rates by central governments has led to economic instability. Yet historically emperors, kings, and other rulers would periodically wipe the slate clear because debt enslaved too many people causing instability.
Read Graeber's book. It's better researched.
Chancellor's axe to grind is clear, that manipulation of interest rates by central governments has led to economic instability. Yet historically emperors, kings, and other rulers would periodically wipe the slate clear because debt enslaved too many people causing instability.
Read Graeber's book. It's better researched.
> Chancellor's axe to grind is clear, that manipulation of interest rates by central governments has led to economic instability
Have you read the book? Cause this is such a simplistic reduction of the book, I can't help to think that YOU have an axe to grind.
Have you read the book? Cause this is such a simplistic reduction of the book, I can't help to think that YOU have an axe to grind.
Thanks for the rec. I’ve wanted to read “Debt” for a long time but I recently read Graeber’s book “the Dawn of Everything” and it bent the truth so much every which way to get to his POV that I won’t read another book by him.
Cherry picking and misrepresenting evidence to argue for his fringe political beliefs was Graeber's whole shtick. You're better off not reading Debt.
You are kidding right? Dawn of everything was a synthesis work. The amount of research it references is insane (a quarter of the book is references) How exactly would you write, an already long book, that doesn't look like cherry picking by those that disagree with the content?
> I recently read Graeber’s book “the Dawn of Everything” and it bent the truth so much every which way to get to his POV that I won’t read another book by him.
Do you mind elaborating on why this is the case? I've read and liked some of his other work (Bullshit Jobs is a great one) and I have Dawn of Everything on my reading list -- was it due to his politics in general or because of disingenuous interpretations of the evidence?
Do you mind elaborating on why this is the case? I've read and liked some of his other work (Bullshit Jobs is a great one) and I have Dawn of Everything on my reading list -- was it due to his politics in general or because of disingenuous interpretations of the evidence?
Disingenuous interpretations of the evidence and stating things as facts that are very much still debated or denied by other experts.
A good example: Graeber posits that the European Enlightenment came directly from contact with Native American ideals rather than being a home grown movement. To support this, Graeber repeatedly references a book written by a French Army officer named Lahontan about his travels in North America in the late 1600s[0]. In this book Lahontan has dialogue with a fictional Native American named Adario that is more or less a disguised critique of European society. Adario bears similarities to Iroquois Chief Kondiaronk[1]. It's thought that Adario was a literary device for Lahontan's ideas but Graeber makes a very hand wavy argument that Adario was actually Kondiaronk and the dialogue was real. Graeber then uses this as his main piece of evidence to support his theory about the origins of the European Enlightenment.
I couldn't finish the book because I kept looking up the evidence Graeber was presenting and it usually ended up like the Kondiaronk situation.
Graeber is also very condescending when he's writing about ideas held by other anthropologists (like Jared Diamond), it was off-putting and came off as unprofessional for someone who was supposed to be a leading academic.
[0] https://en.wikipedia.org/wiki/New_Voyages_to_North_America [1] https://en.wikipedia.org/wiki/Kondiaronk
A good example: Graeber posits that the European Enlightenment came directly from contact with Native American ideals rather than being a home grown movement. To support this, Graeber repeatedly references a book written by a French Army officer named Lahontan about his travels in North America in the late 1600s[0]. In this book Lahontan has dialogue with a fictional Native American named Adario that is more or less a disguised critique of European society. Adario bears similarities to Iroquois Chief Kondiaronk[1]. It's thought that Adario was a literary device for Lahontan's ideas but Graeber makes a very hand wavy argument that Adario was actually Kondiaronk and the dialogue was real. Graeber then uses this as his main piece of evidence to support his theory about the origins of the European Enlightenment.
I couldn't finish the book because I kept looking up the evidence Graeber was presenting and it usually ended up like the Kondiaronk situation.
Graeber is also very condescending when he's writing about ideas held by other anthropologists (like Jared Diamond), it was off-putting and came off as unprofessional for someone who was supposed to be a leading academic.
[0] https://en.wikipedia.org/wiki/New_Voyages_to_North_America [1] https://en.wikipedia.org/wiki/Kondiaronk
I honestly don't know your background. Do you have an education and training in anthropology and/or archeology? Maybe you do.
When I read the criticisms in the press and blogs about the work, I found it telling that most of the criticism about Graeber and Wengrow's book is from non-experts. While experts seem to find it a breathe of fresh air.
I personally don't have enough training and education in anthropology and archeology to properly interpret the evidence. I suspect most readers here do not. That's why it's such an important work, because it synthesizes the latest research. Turns out a lot of it is counter to a lot of contemporary works that don't rely on such depth.
When I read the criticisms in the press and blogs about the work, I found it telling that most of the criticism about Graeber and Wengrow's book is from non-experts. While experts seem to find it a breathe of fresh air.
I personally don't have enough training and education in anthropology and archeology to properly interpret the evidence. I suspect most readers here do not. That's why it's such an important work, because it synthesizes the latest research. Turns out a lot of it is counter to a lot of contemporary works that don't rely on such depth.
Another poster here referenced the Wikipedia page for the book which has some good content under the “Reception” section. Not all anthropologists thought it was a breath of fresh air. And again, I looked up a lot of the evidence and it wasn’t as cut and dry as he made it out to be. He was trying to build a narrative to sell a book.
Just because I’m not an anthropologist doesn’t mean I have to take Graeber’s word for everything.
Just because I’m not an anthropologist doesn’t mean I have to take Graeber’s word for everything.
Did you read the same reception section as me? It seems to be very well regarded and even when there were some criticism, they were minor. For example,
> Anthropologist Durba Chattaraj said "elisions, slippages, and too-exaggerated leaps" when referring to archaeology from India, but stated that its authors are "extremely rigorous and meticulous scholars",
So yes, there are criticism of the book by experts in the field, but they seem minor compared to the whole picture and impact the book is having.
There is a reason this book is so positively received because Graeber and Wengrow are real scholars.
> Anthropologist Durba Chattaraj said "elisions, slippages, and too-exaggerated leaps" when referring to archaeology from India, but stated that its authors are "extremely rigorous and meticulous scholars",
So yes, there are criticism of the book by experts in the field, but they seem minor compared to the whole picture and impact the book is having.
There is a reason this book is so positively received because Graeber and Wengrow are real scholars.
There are many other criticisms in the Reception section such as the below excerpt which is a good summary of how I felt about what I read of the book.
> The historian David A. Bell, responding solely to Graeber and Wengrow's arguments about the Indigenous origins of Enlightenment thought and Jean-Jacques Rousseau, accused the authors of coming "perilously close to scholarly malpractice."
They are real scholars but also trying to use their reputation to sling a narrative to sell a book for the masses. I don’t care that some of their Ivy League/anthropology buddies said it was a breath of fresh air, what I read and researched myself said it was a good amount of hot air.
> The historian David A. Bell, responding solely to Graeber and Wengrow's arguments about the Indigenous origins of Enlightenment thought and Jean-Jacques Rousseau, accused the authors of coming "perilously close to scholarly malpractice."
They are real scholars but also trying to use their reputation to sling a narrative to sell a book for the masses. I don’t care that some of their Ivy League/anthropology buddies said it was a breath of fresh air, what I read and researched myself said it was a good amount of hot air.
Have you read any of his other stuff? His essay on Bullshit Jobs (https://strikemag.org/bullshit-jobs/) is a good example that isn't book-length (though he did write a book of the same name that came out later)
Here I definitely take his condescending / snarky tone with a grain of salt, but as a reader I understand it as largely a literary technique to build a narrative and suggest / propose an alternative, usually somewhat contrarian, viewpoint.
I can't at all disagree with you here re: Dawn of Everything, as I haven't read the book, but is it at all possible that -- given we're analyzing the reported history of indigenous societies and the book talks about a proposed alternative viewpoint -- some level of "matter of fact"-ness works in a similar way as a literary technique? In this context it seems impossible to truly make a definitive claim one way or the other, as we're talking about histories for groups of people (who were largely extinguished by invading colonialist armies; Guns Germs and Steel and all that...) that are no longer around in serious enough numbers to have an oral history, let alone a quasi-accurate one.
https://en.wikipedia.org/wiki/The_Dawn_of_Everything#Recepti... seems largely like reception was a mixed bag, and that while there are parts that are a bit of a stretch, most anthropologists and reviewers found it a refreshing read contrary to the "canonical" (imperialist) narrative(s) commonly taught in history class. Is it as "mixed" from your read as that Wikipedia summary says, or do you find the discrepancies/inaccuracies significantly more egregious than the way I'm characterizing them?
Here I definitely take his condescending / snarky tone with a grain of salt, but as a reader I understand it as largely a literary technique to build a narrative and suggest / propose an alternative, usually somewhat contrarian, viewpoint.
I can't at all disagree with you here re: Dawn of Everything, as I haven't read the book, but is it at all possible that -- given we're analyzing the reported history of indigenous societies and the book talks about a proposed alternative viewpoint -- some level of "matter of fact"-ness works in a similar way as a literary technique? In this context it seems impossible to truly make a definitive claim one way or the other, as we're talking about histories for groups of people (who were largely extinguished by invading colonialist armies; Guns Germs and Steel and all that...) that are no longer around in serious enough numbers to have an oral history, let alone a quasi-accurate one.
https://en.wikipedia.org/wiki/The_Dawn_of_Everything#Recepti... seems largely like reception was a mixed bag, and that while there are parts that are a bit of a stretch, most anthropologists and reviewers found it a refreshing read contrary to the "canonical" (imperialist) narrative(s) commonly taught in history class. Is it as "mixed" from your read as that Wikipedia summary says, or do you find the discrepancies/inaccuracies significantly more egregious than the way I'm characterizing them?
In a general equilibrium economy with no innovation or all innovation potential being exhausted, money demand and interest disappear. "Interest" isn't the price of time, it is the price of liquidity.
For some reason economists seem to gloss over that money doesn't abstract over just time. It abstracts over everything including location, trade partner, the specific commodity being traded and minimum quantities.
Since people involuntarily produce liquidity by bringing their goods to the market, people owning the rights to that liquidity (aka capitalists) can "reap where they haven't sown".
This leads to a paradoxical situation. Liquidity production is work like any other. In short, liquidity production demands to be compensated. Since the holders of liquidity can utilize the benefits of the liquidity services without paying they can either decide to use the liquidity benefits themselves or they can decide to monetize them by selling liquidity on the capital markets. The compensation for this liquidity service is known as risk free interest.
As I mentioned, liquidity demands to be compensated, but since the producer of liquidity does not get paid, they will eventually wisen up and cease producing liquidity in the national transaction network. This leads to production capacity in the economy being dismantled since it represents a commitment in time-commodity-quantity-person-space. Instead, future producers of liquidity await the holders of liquidity to effectively signal their demand so that they know to what production process they should commit to.
Since information acquisition is costly, it is perceived to be cheaper to avoid committing oneself or in more direct terms: interest measures the reluctance to lose control over ones capital.
For some reason economists seem to gloss over that money doesn't abstract over just time. It abstracts over everything including location, trade partner, the specific commodity being traded and minimum quantities.
Since people involuntarily produce liquidity by bringing their goods to the market, people owning the rights to that liquidity (aka capitalists) can "reap where they haven't sown".
This leads to a paradoxical situation. Liquidity production is work like any other. In short, liquidity production demands to be compensated. Since the holders of liquidity can utilize the benefits of the liquidity services without paying they can either decide to use the liquidity benefits themselves or they can decide to monetize them by selling liquidity on the capital markets. The compensation for this liquidity service is known as risk free interest.
As I mentioned, liquidity demands to be compensated, but since the producer of liquidity does not get paid, they will eventually wisen up and cease producing liquidity in the national transaction network. This leads to production capacity in the economy being dismantled since it represents a commitment in time-commodity-quantity-person-space. Instead, future producers of liquidity await the holders of liquidity to effectively signal their demand so that they know to what production process they should commit to.
Since information acquisition is costly, it is perceived to be cheaper to avoid committing oneself or in more direct terms: interest measures the reluctance to lose control over ones capital.
This is a life changing book. It demystifies the biggest part of our lives, which is money (and debt) and helps you contextualize your world by looking into the past. It's the best researched book on the subject.
> the book “Debt: The First 5,000 Years” by David Graeber
Also would recommend Money: The True Story of a Made-Up Thing:
> Money only works because we all agree to believe in it. In Money, Jacob Goldstein shows how money is a useful fiction that has shaped societies for thousands of years, from the rise of coins in ancient Greece to the first stock market in Amsterdam to the emergence of shadow banking in the 21st century.
> At the heart of the story are the fringe thinkers and world leaders who reimagined money. Kublai Khan, the Mongol emperor, created paper money backed by nothing, centuries before it appeared in the west. John Law, a professional gambler and convicted murderer, brought modern money to France (and destroyed the country's economy). The cypherpunks, a group of radical libertarian computer programmers, paved the way for bitcoin.
* https://www.goodreads.com/en/book/show/50358103
And The power of gold : the history of an obsession (and Bernstein's other books):
> Incorporating myth, history and contemporary investigation, Bernstein tells the story of how human beings have become intoxicated, obsessed, enriched, impoverished, humbled and proud for the sake of gold. From the past to the future, Bernstein's portrayal of gold is intimately linked to the character of humankind.
* https://www.goodreads.com/en/book/show/249245
Also would recommend Money: The True Story of a Made-Up Thing:
> Money only works because we all agree to believe in it. In Money, Jacob Goldstein shows how money is a useful fiction that has shaped societies for thousands of years, from the rise of coins in ancient Greece to the first stock market in Amsterdam to the emergence of shadow banking in the 21st century.
> At the heart of the story are the fringe thinkers and world leaders who reimagined money. Kublai Khan, the Mongol emperor, created paper money backed by nothing, centuries before it appeared in the west. John Law, a professional gambler and convicted murderer, brought modern money to France (and destroyed the country's economy). The cypherpunks, a group of radical libertarian computer programmers, paved the way for bitcoin.
* https://www.goodreads.com/en/book/show/50358103
And The power of gold : the history of an obsession (and Bernstein's other books):
> Incorporating myth, history and contemporary investigation, Bernstein tells the story of how human beings have become intoxicated, obsessed, enriched, impoverished, humbled and proud for the sake of gold. From the past to the future, Bernstein's portrayal of gold is intimately linked to the character of humankind.
* https://www.goodreads.com/en/book/show/249245
> Money only works because we all agree to believe in it.
Respectfully, this is the type of true-that-sounds-deep statements that are absolutely shallow and pointless. Yes money the "paper" is not worth anything, but the same could be said of anything in an organized society. Ownership means nothing, it's just a title backed by the government which has a monopoly on violence. Ethics means nothing, it's just something we culturally decided was desirable because if you feel a-ok with murder any trip anywhere would turn into a blood bath.
At this point it should be a named fallacy (maybe it is), if we are discussing the merits of debt as a tool, saying "money isn't worth anything" as if it means something is not some ground breaking statement.
Respectfully, this is the type of true-that-sounds-deep statements that are absolutely shallow and pointless. Yes money the "paper" is not worth anything, but the same could be said of anything in an organized society. Ownership means nothing, it's just a title backed by the government which has a monopoly on violence. Ethics means nothing, it's just something we culturally decided was desirable because if you feel a-ok with murder any trip anywhere would turn into a blood bath.
At this point it should be a named fallacy (maybe it is), if we are discussing the merits of debt as a tool, saying "money isn't worth anything" as if it means something is not some ground breaking statement.
> Respectfully, this is the type of true-that-sounds-deep statements that are absolutely shallow and pointless.
And yet people still insist on the idea that money (or, quite commonly, gold) does have some kind of intrinsic value. The statement may be trope-y, but it's a psychological hurdle that many folks can't seem to get their head around.
And yet people still insist on the idea that money (or, quite commonly, gold) does have some kind of intrinsic value. The statement may be trope-y, but it's a psychological hurdle that many folks can't seem to get their head around.
RIP Graeber.
It is
Interesting they chose to use this example of Japanese companies not having debt, when the country of Japan has the highest debt to GDP of any developed nation[1] which has contributed to its economic stagnation since the 1990s
[1] https://en.wikipedia.org/wiki/National_debt_of_Japan
[1] https://en.wikipedia.org/wiki/National_debt_of_Japan
It is interesting because the top 5 oldest companies are Japanese https://en.wikipedia.org/wiki/List_of_oldest_companies. Their points are still valid even though the country has a different story.
Interesting. Just another reason I'm convinced some of these recent non-fiction is just commentary (almost) making-up/inflating a problem and then providing a "magic" solution. The content isn't nearly as timeless nor broadly true.
yeah, it's content marketing which is all the rage these days. The purpose of pieces like this is to advertise (the VC fund) not to provide deep insight
This is an overly simplistic model which happens to have applied very well to Japan but would break down if applied in other economies where inflationary risk is present.
I'm pretty sure there's a joke about there being three types of economies: developed, undeveloped, and Japan.
Cash is useless if the value of the cash goes down by 10,000% and you don't have an inflation adjusted revenue stream. You have to do something with the cash to get enough interest to keep up with inflation.
I'm pretty sure there's a joke about there being three types of economies: developed, undeveloped, and Japan.
Cash is useless if the value of the cash goes down by 10,000% and you don't have an inflation adjusted revenue stream. You have to do something with the cash to get enough interest to keep up with inflation.
I don't read OP article as "keep all your worth in cash".
Asset allocation is of course extremely important, but the main point made in the article is not having debt
Asset allocation is of course extremely important, but the main point made in the article is not having debt
There are more assets than cash. cash is the most accesible, but others exist and are useful to have.
I took the article as these businesses keep a healthy amount of assets and don’t feel an obsessive need to buy things for the business they can’t afford, or scale at all costs.
If everything they have is paid for, and people are still buying stuff from their business, their prices can adjust with inflation. Some of their cash might get devalued in a period of hyper inflation, but if they still have enough to get by, as well as new sales, they should be ok. They hopefully also diversified their assets in some things that will handle an inflationary period and don’t just have mattresses full of money.
If everything they have is paid for, and people are still buying stuff from their business, their prices can adjust with inflation. Some of their cash might get devalued in a period of hyper inflation, but if they still have enough to get by, as well as new sales, they should be ok. They hopefully also diversified their assets in some things that will handle an inflationary period and don’t just have mattresses full of money.
What about deflationary currencies?
I don't think there have been any currencies that have been deflationary for 100+ years so it's impossible to say. Obviously currency risk is what you have to watch out for though if you're not able to consistently both spend and collect from this single currency over the lifetime of your business.
Bitcoin is a deflationary currency.
It’s a security/commodity, not a currency.
It's a currency and used as a direct form of acceptable payment. Not as much as it's creator envisioned, but it is. It's not a security. It certainly shares attributes with a commodity although I think a characteristic of a commodity is that it is tangible.
Is gold a security or a currency?
That's nonsense. Bitcoin is absolutely a currency.
But it also has been extremely volatile over the lifetime. And quite volatile at all points.
Not sure what point you are making? It's still deflationary. Yes, it's volatile. Could be worse, could be better. No idea what it will do in the future as the race to zero continues with major currencies.
My bet is most of these long lived businesses also maintain a large pile of gold, which is a fantastic multi generational store of value.
But yeah, cash is really just a call on the local monopoly on violence, which changes all the time over the long arc of history. Terrible long term store of value.
But yeah, cash is really just a call on the local monopoly on violence, which changes all the time over the long arc of history. Terrible long term store of value.
I have always hated the recommendation that people should avoid paying off debt and instead leverage that money in interest paying investments.
Sure, on paper you seem better off when you keep a mortgage at 5% and have investments paying 9%, but you're locked in place. That 4% in potential gains means you aren't nearly as flexible when it comes to a job and income, selling your house may be untenable or impossible if markets fall meaningfully, and ultimately you are living in a house that the bank owns while someone took your money and replaced it with IOUs.
Sure, on paper you seem better off when you keep a mortgage at 5% and have investments paying 9%, but you're locked in place. That 4% in potential gains means you aren't nearly as flexible when it comes to a job and income, selling your house may be untenable or impossible if markets fall meaningfully, and ultimately you are living in a house that the bank owns while someone took your money and replaced it with IOUs.
You can always liquidate the investment, pay the house off, sell it, buy elsewhere.
If you’ve invested in volatile titles that can be a problem. But if it’s a bond, it’s quite stable and doable.
If you’ve invested in volatile titles that can be a problem. But if it’s a bond, it’s quite stable and doable.
How often do you have access to bonds that pay higher than a mortgage though? Bonds are much less risky than mortgages, I'd only expect them to pay higher in rare instances when rates changed dramatically and you happened to be in the market at the right time.
I don’t have personal experience with this, I was referring to GP who said that’s what they did.
Situations where a bond pays more than your own debt is either anomalous or carries a risk. The risk is where premium comes from.
One can see cash as universal insurance. For example, if you have more than a car worth of cash in an easily accessible account, your car is effectively insured. If you break it, you can just buy another one. A car is a lot of money but insurance premiums are also a lot of money over time.
And unlike a car insurance that only covers your car and only in specific cases (ex: crashes are covered but not mechanical failures), cash covers for everything up to the value you have available. It doesn't mean you shouldn't get "proper" insurance, there are extreme events you would need way to much cash to cover (ex: civil liability, health,...), just that cash can be counted as insurance.
And unlike a car insurance that only covers your car and only in specific cases (ex: crashes are covered but not mechanical failures), cash covers for everything up to the value you have available. It doesn't mean you shouldn't get "proper" insurance, there are extreme events you would need way to much cash to cover (ex: civil liability, health,...), just that cash can be counted as insurance.
Doesn't car insurance also cover the cost of you hitting another car. Sure I can save enough to replace my 20 year car, but not for a Bugatti (~$3M).
Yes, but I assumed you already have this, as it is mandatory in most places.
I was talking about the more expensive insurance policies that cover "all risks", including theft, vandalism, or damage to the car due to weather or accidents where the owner is at fault.
I was talking about the more expensive insurance policies that cover "all risks", including theft, vandalism, or damage to the car due to weather or accidents where the owner is at fault.
“Debt is slavery” is how I’ve always thought about debt, and what I’ve taught my kids.
For low-income people, debt is slavery.
For high-income people, debt is a powerful tool.
The vast majority of people fall into group #1 and need to treat debts like credit cards and car payments with extreme caution.
For high-income people, debt is a powerful tool.
The vast majority of people fall into group #1 and need to treat debts like credit cards and car payments with extreme caution.
I see this a lot and I think it hurts more than it helps. People read this as, “if I want to be rich, I need to take out debt.” And they almost always take on debt for the wrong reasons.
Agreed and you can use debt very safely if your net position is in credit. For one example I'm always amazed at how many people don't take advantage of the interest free period of credit cards. As long as you have enough savings put aside to cover the CC balance in full each month you're significantly better off doing all your spending on a credit card instead of a debit card.
> extreme caution.
See youtube channel 'CalebHammer' [0] (he does financial audits for those that are in financial trouble) of mistakes the regular people make. It can be quite painful to watch.
[0] https://www.youtube.com/@CalebHammer
See youtube channel 'CalebHammer' [0] (he does financial audits for those that are in financial trouble) of mistakes the regular people make. It can be quite painful to watch.
[0] https://www.youtube.com/@CalebHammer
> For high-income people, debt is a powerful tool.
How?
How?
Not the original poster, but debt can allow you to shift transactions to periods that are most advantageous to you.
Here's an example. Let's say that you as a high wealth individual have some stock. The stock has a value of $10M but you can only realize that value through the sale of the stock.
If you sell the stock right now you have to sell it for the price the market will buy it at and you have to pay taxes on the profit, either income taxes if you've not had the stock for long or capital gains taxes if you've held it for the requisite period.
It is in your interest to optimize your sale so that you pay the least amount in taxes and get the best price per share. You'd love to be able to hold your stock until you can do that, but you need money now. In comes debt.
Someone will probably happily issue you some debt that you can use today as money. You can collateralize that debt with your $10M in paper value and get a nice interest rate.
So you take out $1M in debt and enjoy life and at the end you have to pay back, to keep the math easy, $1.1M. This debt cost you $100k but if by taking on that debt you can sell when the stock price is higher or convert income tax (37%) into capital gains (20%) then the $100k could easily buy you much more than $100k.
In our example if the stock price were the same but all you did was hold the asset long enough to convert it from short term to long term then instead of paying $10M * 37% = $3.7M in taxes, you'd pay $10M * 20% = $2M in taxes. That's a savings of $1.7M on your tax bill.
This is how people with assets can use debt as a tool.
Here's an example. Let's say that you as a high wealth individual have some stock. The stock has a value of $10M but you can only realize that value through the sale of the stock.
If you sell the stock right now you have to sell it for the price the market will buy it at and you have to pay taxes on the profit, either income taxes if you've not had the stock for long or capital gains taxes if you've held it for the requisite period.
It is in your interest to optimize your sale so that you pay the least amount in taxes and get the best price per share. You'd love to be able to hold your stock until you can do that, but you need money now. In comes debt.
Someone will probably happily issue you some debt that you can use today as money. You can collateralize that debt with your $10M in paper value and get a nice interest rate.
So you take out $1M in debt and enjoy life and at the end you have to pay back, to keep the math easy, $1.1M. This debt cost you $100k but if by taking on that debt you can sell when the stock price is higher or convert income tax (37%) into capital gains (20%) then the $100k could easily buy you much more than $100k.
In our example if the stock price were the same but all you did was hold the asset long enough to convert it from short term to long term then instead of paying $10M * 37% = $3.7M in taxes, you'd pay $10M * 20% = $2M in taxes. That's a savings of $1.7M on your tax bill.
This is how people with assets can use debt as a tool.
> How?
Here's an example that could be achievable without needing to be a super high wealth individual, but does require being able to pay a few thousand dollars up front with little notice.
Let's say you get hit with a $3,500 medical bill. The hospital says they're willing to reduce it by 20% ($700) if you pay up front so now your bill is $2,800.
Now, let's say you rarely use credit cards and a major bank will give you $750 cash as a bonus if you spend $4,000 in 3 months. With the medical bill and regular spending you can hit that without making any "extra" purchases.
You could sign up for that card, immediately pay off the $2,800 to avoid paying any interest on the card and once you get the cashback bonus it's really like paying $2,050 instead of $3,500. Now you can take that $1,500 you saved, invest it at 5% for 15 years and with compounding interest you get back +$1,500 profit (minus taxes) which essentially means your medical bill was $500.
Of course this requires luck and timing around being able to do that with the card but even if you didn't have the card bonus you can get a guaranteed 20% return in 1 year by paying it off. The alternative is paying the full amount in smaller payments. Technically a lot of hospitals don't charge interest and give you reasonable plans to pay it off but most other places will charge you interest.
Here's an example that could be achievable without needing to be a super high wealth individual, but does require being able to pay a few thousand dollars up front with little notice.
Let's say you get hit with a $3,500 medical bill. The hospital says they're willing to reduce it by 20% ($700) if you pay up front so now your bill is $2,800.
Now, let's say you rarely use credit cards and a major bank will give you $750 cash as a bonus if you spend $4,000 in 3 months. With the medical bill and regular spending you can hit that without making any "extra" purchases.
You could sign up for that card, immediately pay off the $2,800 to avoid paying any interest on the card and once you get the cashback bonus it's really like paying $2,050 instead of $3,500. Now you can take that $1,500 you saved, invest it at 5% for 15 years and with compounding interest you get back +$1,500 profit (minus taxes) which essentially means your medical bill was $500.
Of course this requires luck and timing around being able to do that with the card but even if you didn't have the card bonus you can get a guaranteed 20% return in 1 year by paying it off. The alternative is paying the full amount in smaller payments. Technically a lot of hospitals don't charge interest and give you reasonable plans to pay it off but most other places will charge you interest.
The most important things financially are cash flow and coffer size. Being able to take on debt at advantageous times provides both of these things because it allows you to shift cash flow temporally and increase the money you have on hand at will. A rich person can translate portions of their future earnings into large amounts of capital on command, and this can come in the form of future anticipated earnings too (e.g., future anticipated rents or sales) while still being able to live on a day-to-day basis. Being able to control your current and future finances can also provide tax benefits if structured correctly.
Poor people can't do that - they need all of their cash now just to live, all the time.
Poor people can't do that - they need all of their cash now just to live, all the time.
I would phrase it more as a powerful tool if you are financially literate and have a predictable income (especially if it's predictable with confidence to a lender), something which is generally more true of high-income people. Debt (when appropriately priced) allows you access things that you would otherwise need to wait to afford, allowing saving money vs. renting said thing, or the time-value to you of the length of that wait (whether it's through directly financially benefitting from that thing, or from simply whatever utility you are getting from that thing, or both, like buying a more expensive car which saves you money on fuel and maintenance as well as just being nicer to drive). It's dangerous when your income is not predictable (because it means that debt is more expensive for you as well as more personal risk), or if you are forced into debt for necessities that are beyond your means, or if you are financially illiterate, all of which can mean you take on debt beyond your means, which quickly becomes exploitative.
(That latter part can happen even with very high incomes. It's not unheard of for e.g. professional sports players or celebrity actors making millions to take on way too much debt and ruin themselves, especially because their high income can disappear quickly, e.g. due to an injury)
(That latter part can happen even with very high incomes. It's not unheard of for e.g. professional sports players or celebrity actors making millions to take on way too much debt and ruin themselves, especially because their high income can disappear quickly, e.g. due to an injury)
you are my group hahaha.
jokes apart, some great replies explain how.
jokes apart, some great replies explain how.
Have you see what rent is like lately?
BTW rent is not much different from a loan. You just do not pay principle.
You are either way paying to use someone else's asset(s).
BTW rent is not much different from a loan. You just do not pay principle.
You are either way paying to use someone else's asset(s).
Debt also allows you to live when you can't find means otherwise.
Here is a mind bending concept. Those that hold a lot of cash are resilient. But that cash came from someone else getting into debt. That's because money IS debt. Money gets created when people take out loans. That debt ends up as income to someone else.
If you hold a lot of savings, others had to get into debt to create the money that ended up in your bank account.
If EVERYONE decides to hoard cash, then the economy goes into a deflationary spiral and everyone's ability to save goes to zero. This is called the Paradox of Thrift.
Many folks on HN have huge savings accounts. Thank those that went into debt so you can have savings. They sacrificed their resilience for you to have yours.
If you hold a lot of savings, others had to get into debt to create the money that ended up in your bank account.
If EVERYONE decides to hoard cash, then the economy goes into a deflationary spiral and everyone's ability to save goes to zero. This is called the Paradox of Thrift.
Many folks on HN have huge savings accounts. Thank those that went into debt so you can have savings. They sacrificed their resilience for you to have yours.
Pretty much all of the value of basically every savings account is primarily debt from organisations, not personal debt.
Not trying to be pedantic, just curious.
Money isn't zero sum right? Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt. Unless its in a metaphorical sense like we're all in "debt" to the U.S government and we pay interest when they inflate more money.
Money isn't zero sum right? Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt. Unless its in a metaphorical sense like we're all in "debt" to the U.S government and we pay interest when they inflate more money.
The government creates money by spending, but most money is actually created by commercial banks when people take out loans. ALL money is accounted for in these ledgers. So consequently, most money in people's deposit accounts is debt, either their own or someone else's.
I recommend reading the Bank of England's Money Creation in the Modern Economy
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
I recommend reading the Bank of England's Money Creation in the Modern Economy
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Money isn't zero sum, but its value is based on being able to exchange it for goods and services - or to compel the production of goods and the carrying out of services. The less debt exists, the less compelled people are to work.
> Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt.
The US government prints it (“quantitative easing") by creating new money and buying its own debt. In this sense it’s still correct to say this Government printed money is backed by debt.
Nb. That this is only a small proportion of the overall money supply though. Commercial bank deposits (created through bank lending) represent the vast majority.
The US government prints it (“quantitative easing") by creating new money and buying its own debt. In this sense it’s still correct to say this Government printed money is backed by debt.
Nb. That this is only a small proportion of the overall money supply though. Commercial bank deposits (created through bank lending) represent the vast majority.
The choice they made to give up their resilience was independent of a savers choice to save.
If I stop saving, it won’t make their life better, it will just make my life worse.
If I stop saving, it won’t make their life better, it will just make my life worse.
The core (flawed) assumption is that a thousand year business is desirable. As a business owner and a worker I don’t want to work in my great, great grand pappy’s toothpick company.
I want to have opportunities to create my own business, make profit, enjoy profit, hand modest generational wealth to my descendants and die without regrets.
Thousand year business are not the way to achieve my goals and my goals are not incomplete with debt.
I hold debt on my house. My future is tied to that debt and I wouldn’t have it another way (I mean unless you want to pay off my house).
I want to have opportunities to create my own business, make profit, enjoy profit, hand modest generational wealth to my descendants and die without regrets.
Thousand year business are not the way to achieve my goals and my goals are not incomplete with debt.
I hold debt on my house. My future is tied to that debt and I wouldn’t have it another way (I mean unless you want to pay off my house).
Maybe Japan and the Japanese have some different values than our fast charging Western world?
Let me introduce the Shokunin (translated as Artisan, when you look it up on Wikipedia, which isn't quite right).
What a Shokunin produces is, sort of, the antithesis of what you can order from Temu.
A rather interesting blog post[0] explaining the concept:
"Shokunin is more than just a craftsperson or artisan. It represents the devotion and lifelong commitment of craftsmen who dedicate themselves to perfecting their art. They embody the values of dedication to craft, excellence in craftsmanship, and masterful work. Shokunin believe in meticulous attention to detail and uphold the highest standards of quality and skill in their work."
For us Westerners it's not fathomable to work 20 years, or a lifetime, ro achieve a perfect product. Who's to say that this concept is wrong?
And I think it has a lot to do with a society who believes that a 1000 year old company is not only desirable but a virtue.
[0] https://tobyleon.com/blogs/art-design/shokunin-japan-artisan...
Let me introduce the Shokunin (translated as Artisan, when you look it up on Wikipedia, which isn't quite right).
What a Shokunin produces is, sort of, the antithesis of what you can order from Temu.
A rather interesting blog post[0] explaining the concept:
"Shokunin is more than just a craftsperson or artisan. It represents the devotion and lifelong commitment of craftsmen who dedicate themselves to perfecting their art. They embody the values of dedication to craft, excellence in craftsmanship, and masterful work. Shokunin believe in meticulous attention to detail and uphold the highest standards of quality and skill in their work."
For us Westerners it's not fathomable to work 20 years, or a lifetime, ro achieve a perfect product. Who's to say that this concept is wrong?
And I think it has a lot to do with a society who believes that a 1000 year old company is not only desirable but a virtue.
[0] https://tobyleon.com/blogs/art-design/shokunin-japan-artisan...
So you're saying his assumption is incorrect because you want something else? You should read some of this guys other stuff - a point he's made many times is that most disagreements in financial advice come from "people with different experiences in life, different time horizons, different risk tolerances talking over each other". There's a lesson in there for you.
You don't want to work at your grandpa's company, fine. This advice may not be for you then. That doesn't make his premise any more flawed than your own.
And FWIW a thousand year old company does not require that it stay within the same family - which is from your (flawed) assumption. In your own example of "creating a business, making a profit, and handing down wealth to your family", one of the ways to make that profit is to sell your business to someone else, who may sell it to another (on and on for... a thousand years).
So not only are you claiming he's wrong based on an opinion you have, your opinion isn't even contradictory to the point he's making.
You don't want to work at your grandpa's company, fine. This advice may not be for you then. That doesn't make his premise any more flawed than your own.
And FWIW a thousand year old company does not require that it stay within the same family - which is from your (flawed) assumption. In your own example of "creating a business, making a profit, and handing down wealth to your family", one of the ways to make that profit is to sell your business to someone else, who may sell it to another (on and on for... a thousand years).
So not only are you claiming he's wrong based on an opinion you have, your opinion isn't even contradictory to the point he's making.
This is essentially an explanation of "absorbing barriers" [1] from ergodicity economics [2]. In ergodic systems, the ensemble average and time average are equivalent, but in non-ergodic systems (most of real life) they aren't. In non-ergodic systems, E[X] [3] is path-dependent.
An absorbing barrier is like going all-in on a hand in poker and losing - you lose your entire bankroll, are out of the game, you stop progressing and have no more iterations. Your E[X] no longer incorporates the set of all possible steps or outcomes (ensemble average), but only the ones you actually experienced before incurring the absorbing barrier (time/path dependent average). As a result your real-life E[X] materially differs from your theoretical one.
The lesson is that long-term survival should anticipate absorbing barriers, prioritize avoiding them, and build deep buffers against them (cash on hand, etc).
[1]:https://en.wikipedia.org/wiki/Absorbing_barrier_(finance)
[2]:https://ergodicityeconomics.com/
[3]:https://en.wikipedia.org/wiki/Expected_value
[4]:https://www.nature.com/articles/s41567-019-0732-0
An absorbing barrier is like going all-in on a hand in poker and losing - you lose your entire bankroll, are out of the game, you stop progressing and have no more iterations. Your E[X] no longer incorporates the set of all possible steps or outcomes (ensemble average), but only the ones you actually experienced before incurring the absorbing barrier (time/path dependent average). As a result your real-life E[X] materially differs from your theoretical one.
The lesson is that long-term survival should anticipate absorbing barriers, prioritize avoiding them, and build deep buffers against them (cash on hand, etc).
[1]:https://en.wikipedia.org/wiki/Absorbing_barrier_(finance)
[2]:https://ergodicityeconomics.com/
[3]:https://en.wikipedia.org/wiki/Expected_value
[4]:https://www.nature.com/articles/s41567-019-0732-0
Not all debt is created equal. There is a really crucial distinction here that the author doesn't mention. Debt to finance consumption is very different than debt to finance production. The former narrows your volatility window permanently, but the latter only does so temporarily. Once you get past that, the window widens again and stays wider than it would have been without the debt. As long as the productive asset returns more than the cost of servicing the debt to acquire it, you win. Of course, that's a big if, but it happens regularly, and it's something that really needs to be taken into account when making these kinds of decisions.
Why is so much financial advice from very wealthy people who did not gain their wealth through their own advice? Ie. Most advice is retrospective.
A lot of retrospective advice can be useful. i.e. For heavens sake, don't make the mistake that I did.
You can take money and pay off your mortgage or you can take that same money, throw it in a low cost index fund, and keep the mortgage. Most people are going to end up better off with the later. Cash has the illusion of being safer but start talking about inflation and it starts to lose its luster.
Sure, and what happens when, after you do that, some calamity happens and stocks go down by more than 50%, you lose your job and you can't pay the mortgage anymore?
That is of course extreme, but proves the article point: by not having debt, you can sustain a much broaden series of events.
As everything in life, it's a spectrum. I think it's pretty reasonable to accept the "sustainability narrowing" that comes from an affordable mortgage, but I avoid taking debt for other goods that are less important and would limit my ability to withstand unexpected events and accidents
That is of course extreme, but proves the article point: by not having debt, you can sustain a much broaden series of events.
As everything in life, it's a spectrum. I think it's pretty reasonable to accept the "sustainability narrowing" that comes from an affordable mortgage, but I avoid taking debt for other goods that are less important and would limit my ability to withstand unexpected events and accidents
You can easily plan for such events.
What if your house collapses due to some event that is not covered by your insurance and you used all the capital to purchase it? This is as an extreme example as the market dropping 50%.
Surviving market crashes is not rocket science, don't be 100% in stocks. Have a decent emergency fund if you have a family, have some bonds, have a house with decent equity, and don't subscribe to consumerism.
What if your house collapses due to some event that is not covered by your insurance and you used all the capital to purchase it? This is as an extreme example as the market dropping 50%.
Surviving market crashes is not rocket science, don't be 100% in stocks. Have a decent emergency fund if you have a family, have some bonds, have a house with decent equity, and don't subscribe to consumerism.
> What if your house collapses due to some event that is not covered by your insurance and you used all the capital to purchase it? This is as an extreme example as the market dropping 50%.
Quite a lot of people have experienced a market dropping 50% - not so many have seen their house collapse due to some event not covered by their insurance.
Quite a lot of people have experienced a market dropping 50% - not so many have seen their house collapse due to some event not covered by their insurance.
At least the stock market has bounced back, can't say the same about that house.
> what happens when, after you do that, some calamity happens and stocks go down by more than 50%, you lose your job and you can't pay the mortgage anymore?
> That is of course extreme
I don’t think that’s even that extreme. In 2020 the market crashed something like 40% and at the same time vast swaths of the population became unemployed. All of my grandparents experienced the great depression. We will be very fortunate if we aren’t heavily hit by war or economic disasters for the rest of our life.
> That is of course extreme
I don’t think that’s even that extreme. In 2020 the market crashed something like 40% and at the same time vast swaths of the population became unemployed. All of my grandparents experienced the great depression. We will be very fortunate if we aren’t heavily hit by war or economic disasters for the rest of our life.
If you held the stock for more than ten years, you are likely ahead because the stock doubled. If not, you still have money to pay your mortgage.
Most people pay extra to mortgage gradually. Until it is paid off, they face the same risk of foreclosure. What happens if you lose your job with one year left? You lose the house, you can't pay your bills cause banks won't give you home equity loan.
Liquidity is more important for most people than returns. Money saved in a house is a huge risk.
Most people pay extra to mortgage gradually. Until it is paid off, they face the same risk of foreclosure. What happens if you lose your job with one year left? You lose the house, you can't pay your bills cause banks won't give you home equity loan.
Liquidity is more important for most people than returns. Money saved in a house is a huge risk.
Paying off your mortgage starts to make more sense as interest rates go up.
> they tend to share a common characteristic: they hold tons of cash, and no debt.
That describes the old-fashioned company that I worked for. They are only a bit over 100 years old, but they are cheap bastards. I learned how to work quite frugally, under them.
That describes the old-fashioned company that I worked for. They are only a bit over 100 years old, but they are cheap bastards. I learned how to work quite frugally, under them.
Isn't that (or still is) the attitude at early Amazon? i.e. using doors as desks. Seems prudent. Not sure if they still do that.
I've always hated startups where I've worked, that burn through HUGE sums of money (per-profitablilty) on expensive coffee/snacks/foosball tables. I feel like proverbial old man (The Simpsons) shouting at the clouds: "You know that fancy coffee you're drinking? it's future diluted equity!"
Of course, maybe there are ranges of being "cheap bastards". :)
I've always hated startups where I've worked, that burn through HUGE sums of money (per-profitablilty) on expensive coffee/snacks/foosball tables. I feel like proverbial old man (The Simpsons) shouting at the clouds: "You know that fancy coffee you're drinking? it's future diluted equity!"
Of course, maybe there are ranges of being "cheap bastards". :)
They had no problem dropping thousands, if the need was there, but they didn't suffer much, in the way of "fluff."
From what I hear, most places that have foosball tables, have about an inch of dust, on said table, because they have all their employees burning out their eyeballs.
From what I hear, most places that have foosball tables, have about an inch of dust, on said table, because they have all their employees burning out their eyeballs.
It reminded me of Berkshire Hathaway. Very old fashioned, run by sensible people, and hold a lot of cash (and very little debt%).
One thing I don't understand is why mortgage payments are fixed in nominal terms over the terms of the repayment plan. This has the effect of meaning they are most painful on month 1 and can be almost trivial by month 360 since they've been inflated away. And that's not even taking into account that earnings tend to increase over time even in real terms.
It seems there would be a gap in the market for a loan whose payments increase either at or above inflation (perhaps this does indeed exist and I'm simply unaware of it.). Rent doesn't stay flat over a decade time period so why should mortgage payments?
It seems there would be a gap in the market for a loan whose payments increase either at or above inflation (perhaps this does indeed exist and I'm simply unaware of it.). Rent doesn't stay flat over a decade time period so why should mortgage payments?
You could always refinance every 5 or so years to achieve this
From a geographical socio-economic standpoint, debt is not a profit maximising tool.
In India, for example, debt is a last resort means that comes with contempt and social taboos. Yet people have no choice, but to avail debt.
In India, for example, debt is a last resort means that comes with contempt and social taboos. Yet people have no choice, but to avail debt.
This thinking links to how corporate debt has being valued theoretically, starting with the work of Merton [1], by looking at debt as an option with non-linear payoff. The borrower can put the busted assets to the lender.
In practice there are countless important complications that make a naive option theoretic analysis very incomplete, e.g., getting into debt makes a lot of sense if you can count on a bailout if things go pear shaped.
[1] https://en.m.wikipedia.org/wiki/Merton_model
In practice there are countless important complications that make a naive option theoretic analysis very incomplete, e.g., getting into debt makes a lot of sense if you can count on a bailout if things go pear shaped.
[1] https://en.m.wikipedia.org/wiki/Merton_model
Saw the title, jumped to the diagrams, and thought I knew where this was going, but I was way off. I made the exact opposite conclusion from a quick glance at the diagram - that debt gives you more freedom. It allows you to go in the red. That a safe, debt-free life leads to less volatility and therefore less ups. Then I read the article, and couldn't hold both opposing ideas in my head.
This guy's entire life (He's a VC) is about pushing debt in the form of promissory notes and equity-debt onto companies in exchange for his own ownership
How does he reconcile the fact that the companies he lauds in the beginning, would completely shun any business with him (an investor) for precisely the reasons described?
I feel like investors and VC are unaware of their own values
How does he reconcile the fact that the companies he lauds in the beginning, would completely shun any business with him (an investor) for precisely the reasons described?
I feel like investors and VC are unaware of their own values
> This guy's entire life (He's a VC) is about pushing debt in the form of promissory notes and equity-debt onto companies in exchange for his own ownership
There's a difference between business finance and personal finance. There's a difference between what needs to be done to start a business and what needs to be done to keep it going.
Apple started in a garage, but it is no longer run out of one. Apple started with loans and investors, Apple now has a large pile of cash (though also bonds that it needs to pay).
There's a difference between business finance and personal finance. There's a difference between what needs to be done to start a business and what needs to be done to keep it going.
Apple started in a garage, but it is no longer run out of one. Apple started with loans and investors, Apple now has a large pile of cash (though also bonds that it needs to pay).
Well, the article specifically references Japanese businesses
In the introduction. He then has paragraphs such as:
> Let’s say this represents volatility over your life. Not just market volatility, but life world and life volatility: recessions, wars, divorces, illness, moves, floods, changes of heart, etc.
And further down:
> I hope to be around for another 50 years. What are the odds that during those 50 years I will experience one or more of the following: Wars, recessions, terrorist attacks, pandemics, bad political decisions, family emergencies, unforeseen health crises, career transitions, wayward children, and other mishaps?
Not sure how many businesses experience divorce, family emergencies, career transitions, wayward children.
> Let’s say this represents volatility over your life. Not just market volatility, but life world and life volatility: recessions, wars, divorces, illness, moves, floods, changes of heart, etc.
And further down:
> I hope to be around for another 50 years. What are the odds that during those 50 years I will experience one or more of the following: Wars, recessions, terrorist attacks, pandemics, bad political decisions, family emergencies, unforeseen health crises, career transitions, wayward children, and other mishaps?
Not sure how many businesses experience divorce, family emergencies, career transitions, wayward children.
I guess there's personal debt and there's company debt. There's a big difference.
What exactly is "equity-debt?" That is never a term I have heard of before.
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I think that the analogy of drawing lines on a volatile plot is a good starting point. But fails to account for some dynamics of how the consequences of debt can be different.
Debt limits choices. But, one can still make a choice that expands their liberty.
Having a stable home, being able to go to college, etc. are good uses of debt.
Buying a flashy car purely to impress the neighbors? Maybe not.
Debt limits choices. But, one can still make a choice that expands their liberty.
Having a stable home, being able to go to college, etc. are good uses of debt.
Buying a flashy car purely to impress the neighbors? Maybe not.
Debt is essentially sacrificing future well-being for immediate access to some product or service utility normally inaccessible from current market conditions.
Even if a specific type of debt load is not necessarily a liability for personal profit, it is assuredly someones problem eventually...
The theory debt doesn't matter only applies to 0.04% of the population dodging tax burdens with structured financial instruments. The interest rates should be set over 14.2% (and we know it), as aristocratic gambling-culture has stolen living-standard value from great-great-grandchildren not even born yet.
The poignant question is 'could anyone do anything about the trends', and the short answer is a simple 'No'.
https://en.wikipedia.org/wiki/Tragedy_of_the_commons
Have a great day, =3
Even if a specific type of debt load is not necessarily a liability for personal profit, it is assuredly someones problem eventually...
The theory debt doesn't matter only applies to 0.04% of the population dodging tax burdens with structured financial instruments. The interest rates should be set over 14.2% (and we know it), as aristocratic gambling-culture has stolen living-standard value from great-great-grandchildren not even born yet.
The poignant question is 'could anyone do anything about the trends', and the short answer is a simple 'No'.
https://en.wikipedia.org/wiki/Tragedy_of_the_commons
Have a great day, =3
Might want to read this monograph from 1990: https://www.cambridge.org/core/books/governing-the-commons/A...
Another counterargument: is the opportunity for individuals to improve family living standards increasing or decreasing since the 1950's?
I'll spare you the exhaustive list from education, housing, infrastructure, and medical service access. It is not, kids are no longer getting stable jobs, their own homes, or starting families until later in life.
In my opinion, creating financial securities out of communities just turned most cities into theme-park economies. Fun, but innately unsustainable for all visitors except the board.
Personally, I have found the contradictions formed between macroeconomics and microeconomics fascinating. Primarily because tragedy can be profitable in a global context, but destructive from a personal perspective.
"Do you want to be right or do you want to be happy?" (Phillip C. McGraw)
I'll spare you the exhaustive list from education, housing, infrastructure, and medical service access. It is not, kids are no longer getting stable jobs, their own homes, or starting families until later in life.
In my opinion, creating financial securities out of communities just turned most cities into theme-park economies. Fun, but innately unsustainable for all visitors except the board.
Personally, I have found the contradictions formed between macroeconomics and microeconomics fascinating. Primarily because tragedy can be profitable in a global context, but destructive from a personal perspective.
"Do you want to be right or do you want to be happy?" (Phillip C. McGraw)
You haven't changed my mind, I still think you ought to read Ostrom.
"Mankind does not strive for happiness; only the Englishman does". (Friedrich Nietzsche)
"Mankind does not strive for happiness; only the Englishman does". (Friedrich Nietzsche)
Nietzsche spent most of his time in a brothel, and is hardly an authority on moral intellectualism.
I actually really respect you have a differing opinion, as most of my data driven conclusions are statistical rather than philosophical in nature.
Have a wonderful day, and good luck out there =3
I actually really respect you have a differing opinion, as most of my data driven conclusions are statistical rather than philosophical in nature.
Have a wonderful day, and good luck out there =3
Kinda weird to make stuff up like that. Maybe you're confusing him with Toulouse-Lautrec, known for moral strength rather than moral intellect?
Nietzsche's The Geneaology of Morals is arguably the most important treatise on christian morality in the previous century, possibly that millenium.
Nietzsche's The Geneaology of Morals is arguably the most important treatise on christian morality in the previous century, possibly that millenium.
Nietzsche was a smart man that had a difficult personal story, and it is interesting to learn about his life. He was suspected of suffering neurological issues from syphilis... obviously not a particularly amusing subject before the invention of antibiotics.
I never make stuff up unless it is obviously funny or someone makes me a liar... my neutral evil temperament usually ensures stoic honesty even when being deceived. Some of my most cherished friends don't agree with me about most things =3
I never make stuff up unless it is obviously funny or someone makes me a liar... my neutral evil temperament usually ensures stoic honesty even when being deceived. Some of my most cherished friends don't agree with me about most things =3
I don't think you have learnt about his life, or read his more important books.
Indeed, German fluency has all but vanished with age.
I am beginning to suspect we no longer may communicate in English as well.
Cheers =3
I am beginning to suspect we no longer may communicate in English as well.
Cheers =3
The article doesn't mention businesses that periodically refinance their debit, which can kill a business when interest rates are unfavorable. Some business owners are experiencing that right now.
Debt is perfect tool for obedient citizens.
“sing the song of him who gives you bread”
“sing the song of him who gives you bread”
That's a really naive view. If you take on debt for a good reason, you can alter the trajectory of the function completely.
Most people who take on debt believe they have a good reason to do so.
It's like how almost nobody thinks of themselves as Evil. Everyone is doing their best, but nobody has the same yardstick.
It's like how almost nobody thinks of themselves as Evil. Everyone is doing their best, but nobody has the same yardstick.
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Debt is a tool:
1. Use it to account for the mismatch between income and expenses.
2. It takes money to start a business. You can borrow and start the business now, or save up for N years and then start. Same thing for buying a house.
3. If you can borrow money at 5%, and invest it at 10%, you make money.
Using debt to buy frills, though, is not a great idea.
I also use margin debt to increase my stock purchases. The returns are larger, but I must also endure wilder swings in the value. Some people say "what if the stock market goes to zero, what then, huh?" My reply is if the stock market goes to zero, everything else has gone to hell including whatever other investments you have.
1. Use it to account for the mismatch between income and expenses.
2. It takes money to start a business. You can borrow and start the business now, or save up for N years and then start. Same thing for buying a house.
3. If you can borrow money at 5%, and invest it at 10%, you make money.
Using debt to buy frills, though, is not a great idea.
I also use margin debt to increase my stock purchases. The returns are larger, but I must also endure wilder swings in the value. Some people say "what if the stock market goes to zero, what then, huh?" My reply is if the stock market goes to zero, everything else has gone to hell including whatever other investments you have.
I like this article.
I also like the book "Debt" by Graeber. Different, but very eye opening.
I also like the book "Debt" by Graeber. Different, but very eye opening.
What does "wayward children" mean? I never heard this expression before.
I'm not qualified to expound on it but the featured article doesn't cover opportunity cost, and a scale of risk appetites. To name just two concepts it's missing.
>> the featured article doesn't cover opportunity cost, and a scale of risk appetites.
If your business is moving along just fine and you have a decent cash reserve, what opportunity cost is all that important? FOMO doesn't seem like a good thing to let influence business decisions.
If your business is moving along just fine and you have a decent cash reserve, what opportunity cost is all that important? FOMO doesn't seem like a good thing to let influence business decisions.
Reminds me of those real estate influencer types you see on social media...
"We are $4.25 million in debt but live care free vacation filled lives bringing in $40,000 a month"
"We are $4.25 million in debt but live care free vacation filled lives bringing in $40,000 a month"
$40,000 is $480,000/year, which is 11.3% of $4.25 million; if one borrowed that $4.25 million at a significant discount to 11.3% then that might be a very good financial decision indeed.
If it’s at a floating rate, it might still be a good decision. But right now some business loans are up around 15%, at which point the situation above would be an absolute catastrophe.
If it’s at a floating rate, it might still be a good decision. But right now some business loans are up around 15%, at which point the situation above would be an absolute catastrophe.
Most people don't think about debt rationally. If going into debt can accelerate your plans by a significant timeframe, why not do it, assuming it's affordable? Especially if you can get money without having to give up equity. Their funds accelerate your business, you pay them back with the increased earnings. It's literally how capitalism is supposed to work.
necessary debt has value
unnecessary debt costs value
This bro just described leverage lolz
TL;DR: having tons of cash is better than having debt.
I thought the "The more debt you have, the less financially resilient you are" was the more important message.
But this isn’t true, one has to consider the debt ratio, not just the debt. Someone with a million dollars of debt is financially resilient if they have a debt ratio of .1
That's only true if the rest of their bet worth isn't tied up in some high risk investment where they could lose everything. Just because it's financially more optimal to have some debt in some situations doesn't mean that it's also more resilient. Yes, debt ratio plays a role (although a debt ratio of 0.1 is almost like having no debt at all), but no debt is for sure more resilient than debt.
I think my point was more that 1 million dollars of debt is a pretty large sum to most people, but not much to someone who has substantial assets. You can draw up "that's only true" scenarios on basically any situation, so its not very helpful to go back and forth.
I will say the point about having debt limits your future possibilities is very true, and if someone would like to maintain an open future, stay away from large amounts of debt(homes, expensive cars, boats, etc...)
I will say the point about having debt limits your future possibilities is very true, and if someone would like to maintain an open future, stay away from large amounts of debt(homes, expensive cars, boats, etc...)
It's still true though. If push comes to shove, having no debt will increase your odds of surviving volatility - it the debt ratio just expands or tightens what range of volatility you can survive (which he did write about). Even if you have $5 of debt and $5m in the bank, you would still be measurably better off to have had $0 of debt in financial "survival".
If your other millions are not liquid then the one million of debt is still a potentially significant liability when adverse events happen. If it is liquid then why bother borrowing for something so small? The spent cash can be replenished quickly when there are no debt payments.
Very true, I think the article is pretty high level, and so are my comments. Actual financial health can be difficult to evaluate given that world events are pretty open ended and anything can happen.
Debt to income or debt to asset is the only way of evaluating if someone's debt is high or low. I thought it was obvious that's what GP meant.
I did not get that assumption from "The more debt you have, the less financially resilient you are". Debt is an absolute value, and debt-to-asset ratio is...not. You can also evaluate debt loads by debt-to-income ratio, which is not to be overlooked as most homeowners buy homes based on their income, rather than their savings. As others have said, debt-to-asset is also not a golden ratio, because if your assets are not liquid and you get called for your debt, you still have a bad situation.
> You can also evaluate debt loads by debt-to-income ratio, which is not to be overlooked
Debt to income is literally the first thing I wrote in my comment. I didn't overlook it.
The absolute value of a debt is a meaningless number so "more debt" should always be evaluated in that context. And that's how I took the comment I originally responded to. Some extremely obvious things are being rehashed for no apparent reason in this thread.
When evaluating relative debt load, asset values should have a multiplier to reflect both liquidity and volatility.
Debt to income is literally the first thing I wrote in my comment. I didn't overlook it.
The absolute value of a debt is a meaningless number so "more debt" should always be evaluated in that context. And that's how I took the comment I originally responded to. Some extremely obvious things are being rehashed for no apparent reason in this thread.
When evaluating relative debt load, asset values should have a multiplier to reflect both liquidity and volatility.
True, but that is not the situation most of humanity is facing.
I read that as an example to illustrate a point: it could also have said debt of $1000 with a debt ratio of 0.1 which is still pretty resilient.
Resilient? Sure. Realistic for anyone with only $10k in assets? Not even remotely. Not in the market we have today. There are too many people who are using debt just to get their basic needs met, let alone something with enough permanence to be considered an asset.
We're just using arbitrary numbers to demonstrate a point, we aren't trying to assess anyone's actual financial health.
That was exactly my point...a million dollars of debt is astronomical for the majority of people, but adding another data point such as DTA or DTI would make for a clearer picture of what the debt load actually is. Its like putting down a 100kg kettle bell and asking a group of people "is it hard to lift"? For the average person sure...but you're going to get a variety of answers if you put that kettle bell in front of kids vs a group of gym rats.
Edit: I guess a smaller amount like 10k USD might be better to illustrate the point.
Edit: I guess a smaller amount like 10k USD might be better to illustrate the point.
Having both can often be the ideal situation. It’s also really dependent on what the debt is, how is it being serviced…etc. For some people, not having any debt at all is extremely liberating, and that benefit outweighs any of the benefits of getting marginal returns.
>For some people, not having any debt at all is extremely liberating
Indeed. I lived with my parents into my 30s, saved up for ~10 years and bought a nice house cash, no mortgage. Was it financially optimal? Probably not, but the peace of mind of being immune to market crashes or interest hikes (we tend to not have 20+ years fixed mortgages here) is just really nice.
Indeed. I lived with my parents into my 30s, saved up for ~10 years and bought a nice house cash, no mortgage. Was it financially optimal? Probably not, but the peace of mind of being immune to market crashes or interest hikes (we tend to not have 20+ years fixed mortgages here) is just really nice.
You simply restructured your debt and borrowed from parents instead, no?
That is to say, you owe them for those ten years.
Not saying there’s anything wrong with it. Most people in average circumstances owe a lot to their parents.
That is to say, you owe them for those ten years.
Not saying there’s anything wrong with it. Most people in average circumstances owe a lot to their parents.
>> You simply restructured your debt and borrowed from parents instead, no?
>> That is to say, you owe them for those ten years.
To me that seems like a strange take on it. I saw no indication of a debt owed in the GPs comment.
>> That is to say, you owe them for those ten years.
To me that seems like a strange take on it. I saw no indication of a debt owed in the GPs comment.
I think the OP used "owe" in the second dictionary sense:
2: to be attributable an idea that owes to Greek philosophy
2: to be attributable an idea that owes to Greek philosophy
This is a very transactional view of it, but I can see the line of thinking. My mom gave me everything I needed to succeed as an adult, and I owe her a lot, so now whatever she needs, I try to take care of it. Hopefully other people come to the same conclusion, but I don't think parents usually expect a financial ROI on raising kids haha.
I love this article. Very well laid out and simply explained. This article is explaining the set in stone mental health association with debt servicing.
>I’m not an anti-debt zealot. There’s a time and place, and used responsibly it’s a wonderful tool.
I am, here's how I would add to this article.
How do you tell how in debt you are. How tight is the graph? Its not just your debt.
Your paycheque comes from your neighbour's spending. If they are in debt, then you too will feel their collective debt. Generally speaking debt is mortgages> cars> tuition. Not a great deal else.
So you can actually look at the public data.
Norway is 210% debt to income.
Canada is 178% debt to income.
The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt. It's generally regarded that you keep this in the 30-40% range.
When these thresholds hit ~130% that's typical of a financial crisis. To reach 178% or above 200%... that's only possible if actions are being taken by the central banks to prevent a crash temporarily.
Checking Norway, because I don't know the state of their central bank. It seems Norway went bankrupt in the early 2000s? It has been a steady crash since being prevented by their central bank?
Private Debt to GDP in Norway increased to 277.90 percent in 2023
So here's the thing about central banks working to prevent crashes. You can do so of course, but you also need to deflate the risk. But all they are doing is inflating the inevitable pop. You're just making the crash worse over time.
>I’m not an anti-debt zealot. There’s a time and place, and used responsibly it’s a wonderful tool.
I am, here's how I would add to this article.
How do you tell how in debt you are. How tight is the graph? Its not just your debt.
Your paycheque comes from your neighbour's spending. If they are in debt, then you too will feel their collective debt. Generally speaking debt is mortgages> cars> tuition. Not a great deal else.
So you can actually look at the public data.
Norway is 210% debt to income.
Canada is 178% debt to income.
The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt. It's generally regarded that you keep this in the 30-40% range.
When these thresholds hit ~130% that's typical of a financial crisis. To reach 178% or above 200%... that's only possible if actions are being taken by the central banks to prevent a crash temporarily.
Checking Norway, because I don't know the state of their central bank. It seems Norway went bankrupt in the early 2000s? It has been a steady crash since being prevented by their central bank?
Private Debt to GDP in Norway increased to 277.90 percent in 2023
So here's the thing about central banks working to prevent crashes. You can do so of course, but you also need to deflate the risk. But all they are doing is inflating the inevitable pop. You're just making the crash worse over time.
> Norway is 210% debt to income.
> Canada is 178% debt to income.
> The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt.
You're confusing two different measures there. The first two are "total debt" (a stock) vs "total income" (a flow). Then, in the last paragraph, you switch to talking about consumption declines as if the total debt stock was directly comparable to a total income flow, which it obviously isn't.
The total interest due on the debt is the flow that you should be comparing to the total income flow. (Otherwise, if spending stopped at 100% debt-to-income, how could Canada and Norway's economy be working at 1.8 and 2.1 times that trigger threshold?)
My mortgage debt (the stock) is give-or-take 100% of our annual household income (the flow).
We have plenty of money left over each month to buy things, because the payments on that mortgage (the flow) are a sensible fraction of our household income (the flow).
> Canada is 178% debt to income.
> The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt.
You're confusing two different measures there. The first two are "total debt" (a stock) vs "total income" (a flow). Then, in the last paragraph, you switch to talking about consumption declines as if the total debt stock was directly comparable to a total income flow, which it obviously isn't.
The total interest due on the debt is the flow that you should be comparing to the total income flow. (Otherwise, if spending stopped at 100% debt-to-income, how could Canada and Norway's economy be working at 1.8 and 2.1 times that trigger threshold?)
My mortgage debt (the stock) is give-or-take 100% of our annual household income (the flow).
We have plenty of money left over each month to buy things, because the payments on that mortgage (the flow) are a sensible fraction of our household income (the flow).
>The total interest due on the debt is the flow that you should be comparing to the total income flow.
That's what these numbers are.
I'm talking about a calculated popular metric many people use for many countries all over the world.
It's really not a controversial or debated subject for either of these countries.
That's what these numbers are.
I'm talking about a calculated popular metric many people use for many countries all over the world.
It's really not a controversial or debated subject for either of these countries.
You’re incorrect about what that figure is.
https://tradingeconomics.com/norway/households-debt-to-incom...
That means for every 100 units of annual income, Norwegians owe 210 units in total debt. (Not total debt service payments [a flow, with unit of kr/yr], but total debt [a stock, with unit of kr].)
https://tradingeconomics.com/norway/households-debt-to-incom...
That means for every 100 units of annual income, Norwegians owe 210 units in total debt. (Not total debt service payments [a flow, with unit of kr/yr], but total debt [a stock, with unit of kr].)
>You’re incorrect about what that figure is.
Why then would all these countries, as websites such as your source be calculating such a useless indicator? If I am incorrect?
Why then would all these countries, as websites such as your source be calculating such a useless indicator? If I am incorrect?
It's not a useless measure. Normalizing total debt against total income is a sensible way to compare countries to another. It's just not a measure that is a unitless ratio of two measures with the same units. (The unit is years [of income to payoff the debt if no further interest accrued].)
>It's not a useless measure.
Thanks for confirming that. I'll return to my original post then.
Thanks for confirming that. I'll return to my original post then.
I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered.
If I had decided not to leverage several hundred thousands of dollars of debt, then yes I'd have more cash directly now, but I might have suffered the fate that lots of others faced with the recent spikes in rent that have happened due to COVID. I simply didn't have to worry about that.
Obviously there's different types of debt; some insanely high-interest loan you get from a payday loan place absolutely is a bad and will hurt your ability to stand volatility.