That was the gist of a comment left on my post Let’s Define Debt Free (which you might have seen yesterday on my Twitter Feed).
Interesting point of view that I don’t agree with for a lot of reasons. Mostly because rates are not going to stay this low forever. I have also never been a big fan of borrowing money to make money.
Having lived through the dog days of the 90’s in the High Tech World, where our CEO attempted to rationalize how for every dollar that Nortel borrowed they made $3 back, it never really made a lot of sense to me at the time, and at the end of it, maybe I was correct in my assumption that this didn’t make any sense. I realize that most businesses do have to borrow to get on their feet. To continuously borrow without paying off debt has always seemed rather fool-hardy to me.
The statement of why should I pay off debt when I can make more money investing, is fool-hardy? Just how long do you think the gravy train will last? If you have a Mortgage at 3% that you are simply paying down as needed, but you are investing that extra money in the Market currently, you most likely are ahead of the game (i.e. making more than 4% back on investments). Are you sure that is going to last, and are you taking your profits?
This is my other concern. I had many colleagues and friends who were “on paper” millionaires, but never took their profits (and jumped to the wrong conclusions). Many folks did one of the following:
- Never took out their profits, and they kept thinking that the bubble would keep growing (it didn’t).
- Borrowed against perceived profits. Using their stock as collateral for loans to either buy oversized houses or extravagant vacations. Those loans were called when those stocks went bust.
- Fiddled while Rome burned (i.e. didn’t get out because they kept thinking things would get better). I was very guilty of that too.
- Sold, took their profits, but then invested in even riskier stocks (remember Pets Inc., or Groceries to the Door?). Some of those risky stocks burned through cash and then just shuttered the windows.
These are some of the reasons I am paranoid about Debt (yes I said paranoid) and feel it is a much better “investment” to pay it down, then invest in anything else.
I concur 100%. Once you have your debts paid, then by all means dabble with borrowing/investing and hope it works, but until you are in the black, it is probably best to wait. Our mortgage was at a rate of 6.3% fixed in and around 2001, so not that far back. By paying our debt we were making 6.3%! Now that the house and chalet are owned and long term investments are chugging upward over the long term, I have been dabbling with the borrowing/investing theory a little more. For me it has been working, but again, I am of the mindset that my life will not change if I “bet” wrong, and I only borrow 30% of whatever I’m investing… So if I had $50,ooo account, only $15,000 of it could be made up of borrowed money, that way I’m always covered, and because I borrow the money off what I have as collateral, I will never receive a margin call unexpectedly… – Cheers.