This article aged better than I had hoped. Yes in the days of cheap money, there was a (bad) argument against paying off debt. Today, that argument is a fallacy. Paying off debt is the only investment these days.
I have been attempting to raise my visibility on social media, lately. I have been commenting on Instagram and Twitter and I have ruffled a few feathers. Paying off debt is risky ?
The risk is losing possible growth through investing. To be specific, the argument made was:
“…disagree. This is why so many people are cash poor, they race to pay off debts costing them 3% with cash making 7-8%…”Instagram rebuke of my comment about paying off debt (Instagram has financial advice?)
Firstly 3% debt rate is only for Mortgages (or secured credit). Most unsecured debt is much closer to 3 to 18% more than many advisers would have you think about. The “cash poor” phrase made me bristle, too. Remember how no one talks about house poor anymore.
Borrowing money to invest in the market always worries me. Leverage has the potential to make a lot of money, but it can also do the opposite. I wouldn’t do it, but I only buy Index Funds and similar ETFs.
A Scenario of What Can Go Wrong
I know a former exec at a large tech firm. He had many “options to buy” the firm’s stack at a lower price. He decided to exercise the options on the stock and hold the stock. Usually, the option is exercised and then a quick sell order is put in place to take profits from the sale.
This gentleman decided he would be cleverer, and hold the stock, to live off the dividends from it. The stock dividend yield was about 1% at the time, which would be plenty to live on. Money was borrowed to make the transaction, as it was for a large amount of stock.
Less than two years later, the dividends were reduced to zero. A short period afterwards, the stock was worthless. This was yet another firm that was “too big to fail”.
Is this a “corner case”, yes I think it is. It is also an excellent example of someone assuming, “the good days are here to stay”.
Removal of Debt, Addition of Options
If you pay off debt, you have more options. Do not fall for the FOMO (fear of missing out) arguments. If you have little or no debt, you then have options to do whatever you like, with your money.
Social Media and Financial Advice
Some frowned at financial talk on web sites. Then there was Twitter and Facebook that got in on it, but now Instagram and TikTok? Seriously, unless it is the Wizard of Omaha on TikTok, maybe get your financial advice elsewhere? Need I point at the Gamestop Reddit debacle to suggest maybe you should be careful where you get your advice?
A Very True Statement
“Think of borrowing money today as negotiating a pay cut with your future self”Preet Banerjee