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The only good debt is dead debt

by The Investor on December 7, 2007

The only good debt is debt you take on for investment. Unless you run your own business, that begins and ends with an affordable mortgage to buy property.

Get out of debt of any other kind, as soon as you can. Pay it off! Kill it dead!

Borrowing to invest in shares is too risky. The market goes up over the long-term, but shares are volatile, and stocks could easily go down over the 3-5 year time period of a personal loan, forcing you to sell at a loss.

Very occasionally debt might be acceptable if you need to buy something to earn more money, and you really can’t save it up. For instance, you may need specific training to upgrade your job, or buying an ice cream van could whip up a fortune. (Don’t laugh, it worked for Duncan Bannatyne.)

You’ll have to use your judgment here. Buying a sports car with debt to impress your boss doesn’t count!

Why is mortgage debt okay?

The reason that that mortgage debt is good debt is that over the long term house prices tend to rise.

Over any ten year period houses have at least kept their value. A mortgage is for 25 years or so, over which time house prices might double or triple.

When you buy a house with a mortgage, you benefit in three main ways.

Utility

You have somewhere to live, that you are in control of.

Rising value

House price inflation combats the pernicious effect of compound interest on your debt. If house prices are rising 5% a year and your mortgage rate is 5%, your asset is rising as fast in value as your debt is growing.

Future asset

When you buy a house with a mortgage, you end up with a future asset that you own – for most people their biggest asset of all. In contrast, when you rent, buy a hamburger, or go on holiday to the Maldives, you’re just consuming; you’ll get no future financial value out of it. (Possible exception – borrowing to pay for study).

A mortgage is a dead debt, by the way…

Perhaps you think though my headline is misleading. Didn’t I say the only good debt was dead debt?

I did, but that’s because I happen to have learned along the way what the word mortgage means.

It turns out it comes from two parts:

The French word mort which means dead.

The Old English word gage, which means pledge.

So mortgage means ‘dead pledge’. Close enough!

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Why you must get out and stay out of debt

by The Investor on December 6, 2007

Your debt makes other people rich. You’re borrowing from your future self, who will be poorer, less secure, or lead a less abundant life because you wanted something now, before you could afford it.

You must get out of debt. You can’t save while you’re in debt, and it grows like a weed. Kill it!

Avoid debt like the plague

The only good debt is debt taken on for investment. In personal finance terms, that means an affordable mortgage to buy property for the long-term.

We all know what bad debt looks like:

Excess clothes piled up on store cards.
A loan taken out to fund a holiday.
Flashing the plastic to keep up with your mates.
The last week of every month’s expenses being put on a credit card and never actually paid off.
Sundry pointless items bought on the ‘never never’ as our grandparents wisely called what we call credit.

Bad debt – non-mortgage debt – will make you poor if you’re not doing very well already, and it will stop you becoming rich if you are.

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Taking stock: Your Statement of Affairs

by The Investor on November 28, 2007

To get the most from your money in the long-term, you need to know what you own, what you owe, how much you bring in every month from your earnings, savings and investments, how much goes out again, and thus whether you’re living beyond your means.

Completing this personal reckoning is step two of my rather dramatically entitled 10 eternally true steps to financial freedom.

If we don’t take stock, we’re liable to do silly things like:

Saving into a bank account earning interest at 5% while simultaneously accruing interest on a storecard debt at 26%.
Working overtime, then buying takeaway food and late night drinks as a reward and so, post-tax, negating the overtime we’ve earned.
Devoting evenings and weekends to our investments, to the detriment of the job or second income stream that’s actually bringing in the loot.
Spending hours looking for the cheapest books or CDs online, while paying thousands extra a year on an expensive mortgage that’s moved onto the lender’s standard variable rate.
Talking celebrity gossip at parties, when we could be enthusing to a cute stranger about how we’ve reduced our grocery bill down to £30 a week.

Okay, maybe that last one is an acquired taste.

How to take stock of your finances

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A journey of a thousand miles starts with one step

by The Investor on November 27, 2007

That which is at rest is easy to grasp.
That which has not yet come about is easy to plan for.
That which is fragile is easily broken.
That which is minute is easily scattered.
Handle things before they arise.Manage affairs before they are in a mess.
A thick tree grows from a tiny seed.
A tall building arises from a mound of earth.
A journey of a thousand miles starts with one step.
Contriving, you are defeated;
Grasping, you lose.
Laozi, (Taoist philosopher, China, 4th Century B.C.)

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