| Do you want to live a debt-free life? |
|
|
|
|
|
oti4uzo
New Poster
Cash: $ 0.45
Posts: 2
Joined: 28 Mar 2012
|
| Do you want to live a debt-free life? |
 |
|
|
Thu Mar 29, 2012 5:12 am |
|
|
fast
Senior Member
Cash: $ 45.05
Posts: 220
Joined: 20 Oct 2009
|
| Re: Do you want to live a debt-free life? |
|
|
Why in the world would anyone want to live a debt free life? That would cause the risk in their financial lives to go down, and although risk isn't something we want for the sake of having it, shouldn't we strive to increase our risks since the opportunity for reward only comes with risk?
If I tell you to follow the sun and all you see is your shadow, then you're going the wrong way. Do you want to live a debt-free life? If so, then maybe you're going the wrong way. Short-term, high interest debt doesn't do any of us any good, but long-term, low interest debt can be utilized for the betterment of our lives.
PS: Not all of us are dudes. Some of us are dudettes
|
|
Thu Mar 29, 2012 1:06 pm |
|
|
littleroc02us
Moderator
Cash: $ 384.35
Posts: 1891
Joined: 09 Feb 2009
|
Of course I would want to be debt free. My wife and I are except our mortgage which will also be gone someday. What that would do is lower our risk level and allow us to pile up cash and invest tons of money, have no payments, owe nobody and give money away like crazy. Who wouldn't want that?
Risk comes from not knowing what you're doing. (Warren Buffet)
|
|
Thu Mar 29, 2012 3:19 pm |
|
|
fast
Senior Member
Cash: $ 45.05
Posts: 220
Joined: 20 Oct 2009
|
|
|
|
quote:
Originally posted by littleroc02us
Of course I would want to be debt free. My wife and I are except our mortgage which will also be gone someday. What that would do is lower our risk level and allow us to pile up cash and invest tons of money, have no payments, owe nobody and give money away like crazy. Who wouldn't want that?
I wrote my previous post in jest; I think what you're saying is the smart thing, and I want to say it aloud and let it be known.
But, there's another side to the story I've been grappling with. Yes, the risk is lower, but just how significant is that? If the only debt you have is the mortgage and maybe a small balance on a credit card, then given your income and aversion to risk, then the added risk of investing the equity in your home is minimal--or at least that's appears to be the claim of those that advise investing in the market while in debt.
Yet, if your household income goes away and the market tanks, you may have to face the sad eyes of your spouse. So, as far as I'm concerned, I'm still with ya; it's going to take a bit more than a functioning calculator and lecture on the past performance of the stock market over the last several decades to convince me that the risk is merely minimal.
I would still like to play the game though and have a good credit score, for despite the risks of having credit at all, I still think the advantages outweigh the disadvantages.
|
|
Thu Mar 29, 2012 3:45 pm |
|
|
littleroc02us
Moderator
Cash: $ 384.35
Posts: 1891
Joined: 09 Feb 2009
|
Here's my theory, I would rather use actual cash to invest in the market with no debt then to have a mortgage, cc debt, furniture debt, car debt and invest in the market because what you are basically doing is borrowing to invest in the market. Most people only care about interest rates mathematics, there are times when they don't matter in my opinion.
Risk comes from not knowing what you're doing. (Warren Buffet)
|
|
Thu Mar 29, 2012 4:20 pm |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
|
|
|
quote:
Why in the world would anyone want to live a debt free life?
I'm age 73, I"ve used debt all of my life and continually use debt, even now that I'm retired and wealthy - so I avoid 'debt-free'. Yes, obviously the 'young' (dudes, lol) should avoid high-cost consumer debt - late model cars & credit cards keep many people from ever breaking out of the paycyeck to paycheck life.
But we are given about a 30 yr block of time to acquire wealth, after you are 55 you need to transition from wealth building to wealth preservation, you no longer have time to rebuild wealth if you lose it - plus you have way more wealth to lose. So, to become wealthy in 30 years, you will need leverage/risk, no one ever 'saved' millions, they earn it by investing.
But even then, if you have considerable money plced in safe places that will last you for life (and way more) - then your 'extra' wealth can be placed in growth items for your heirs - ie, that extra money falls into the longterm growth category - it can/should be placed at moderate risk (rather than no-risk) and leveraged.
|
|
Thu Mar 29, 2012 4:25 pm |
|
|
fast
Senior Member
Cash: $ 45.05
Posts: 220
Joined: 20 Oct 2009
|
|
|
|
quote:
Originally posted by littleroc02us
Here's my theory, I would rather use actual cash to invest in the market with no debt then to have a mortgage, cc debt, furniture debt, car debt and invest in the market because what you are basically doing is borrowing to invest in the market. Most people only care about interest rates mathematics, there are times when they don't matter in my opinion.
I would rather walk the risk-averse trail myself, but I don't merely want to get to an overlook; I want to get somewhere near the top of the mountain. If I'm understanding oldguy correctly, I would be seriously shooting myself in the foot and slowing down my wealth-building opportunity by not taking advantage of debt. See, the issue I'm having is that even though that cold calculator cares not a whip about the risks, it at least honestly reflects the fact that the difference between the risk-averse trail and the risk-laden trail is significant. Not insignificant but significant. It's not like we're talking about a minimal difference. The philosophy that guides us can (apparently) have well over a million dollar difference.
I fear that our aversion to risk may stem too much from the dangers that come from credit mismanagement. There are countless stories of how people who use credit ruin their financial lives and live paycheck to paycheck only to later file bankruptcy. Oldguy isn't advocating being in that kind of debt. He is only okay with what we can call constructive debt--debt that goes to support our wealth-building endeavors.
I'm opposed to extremism. I'm a moderate kinda person. I think both a risk free approach and a risk blind approach is unwise.
|
|
Thu Mar 29, 2012 4:44 pm |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
|
|
|
quote:
I'm opposed to extremism. I'm a moderate kinda person. I think both a risk free approach and a risk blind approach is unwise.
Yes - a no-risk approach where you confine yourself to savings and CDs gives you mathematical certainty of tracking inflation (that is what no-risk products are designed to do). But that also assures that the average wage earner cannot attain wealth, you cannot 'save' your way to wealth.
And the high-risk approach almost always fails, except for a very few lottery-type home runs - and even then most gamblers are unable to stop at the top.
So you are absolutely correct - the moderate risk approach will provide wealth for an average wage earner - not mega bucks but multiple millions.
quote:
See, the issue I'm having is that even though that cold calculator cares not a whip about the risks, it at least honestly reflects the fact that the difference between the risk-averse trail and the risk-laden trail is significant.
Well, the cold calculator can find the standard deviation of various products and give you the probability of success over various time frames. Eg, it tells you that the SP500 will go up 11% +/- 36% in 19 yrs out of 20. That info is almost useless EXCEPT that it tells you NOT to use the SP500 for your one year goals. Conversely, if you leave that money in place for 30 yrs (33 is considered to be the statistically significant sample) that provides time for statistical averaging to occur and the answer will converge on 11%/yr.  Unless of course you live in a 30 year outlier period, then you may fail. Of course, 'failing" might be 8%/yr for 30 yrs, not exactly a wasted life, way better than a 1% savings account. So to give yourself an opportunity you must take the risk.
|
|
Thu Mar 29, 2012 5:19 pm |
|
|
fast
Senior Member
Cash: $ 45.05
Posts: 220
Joined: 20 Oct 2009
|
|
|
|
quote:
Originally posted by oldguy
Well, the cold calculator can find the standard deviation of various products and give you the probability of success over various time frames. Eg, it tells you that the SP500 will go up 11% +/- 36% in 19 yrs out of 20. That info is almost useless EXCEPT that it tells you NOT to use the SP500 for your one year goals. Conversely, if you leave that money in place for 30 yrs (33 is considered to be the statistically significant sample) that provides time for statistical averaging to occur and the answer will converge on 11%/yr. Unless of course you live in a 30 year outlier period, then you may fail. Of course, 'failing" might be 8%/yr for 30 yrs, not exactly a wasted life, way better than a 1% savings account. So to give yourself an opportunity you must take the risk.
I think we're all willing to take on the risk that comes with investing in the S&P 500.
Your financial position is such that you will never find difficulty in servicing the mortgage on your primary residence, so your choice to continue borrowing on your home is a low risk choice. The current issue on the table isn't whether or not we should take on the risk of investing in the market; instead, the current issue is whether or not we should be so risk-averse as to refrain from using debt as a means to speed up our wealth-building, market investment plans.
I suspect that it depends on the financial health of the individual or couple. For example, a married couple making a combined income of three times the national household median income with liquid assets twice the value of their home (and again, this is just an example) is in a mighty fine position to take on the risk that comes with continuously borrowing on their home.
However, a newlywed couple where the wife doesn't work and the husband makes $30,000 a year who has no debt except the $75,000 balance on their $150,000 home has no business (in my opinion) borrowing on their home to speed up their investment for retirement. Too much can go wrong with no means to solve the problems that may arise.
If person A says to never borrow on their home to invest, and if person B says to always borrow on their home to invest, then I'm neither person A nor person C, for the view that I'm coming to have is that it depends, and as I said earlier, it depends on the financial health of the people in question.
Littleroc02us seems to lean towards having the view that would be espoused by person A, and you seem to lean towards having the view that would be espoused by person B. I find myself in the middle arguing against both of you, yet to the unwary listener, it would seem as though I share your stance when discussing the issue with him; furthermore, it would seem as though I share his stance when discussing the issue with you--all because my view seems to be somewhere inbetween. Yet, the truth is that I’m still feeling my way through all of this as I appear to go back and forth.
I’m sure you can calculate how much wouldn’t be earned by not keeping long term, low interest debt, and I’m sure he can produce several examples of what can go wrong while using borrowed money to invest with. I can’t do much of anything except try to stay focused. 
|
|
Fri Mar 30, 2012 4:11 am |
|
|
littleroc02us
Moderator
Cash: $ 384.35
Posts: 1891
Joined: 09 Feb 2009
|
|
|
|
You have to remember that although Old Guy was successful with his risky approach, a lot more people do fail. For example my parents were teachers for around 30 years they made good choices with real estate and investments, save and worked very hard. They retired at age 58, have a home in Minnesota and one in Arizona on a golf course, they travel the world and are very well off due to smart decisions that were lower risk. Whereas a lot of their friends are still stuck in their hometown unable to leave or do things because of choices they made like buying new cars all the time, buying larger homes then they could afford and not investing in the right things.
In my life I can already see these things happening, I have friends I wish I could tell to stop making dumb decisions like not taking advantage of Roth IRA's, buying new cars and boats, buying large homes they can barely afford.
Again I take a very conservative route to being wealthy and it shouldn't hurt me at all. The risk I do take is with the stock market, but that to me is good risk because according to Burton's study the worst 25 years stock market period was 8%. I think I can handle even the worst time in history of the stock market. So with the money my wife and I have already accumulated by the time we retire making 10% on our money we should easily have over a couple 2-3 million and everything paid for. I can live with that if that's what losing out on leveraging and borrowing might get you.
So to me I think a lot of people here if they had a paid for house they would borrow against it to invest, I say no way never!!!
Risk comes from not knowing what you're doing. (Warren Buffet)
|
|
Fri Mar 30, 2012 1:31 pm |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
|
|
|
quote:
I suspect that it depends on the financial health of the individual or couple. For example, a married couple making a combined income of three times the national household median income with liquid assets twice the value of their home (and again, this is just an example) is in a mighty fine position to take on the risk that comes with continuously borrowing on their home.
However, a newlywed couple where the wife doesn't work and the husband makes $30,000 a year who has no debt except the $75,000 balance on their $150,000 home has no business (in my opinion) borrowing on their home to speed up their investment for retirement. Too much can go wrong with no means to solve the problems that may arise.
Yes, the risk for the young couple is way higher than the risk for the older wealthy couple. But, the old couple got wealthy by taking that extra risk when they were newlyweds. And the time to take risk is when you are young - lots of years to benefit from your good decisions (and to learn from your bad ones) and get the power of compounding on track for you, not against you.
quote:
You have to remember that although Old Guy was successful with his risky approach, a lot more people do fail.
This is true, I witnessed it first hand. But the common error wasn't the approach, it was NOT following the approach - most failures were due to lack of patience, lack of conviction, selling in a market crash, then holding cash until the market recovered, and buying back in. It takes patience to become rich.
|
|
Fri Mar 30, 2012 3:24 pm |
|
|
fast
Senior Member
Cash: $ 45.05
Posts: 220
Joined: 20 Oct 2009
|
|
|
|
quote:
Originally posted by littleroc02us
The risk I do take is with the stock market, but that to me is good risk because according to Burton's study the worst 25 years stock market period was 8%.
Although I am willing to take on the risk that comes with investing in the stock market, it's not because of any facts or figures I've heard here on this forum.
A long hard look at a chart of the SP500 over the last several decades and a cursory look at how significant are the rates of change for each five year block of time since 1985 compared to the markets performance prior to that give me reason to be wary of the interpretations people make when they extrapolate from the data set. I’ve taken statistics and calculus, and I still don’t know what to make of half the stuff I hear about, but I do know enough to know that there is very good reason to be extremely cautious when it comes to accepting how people interpret their findings. A mistaken interpretation is to a correct numerical calculation as is a fire to a house. (Source: me)
But, that's neither here nor there; it's still the case that I am willing to invest in the market--whatever it may have in store for us.
|
|
Sat Mar 31, 2012 12:01 am |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
quote:
A long hard look at a chart of the SP500 over the last several decades and a cursory look at how significant are the rates of change for each five year block of time since 1985 compared to the markets performance prior to that give me reason to be wary of the interpretations people make when they extrapolate from the data set. I’ve taken statistics and calculus, and I still don’t know what to make of half the stuff I hear about
fast - I don't recall if I've posted thsi for you before - but it's a good source of SP500 data - it may help with your five-year blocking.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
|
|
Sat Mar 31, 2012 2:04 am |
|
|
fast
Senior Member
Cash: $ 45.05
Posts: 220
Joined: 20 Oct 2009
|
quote:
Originally posted by oldguy
quote:
A long hard look at a chart of the SP500 over the last several decades and a cursory look at how significant are the rates of change for each five year block of time since 1985 compared to the markets performance prior to that give me reason to be wary of the interpretations people make when they extrapolate from the data set. I’ve taken statistics and calculus, and I still don’t know what to make of half the stuff I hear about
fast - I don't recall if I've posted thsi for you before - but it's a good source of SP500 data - it may help with your five-year blocking.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
You did.
According to the site, "the tool will provide the average index value of the S&P 500 for the given month and year." Because I'm not given the beginning and ending values, the numbers are skewed.
|
|
Sat Mar 31, 2012 2:30 am |
|
|
|
