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Get debt free as soon as possible? Bad advice!

I spend a lot of time reading articles on the internet about economics and personal finances. The comments are particularly interesting since they give you an idea of what average people are thinking. Something that really astounds me is this absolute fear of debt. I just read an article about a young couple who was making 4 times their minimum monthly payment to their only debt, a student loan, and decided to take a vacation with the money they had saved for that purpose. The comments absolutely blasted them!

It seems, in the eyes of the readers, that people should put every effort into becoming debt free as soon as possible and delay expenses and savings until that happens. Most of the commenters stated that paying off all their debts should have been done before they take a vacation.

I don’t know where this advice is coming from, but it’s just plain evil.

The advice to avoid debt like the plague is short sighted and it will make your standard of living lower.

It will make you poorer.

It almost feels like a conspiracy to keep the masses poor, it’s such prevalent advice. How many billionaires didn’t take on debt? How many billion dollar companies don’t have debt? Debt can make you rich! In fact, it’s almost impossible to get rich without debt.

So you have a choice. The first option is to live as debt free as possible. Assuming you’re an average person with an average income, it will take you years to save up for a house. If you want to pay cash for a house? Good luck! By the time you have saved enough for a house, the price will have gone up so far you won’t be able to afford it. Meanwhile you will have paid people like me tens, if not hundreds of thousands of dollars in rent. Thank you, by the way! If you are willing to get a mortgage and then attack that debt as quickly as possible, you are still selling yourself short. With today’s interest rates, a mortgage is practically interest free after inflation and deductions. Every extra dollar you are putting towards your mortgage is you investing at just over 0%. Does that sound like a good idea?

The second choice, the choice used by most of the rich, is to use debt wisely. If you can borrow at low interest rates to buy an appreciable asset that will grow at a rate higher than the borrowed interest rate, then do it. The only thing you need to worry about is the cash flow. Make sure you can make the payment even in bad situations. The math works out like this. If you can borrow $100 at 4% and invest it at 6%, you are making $2 per year. If those are guaranteed rates, how much should you borrow? As much as possible! Of course, while the borrowed side can be a guaranteed rate, the invested side is rarely guaranteed. In the long run, however, you can find investments that average 6% or more and the math will work out and make you richer. Every dollar of debt you pay off makes your potential net worth lower because you can’t invest that money at the higher rate.

In my personal situation, I got out of college, and one year later bought a house. I financed it. Then I bought a rental house, also financed. The next year, I bought three more. The next year I bought ten more all using debt. By the time I was three years out of college, I had accumulated about two million dollars in debt from mortgages. I owned 14 homes though. The rent from those homes paid the mortgages. A few years later, the financial crisis happened. It was painful, and I had to chip in from my personal income, but I covered the mortgages. Now it’s been almost twenty years, and it hasn’t been a particularly good real estate market over that time, but my renters have been making my mortgage payments for decades. The houses have doubled in price, and the mortgages have gone down. I have collected millions of dollars in rent from other people that has gone to buy me houses. Without debt, it could not have happened.

Yes, debt can be bad if used incorrectly, but don’t let anyone tell you that debt itself is bad. There are of course risks and it doesn’t work every time, but look at ten rich business people’s situations. I bet nine if not ten of them got there using debt.

Don’t let the mass media keep you poor with bad advice.

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