I Don’t Want To Be Debt Free

by A Blinkin on April 2, 2012

Did you do a double-take when you read this title? Considering a lot of my readers are personal finance bloggers, I’m guessing yes; especially since the majority of personal finance bloggers see debt as an unnecessary evil.

A few years ago I was faced with a personal dilemma: should I pay off my student loans or invest my excess funds? With the cost of my loans averaging 4% I decided to hold onto my debt and use my monies elsewhere. Seeing that the money I chose to invest returned roughly 38%, I sleep well at night knowing that I made the right move.

I was having a conversation last week that brought a similar decision-analysis into my mind. I foresee myself purchasing a home within the next 2 years. My exact thought was: “How cool would it be to save aggressively over this time so that I could purchase the home in cash?” Living a mortgage-less life has got to have some positive side effects but is pouring 200k into an illiquid asset the best use of your funds?

I don’t know but I don’t think so.

(If there was an option to open a fixed-rate HELOC that I could draw from for 30 years, I would consider it; but to my knowledge this doesn’t exist.)

There are a lot of people that would love to see a 4% risk-free return right now, but I’m not one of them. I am confident that investing will produce (on average) better returns than this. Whether that’s investing in stocks, bonds, OR myself – I’m not sure – but having the flexibility to make these investments is appealing to me.

My feelings may change as interest rates and the cost of borrowing start to rise, but for now money is cheap.

Use it wisely.

  • http://www.modestmoney.com/ Modest Money

    Wow, nice 38% return on your investment. When you can get returns like that, no wonder you are not in a rush to pay off debts.

    • Anonymous

      Keep in mind the markets been attractive. I don’t expect to see 38% moving forward but >4% shouldn’t be an issue.

  • http://www.bluecollarworkman.com/ TB at BlueCollarWorkman

    Just stumbled onto this site and already love it. Here’s a less-well-founded dumb mental reason that I “enjoy” being in debt. Becuase every month my wife and me pay off more of our debt I feel good about myself at the shrinking debt number. Sure, I could feel good about not being in debt and putting money towards investments each month, but right now I find a ridiculous amount of satisfaction in making the debt number shrink each month. Makes me happy to be in debt. :)

    • Anonymous

      Haha I like it. So whenever you get down to one final payment will you refinance to get max cash out to ensure you’ll forever have a dwindling balance to watch?

  • http://www.makingsenseofcents.com/ Michelle

    This is something I’m currently debating. My student loans are at a relatively low rate (4%), so I could do what you’re doing.

    • Anonymous

      Unfortunately I can’t say that its black and white. Depending on a number of variables, I would actually encourage paying off the debt. What is your risk tolerance? What would you do if you lost the money?

  • http://moneymamba.com/ JT

    If I had student loan debt, I’d probably pay it off before risking it. The whole bankruptcy deal, or whatever.

    But when it comes to mortgage debt, sign me up! A home is a very inexpensive source of awesome, fixed-rate leverage. There’s no reason to ever pay off a home, as far as I’m concerned.

    The real shame is that most people start thinking about paying off debt when it is the best time to be a debtor. Economic growth turns negative, interest rates plummet to boost economic activity, and meanwhile people stressed with smaller incomes start paying off debt to boost their own cash flow. It’s in these kinds of recoveries that the wealthy become wealthier, because they recognize once in a lifetime opportunities to borrow money for practically nothing.

    • Anonymous

      I need to link back to your site because your recent article sparked some of my thoughts.
      If I lose all my investments, I’ll still have money to pay my student loans. Bankruptcy never crossed my mind – even as a worst case.

  • Maria@moneyprinciple

    I am with you on this one where mortgage is concerned – money put in your house is dead money and is not working for you. Apart from that, it seems to me that the next decade or so will be time when it is no so bad to be a borrower. This is my head. My heart is on a different planet – it says, pay the debt off, pay the mortgage off…

  • http://erinshanendoah.com/dogatemywallet/ shanendoah

    We aren’t in a hurry to pay off my loans that are at 3.5%, but the loans that are at 5.8%, or our mortgage at 6%, those we’d like to get rid of a little more quickly. C believes the best retirement fund is a paid off house, and others can argue with that, but since it’s my marriage, its a compromise I’m willing to make. Save for retirement (my percentage saved went up 1% today, as it does every April), but pay a little extra every month on the mortgage.

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  • http://onecentatatime.com/ Onecentatatime

    38% return, I am sure it was from stocks. Guess what would have happened had the market turned opposite. It all depends on risk appetite.

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  • http://www.mymoneydesign.com/ MyMoneyDesign

    With a 2.25% auto loan and 3.75% mortgage, I’m asking myself the very same question – What is the point in paying these loans off if I could potentially grab 8% on an index fund, 4% from a dividend fund, or possibly even more with an all-star pick. There is a technical term for this called “leverage” that rich people have exercised for years. Admittedly it is great to payoff your debts, but sometimes a smarter alternative is available!

  • http://www.financialexcellence.net Matt Wegner

    I think the trick is in how much you do of either one. So many people used the same logic to buy more house than they needed and it got them in trouble when their income dropped. If you have a $1200 mortgage because rates are so low, but you invest only $400 a month, I’d say you’re missing the point.

    Of course, it also depends on your risk tolerance. If you can’t handle the years when the market gives you a negative return, you’d better not be leveraging your investments. I can say from experience that it’s really nice to not worry about having to pay your mortgage when you lose your job. That doesn’t mean I won’t get a mortgage on my next house, but it does mean I’ll make sure it makes sense with my cash flow situation.

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  • Stephen

    Think of what you could do with an extra $1000-2000 per month that was previously going to your mortgage and car payment. You won’t find a more liquid asset than cash each and every month to do with as you please. Granted there should be a balance between keeping a contingency fund, investing and paying off debt. Just something to consider.

    Full disclosure, I am a Dave Ramsey fanatic.

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