Why Debt is Good

Is debt ever good? Why do Millionaires and Billionaires often have mortgages on their home? Every time you deposit money in a bank, the bank is borring money. In fact, the "commodity" of a bank is debt. Banks make BILLIONS and the only thing they sell is debt?

It's called arbitrage. If you could borrow $1million at 2% and lend it at 5%, would you do it? What if your risk was guaranteed? The federal reserve and government pretty much guarantee that banks can't go bankrupt. They are "too big to fail." A 3% gap on $1million is $30,000 a year, plus compound interest!

That doesn't mean that debt is good. Neither you, nor I have a government guarantee. In fact we have no guarantee. Debt is never good, but sometime it is a necessary evil.

I recently purchased a car. I could have paid cash, but the bank offered 2.24%! I only pay $517 in interest over 52 months of the loan! That is uber cheap. The average annual inflation is about 3%. If I can borrow  money at less than 3% then it's basically free money. If I think we are headed into an inflationary cycle, then they are paying me to borrow money.

No, don't borrow money to make money. That's stupid. However, in these uncertain times I feel paying $517 over 52 months is worth having $10k+ in reserves in the event that I need it for another reason. So is that debt bad? Especially if I have the ability to pay it off at any moment?

I'm not going to answer. I would never suggest that someone goes against their principles. If someone needs to be debt free based on principle, I will never say that is a bad idea. However, it might be possible that there are better things you can do with your money. It's a personal decision on a case by case basis. Good luck!

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