The financial world we live in is just as wild, if not more, than the mountains and woods we walk through. We are told that the fundamentals of our economy are strong, but we can feel that something is wrong. My unique financial background and survival passion make Financial Survivalist and excellent place to learn and share.

Monday, November 5, 2012

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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