Dave Ramsey is famous for his absolutely no debt approach to living. He believes that it’s better to master the behaviors he believes are ideal rather than optimizing returns.
I disagree with Dave. Debt is obviously sub optimal especially at high rates, but I’ve used debt successfully for decades to grow my net worth, and to optimize my cash flow, and I’m about to do it again.
Here are just a few examples of how I’ve used debt to get ahead:
I bought a house
In 2008, I bought a home that had sold for $300,000 for $146,000. 15 years later it was worth $400,000. The interest rate on the home is under 3%. This is a net 0% interest rate when factoring in inflation, and means that this debt is costing me nothing to hold on to.
Without debt I’d have missed out on this return.
I financed solar panels and a hybrid
I cut my energy bill in half and went from spending $500 a month in gas for my SUV to spending $100 a month for the hybrid. When rates dropped below 3% on the mortgage I rolled the panels into the note, effectively getting the panels with 1) a tax credit 2) using equity from my home which was also tax free because debt is not taxable income.
0% credit cards
I used a 0% intro interest for 12 months to buy thousands of dollars in silver bullion at around $35 an oz. It has gone to $120 an oz just about 15 months later. It currently sits around $90 an oz.
Rather than pay off the card. I divided then balance into 12 payments and put that money instead into the S&P 500 to ensure I could pay it off when the interest free period ended.
Then when the time came due, I got another 2.99% balance transfer and just rolled the debt over there while continuing to fund my portfolio with the same amount of money every month.
When the balance is due, I’ll look for another zero percent balance transfer or just pay it off using a margin loan from my portfolio.
Benefits of Debt
- Leverage: In a world where everyone uses debt including the government, you risk falling behind if you don’t use debt as well. Debt causes inflation, and leverage is how you protect yourself from inflation.
- Debt is not taxable as income but you can spend it just like income.
- Debt can be good or bad, it’s all how you use it. Using debt to finance a trip or to buy concert tickets is a bad idea. Using debt to buy real estate, start a business, or to buy stock, precious metals, or other cash producing assets is a good way to use debt.
- Debt can be secured by assets that return more than the rate of the debt: This makes the rate on the debt effectively negative . That is to say you have borrowed money against an asset but the appreciation of the asset is exceeding the cost of the debt. If you use the borrowed money to buy another asset that also has a yield you can get ahead even faster.