Obsessing Over Debt Can Stop You From Getting Rich

The credo preached by just about every personal finance writer is that debt is an enemy that must be eradicated before you can think about building wealth. But there’s a reason many rich people have no problem with taking on more debt to finance new ventures. Those who think big and take manageable risks tend to be the biggest winners.

In a guest post at Budgets Are Sexy, a writer named Todd laments his mistake in getting rid of debt rather than using his extra money to double down on investments. Because he was so conservative, he lost out on a chance to make a tremendous amount of money.

It’s tough to feel much sympathy for Todd — rich people problems and all that — but he isn’t exactly asking for you to cry for him. What it seems he’s trying to impart is that diversity is key. Focusing too much on any single financial area can lead to a failure at another level. Horse blinders may keep you focused, but they stop you from seeing the bigger picture.

How I Lost a Fortune Getting Out of Debt [Budgets Are Sexy]

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  1. bigasssuperstar says:

    It depends on how long it’s going to take you to nuke your debt. If it’s going to take years, well, yeah, you’ll miss out on opportunities. If you can kill the debt in months or maybe even two years, you’re really not missing out on much growth. And once the debt’s gone, you’ll have that much more money to pour into investing.

    Also, never forget that debt is risk, and that high-interest debt is going to cost you so much more than you’d likely make on investments. If you’re the type to surround yourself with consumer debt, one might guess that you’re not the best candidate for making great investment choices right off the bat.

  2. ARP says:

    I think it depends on your debt to income ratio and what kind of debt. Yeah, if you’ve got a good, stable (as stable as you can have these days) income and low-ish interest debt, then yes, you can push your investments as they’re earn more than the interest rate on your debt. But if you’ve got $10k in 20% credit card debt, I doubt you’ll be able to beat the stock market well enough to ignore (i.e. min payments) that debt.

    So, his advice sounds like 1% problem.

    • bendee says:

      I don’t think it is a 1% problem – think about the people with new/refinanced mortgages with an interest rate under 4%. Making additional principal payments may not be a smart idea, especially if interest rates go up in the next 2-10 years, allowing one to earn more than 4% in a low risk mutual fund, CD, or other financial product.

      • Firethorn says:

        I think that it could be taken as a 1%’er ‘problem’ because the average person isn’t capable of making those informed decisions, nor having enough capital to make enough of them to diversify and survive the occasional failure.

        It’s one thing to be able to toss $1M each at 10 startups, knowing that 4 will fail, 4 will break even, and 1 will return $10M. It’s quite another to only have $100k or so(which isn’t enough to get into startups), to go into ONE of those investments.

    • huadpe says:

      Even for the 1%, that advice isn’t true, unless you took on the debt in an absurdly low interest environment and are investing in a high interest environment.

      The interest you pay on newly taken out debt is, assuming your lender is subject to the same market forces as you, going to eat up your entire alpha and then some (that is, the expected risk-adjusted return on your investment). All that’s left is your beta (the variance on your return). It’s roughly equivalent to putting your money on Red.

  3. DGC says:

    If I had a choice, I’d do exactly as he did. I can’t think of any more secure feeling than owning a home free and clear. His investments could have lost money (that never happens,right?) and he would still have the house – sans mortgage.

    • consumeristjohnny says:

      I wonder how much value your home has lost in the last several years. Why pump extra money into a decreasing asset? People who are intelligent about money realize real estate is an asset and financial instrument.

      • humphrmi says:

        Some people do this weird thing called “living in a home”, which doesn’t lose value because it was never an investment in the first place. I realize this is a foreign concept to some of you, who were told that all house purchases were investments. Unfortunately, while you’re were betting on the housing market, some people were (more conservatively) betting that they would have a place to live in the future. And guess what, they won!

        • NeverLetMeDown says:

          Living in it or not is irrelevant. It’s an investment, since the money used to buy the house has an opportunity cost. Think of it this way (to use an extreme example to make the point). You have $1 million in cash. You use it to buy a house, outright. Assume (for simplicity) that there are no property taxes, no maintenance costs, etc etc (very optimistic, needless to say). So, you have a place to live, for zero cash outlay, forever. Then, imagine that real estate prices drop by 50%. So, houses like yours are now renting for $1000 a month. Someone who didn’t buy the house, but instead rented and put the money into the market, would historically earn about (over time) 8%. So, they’d be getting $80k a year, or about $65k after taxes. They pay the $12k a year in rent, and they’re sitting there in a house identical to yours, with $53k in cash flow, every year.

          You can claim that “buying a house is a place to live, not an investment,” but you can’t just pretend that buying a house is an explicit choice about how to pay for housing, and where to invest your money. Not at all saying that it’s the wrong choice, but it’s a choice, with consequences.

          • Conformist138 says:

            Compare cars and houses. With a house, everything you said is true but also applies to cars, which are NOT investments in the “increasing value over time” sense. Like housing options, transportation options are varied with a variety of prices, benefits, and drawbacks. Like houses, we spend a lot of money to get cars and maintain them. Yet I never see anyone freaking out about how their car depreciated significantly just driving it off the lot- that is 100% expected. “Used” items often lose value, but we expect our houses to increase. When a house depreciates, the only real problem appears when you want to sell- just like a car. If the car has depreciated and yet you owe more on it, you might not be able to sell it without taking a loss. Yet, somehow, when houses do this people have almighty tantrums like they were owed increased returns on their house and got cheated out of their rightful gains.

            • Firethorn says:

              My personal philosophy is that homes DO depreciate, they just generally depreciate slower than inflation. If you maintain it properly(costing $), it’ll maintain it’s value. If you improve it(costing $$), it’ll increase in value.

              What can increase it’s value all on it’s own? The land it’s on. As they say, location location location, – if the area you live in is expanding, it can place your property ‘closer’ to important destination spots, or at least you have more people looking to live as close to the target spots than there were when you got the spot. In some cases it can get extreme enough that somebody buys the land with the house on it, only to demolish the house to build a new one.

              With incomes remaining static and the growth in the USA slowing, the expectation of increase combined with loosened credit to create a bubble.

  4. Coles_Law says:

    It really depends on how risky the investment is. If you can make reasonable estimates, you can calculate an expected return and compare it to the interest on the debt. More importantly though would be to figure out the most you could end up losing and figuring out if you can handle that.

  5. Bort says:

    this is very tricky advice, making more money on investments is not guaranteed, the rate of return cannot be predicted, and there is no math formula to determine what allocation should be to investment/debt, and not everyone is in a position to positively use debt to grow their venture (assuming they are involved in one)
    to pull this off you would need experience, being in the right place at the right time, excellent risk management skills, and often more then a little luck

    • stinerman says:

      Exactly. If you read the story you can see his situation was such that he paid off his teaser-rate ARM in 2 years(!), but his portfolio doubled in the same amount of time.

      This is a case of hindsight being 20/20. I have a feeling most of us here couldn’t possibly pay off a mortgage in 2 years, even if it was interest free. So he’s got that going for him. And of course, he got lucky and his portfolio skyrocketed.

      Just imagine if it would have went the other way. He put every dime he had into his portfolio instead of paying off his mortgage…and the portfolio lost 50% of its value. He’d be sitting on an underwater property, asking to refinance at our expense because he bet on red and the wheel came up black.

      I guess the moral of the story is “if you can see into the future, determine which is better — paying off debt or doubling down on your investments”.

  6. lovemypets00 - You'll need to forgive me, my social filter has cracked. says:

    I’ve been in debt throughout my adult life. About 9 years ago, I took the bull by the horns and vowed no more. Finally, after scrimping, saving, and making extra payments, I’m down to about $8200 on a Parent Plus college loan and a small (under $1000) in credit card debt. I am building an emergency fund, and I’m longing for the day when I get a paycheck, it’s mine and not a bank’s.

    Since I don’t make much money (under $40K but until about 5 years ago it was under $30K), I don’t have tons of money to invest. So for me, getting out of debt means more than making a small amount of money on an investment.

  7. HomerSimpson says:

    You’re forgetting the rich often have no problem thumbing their nose at something that’s a bad investment and letting it go into the toilet (this while telling the common folk that it’s ‘yer personal responsibility’ to keep on paying those bills!)

  8. RedHatMatt says:

    I don’t see anywhere in the article where Todd mortgages his paid off house to the hilt so that he can plow that money into the stock market because he is so sure he can make more money that way. Sure, I could have made a lot more money by not paying off my house and shoving that money into Apple stock, but that is not the point in paying off your house. My house is paid off so that if I lose my job and the stock market tanks, I still have a place to live.

    -Matt

    • Bob says:

      “But…but…I will NEVER lose my income.”

      That seems what the author of this article is assuming. 5 years ago I can why he would think he would always have a good income. Right now H*LL NO! Some of the most seemly stable rock solid business people have taken big hits in income in the last 3 years. Many of them are looking at downward mobility.

      I have no idea why banks would think that any “scared straight” private sector worker would even entertain the notion that they would be guaranteed to have an steady and ever increasing income for the next 30 years straight without serious interruption. But that is needed to pay a 30 year mortgage! This is a major reason why this economic slowdown is dragging on. Until people are once again confident about their employment you will only get a trickle of people signing up for mortgages on real estate.

  9. Yorick says:

    I don’t worry about my debt much. I’m too busy trying to take care of today to worry about my past or the future.

  10. stinerman says:

    Well it’s a simple math problem. If I’ve got student loans sitting at 2.5% (I do) and I can put money in a CD that gets 3%, it makes sense to put the money in the CD. If you want to be a bit more aggressive, you can buy some stocks, but always heed that warning you see on the commercials:

    Not FDIC Insured. Not Bank Guaranteed. May Lose Value.

  11. brinks says:

    Must be nice to be able to cry over missed investment opportunities when others are living paycheck to paycheck and drowning in student loan debt and credit card debt (that was used to finance groceries and gas between paychecks).

  12. sirwired says:

    Not nearly “every” personal finance writer preaches getting rid of every penny of debt. Certainly a few of them do, and frankly that advice is targeted towards those with insufficient willpower to save. If you can’t save… well, paying off debt is a kind of savings too.

    Mainstream personal finance writers recommend paying off high-interest debt, but things like mortgage or low-interest car debt are foolish to prioritize over retirement savings.

  13. rpm773 says:

    Paid-off condo? Doubled stock portfolio?

    How’s the saying go? This guy has a Virginia hams under each arm, and he’s crying that he doesn’t have any bread.

    • wrjohnston91283 says:

      I think he has a very good point, but he’s written his post so that he comes of whining about his situation. The moral of his story is “if you use all your money to pay off debt, you won’t have any to invest; and if you use it to pay off a mortgage, your money is tied up in your home rather than accessable cash”. It’s a good point, and one that many people should consider when determining if they should pay off all their debt at once, versus slowly over time; and there is a good deal of math, and some guessing involved. If you are sitting on credit card debt at 20%, you are going to be hard pressed to find an investment that will return that amount without taking on massive risk. If you have a car loan at 2.9% (like I do) and you have old savings bonds that are earning 3.4% after tax, then it doesn’t make much sense to cash in those bonds to pay off the loan.

  14. Awesome McAwesomeness says:

    Not every person is out to make a tremendous amount of money. I’d rather have the sure thing of having no debt than take risks on investments that may or may not pan out. I’m very happy just being comfortable.

  15. n0th1ng says:

    I never wanted to go to a university because I didn’t want to get into debt. But it looks like I will have to, community colleges suck.

  16. Tumara Baap says:

    The advice is debt is okay if it yields a return. Debt for getting an education is good. Debt for enterprise is good. Maintaining a debt on a low interest student loan so you can max out your Roth IRA is good. Of course such advise creates room for excuses not to pay down debt because the real reason you don’t have enough for an investment is you’ve been living beyond your means.
    The theory is all on admittedly on shaky grounds – there is no telling how much an investment will really appreciate or whether the home market will crater again in a decade. Our prosperity depends on a sound bedrock of civilizing laws and oversight that keeps vicissitudes of market irrationality, greed, and abuse at bay. Never forget your vote counts. Then you can ponder on things like your debt load.

  17. PortlandBeavers says:

    Hindsight is 20/20. It’s easy to see after time has passed that the investments would have done well, but he didn’t know that beforehand. Truly safe investments are paying less than 1% for short durations, so you are turning a few percent even by keeping a low-interest mortgage as opposed to retiring it.

  18. kc2idf says:

    The obvious counterpoint is that debt can stop you from getting rich.

    Now, I must ask you: If you can earn 10% on your money, or use that same money to stop paying 15% on a like sum, which move is the win?

  19. Ablinkin says:

    Wow this article sure brings out the OWS supporters.

    I know several “rich” people who make a little more than a million a year, employ several persons in their businesses, and take huge financial risks to keep their businesses afloat. But they are lucky to make 50 grand a year “take home”. But to the current administration and the OWS mindset they should have a close to 100 percent tax rate to “redistribute the wealth” since they just happen to have more money on paper.

    With my 40 hour a week job, I don’t know if I’d be able to take those type of risks. The article has some good valid points. If you follow Dave Ramsey’s advice you should live a meager life style, drive a paid off Yugo, live in a yurt, and pinch pennies to pay off every bit of your debt. While I agree that you should keep hammering at debt, a person can get carried away and miss opportunities like the writer did.

  20. Extended-Warranty says:

    This kind of advice is nothing but advertising for you to see financial advisors. Investments are not guaranteed, ever. Ask those who had healthy portfolios before the 2008 stock market crash. You know what is for sure? Mortgages. They aren’t going to go away or get any cheaper. The problem is this country is not that people could have earned an extra 1-2% on their assets, it’s that people spend more than they make on worthless things that don’t build net worth. Who do you know that is suffering because they paid off all their debts?

    I’m not saying investments are all a joke, because I have had a 401k for years. With my employer match, it’s a no-brainer. The majority of my extra earnings goes to extra mortgage payments. IMO, I would rather take the for sure 4.25% savings than the possible 2% more I could have gained elsewhere.

  21. bwcbwc says:

    Takeaway point: Debt as part of an investment is a strategy. Debt for the sake of consumption is still stupid. For most people this means that debt for a house or education is frequently justifiable. Debt for a vehicle only applies if you need it for business. And credit card debt for consumption? Fuggedaboutit.

  22. smo0 says:

    I’m about to declare bankruptcy – I was basically told to not have any money or they would take everything I had…. I couldn’t even have more than 100 dollars in the bank at the time of filing.

  23. Todd Tresidder says:

    Phil, thanks for bringing attention to the post!

    The purpose of the post is simple – to illustrate through personal example how paying off debt is not the slam dunk decision most people assume.

    In fact, the deeper purpose of the post was to illustrate how very few “financial truths” that we assume are valid are really as one-dimensional as our thinking concludes. The story in this post is just one example to illustrate the deeper point.

    There are multiple aspects to this decision depending on what real estate values do compared with alternative investments. In some environments it is advantageous and other environments it is a disadvantage.

    Also, it is not simply an economic decision but an emotionally charged one as well (just notice the comments in this thread and the other thread associated with the original article.)

    In fact, the article acts as a wonderful mirror for us to see our own stuff in it. Some people see whining or asking for sympathy, others focus on the security of being mortgage free, still others discuss stock market performance. In a nutshell, most comments are polarized rather than considering the deeper issues where the real value lies.

    The goal is for the reader to begin questioning assumptions that appear superficially obvious so they can develop more balanced and well-reasoned decisions. This story is just one example to illustrate the point in a (hopefully) interesting and entertaining way.

    The truth is there is no way to know the right or optimum decision in advance since it is predicated on an unknowable future. You will only know in hindsight.

    However, the thinking process of considering all possibilities and reasoning beyond the superficially obvious is essential to long term success.

    …And that was the point of the article…

  24. Sad Sam says:

    This is a topic we are exploring. We are debt free except for the mortgage (which is pretty low, fixed and based on our present payment plan will be paid off in 15 years). We max out our retirement accounts and we put savings away for short and mid term goals (think vacation account, car replacement account, emergency fund, etc.).

    Do we put any extra money towards the mortgage (right now we are prepaying an extra $415 per month/$5000 per year) knowing that (1) we are tying up extra money (2) our mortgage interest rate is quite low and with tax deduction even lower (3) paying on normal schedule means paying with dollars worth less. But prepaying would give us more insurance flexibility (we are in So. Fla. where insurance is very expensive), we would not be tempted to spend the dollars we are saving up to pay down mortgage if we actually give those dollars over to the bank, peace of mind/emotional pay off.

    Then there is another issue, the money for paying down the mortgage/extra investing. If we work hard to free up money that we would spend on frivolities and we take that money that would be otherwise spent, putting it towards the mortgage is certainly better than spending it.

  25. axolotl says:

    I’m trying to understand why, if this guy was able to pay off an entire mortgage in less than two years, he didn’t just save the money in a low-risk investment and buy the thing for cash (most likely at a discounted rate)? That, to me, seems like the most intelligent method. He would have paid 0 interest, would probably have paid less for the condo AND he would have had the flexibility in the meantime to magically predict that his portfolio was going to double and move some of his money into it (as he seems to think he was able to do).