Justifications For Going Into Debt

It’s usually wise to avoid spending your way into the red, but sometimes it makes more sense to go wild and take on some debt rather than play things conservatively.

Len Penzo dot Com offers three reasons that justify personal deficit spending.

One instance is starting your own business. If you’re determined to go that route, debt will most likely be part of your lifestyle for the first few years. If you wait until you can pay cash to indulge your fantastic idea, it may well be obsolete by the time you can finally get to it. Even in the worst-case scenario, in which you end up losing everything, at least you won’t be troubled by gnawing regret for having failed to take a chance.

Check out the source story for examples of when you should indulge your travel plans, as well as urges to live more extravagantly.

3 Personal Finance Instances When Deficit Spending Is a Good Idea [Len Penzo dot Com]

Comments

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  1. Cat says:

    Travel:

    It’s just crazy – in fact, downright incompetent – to pay for travel with anything but a credit card. You’re protected from your airline shutting down, hotel screw-ups, and a host of other things that can – and do – go wrong. And paying with the right card gets you additional protections (lost luggage, AD&D insurance), earns points, and no fees for international transactions.

    Even if you can pay cash, DON’T. Leave the money in the bank and pay the credit card bill when you get home.

    • milkcake says:

      To extend that further, I just pay everything with CC if possible. Just pay the balance at the end of month.

      • Helpful moose is helpful says:

        And set it up so thatthe full amount owed is automatically debited from your bank account each month, so you never need to remember to pay the bill. The CC then acts like a front-end to your bank account, with the added protections.

    • who? says:

      I’m not sure I consider paying for something with a credit card, then paying it off before any interest accrues to be debt. But yes, I would never pay for a trip any other way.

    • AstroPig7 says:

      I usually get the supplemental AD&D insurance as well so I only have to roll 2d6 for coverage. *ducks*

    • Remarkable Melba Kramer says:

      All you need to do is borrow against all of the equity in your home if you want to start a business.

  2. Altman says:

    Reason #4: You know hyperinflation is coming.

    /jk

    • AtlantaCPA says:

      You may be on to something actually. Having debt is considered a type of hedge against inflation (assuming it’s fixed rate debt of course). Ultimately I think the downsides outweigh this small upside but it is one one small upside to a mortgage for example.

    • sspeedracer says:

      Bingo. A dollar now will buy more than a dollar tomorrow. You can thank Federal Govt and Federal Reserve. But be aware that hyperinflation will also effect living expenses such as cost to feed yourself.

  3. crispyduck13 says:

    Another top quality, well referenced and outlined, really complete article with good advice and sound reasoning.

  4. Rebecca K-S says:

    If you wait until you can pay cash to indulge your fantastic idea, it may well be obsolete by the time you can finally get to it.

    This probably isn’t a very good idea for a business, then, started with debt or not.

    • pinkbunnyslippers says:

      I’d substitute the word “obsolete” with the phrase “already taken by someone else”.

      • Rebecca K-S says:

        Yeah, I thought of that after I posted. That’s a much more reasonable concern.

        • pinkbunnyslippers says:

          haha I think of so many things after I post . It leads me to believe I actually ought to think first, but that wouldn’t be nearly as fun for me!!

  5. veggie says:

    Really,

    Whoever Len Penzo is and whoever this CFP Neal Frankle is: STAY AWAY FROM THEM.

    There is no reason to go into debt, except maybe to get a mortgage for a home (with 20%) down.

    Small business can be started without borrowing. Start small, expand with cash, rent stuff if necessary.

    Travel: Save first, then go.

    Lifestyle: No example given about borrowing. Why does this paragraph exist?

    The internet: you get what you pay for.

    • crispyduck13 says:

      It is only possible to start a business without debt if you are opening something with very low overhead and/or you have a hefty savings account. There’s a reason most banks have a business loan department.

      • Kaleey says:

        Yes. I work at a small business who did nothing of the sort, though, interestingly enough. The business had been flourishing for 8 or 9 years, and one of the owners (working out of her home) had been with the same bank the entire time. She went to the bank and said “We’re doing great and we want expand? Can I have ?” :)

        They did give it to her, and it’s still going strong. But most businesses do actually take on some debt during or right after startup (supplies, space, machinery, etc).

    • blueman says:

      This idea that businesses don’t have debt clearly comes from people who have never owned a business. Just about EVERY small business — and many larger ones — has some amount of debt. You borrow to get off the ground, you borrow to buy inventory, you borrow when you have an opportunity to expand. How do you think banks stay in business?

      I always laugh when I hear people say the government should be run like a business, without debt. It’s a joke.

      • rugman11 says:

        Maybe that’s why 64% of businesses fail in a decade, because they leverage themselves to the hilt all in the name of growth and then, when there’s a slow down, they have no safety net. It might be better to start off slowly and to only expand when you can afford it.

    • who? says:

      What the article was trying to get at, but never really said, is that there are basically two types of debt. The first type is what I’d call consumer debt. This involves running up debt to buy something you can’t afford right now, and don’t really need, which I think we mostly agree is a bad idea. The second type is investment debt. This is debt that is leveraged to make money down the road. The example from the article is borrowing money to start a business. Beyond this, I would argue that student loans, within reason, fit into the investment debt category, and I would argue that taking out a car loan in order to get to a job might be a good idea, depending on both the cost of the car and the alternative means of transportation available.

      I’m not sure I agree with the author’s argument about the college age girl using debt to travel, unless she’s planning on going into international business or some field where being well traveled will help her career.

      In other words investment debt can be good, if it’s thoughtfully used.

      • sponica says:

        the ONLY time I can think of taking on good consumer debt is buying new clothes when you get a job with a different dress code than your old job….or buying those few pieces of a professional wardrobe when all you have is jeans/t-shirts/sneakers.

        • who? says:

          I use the car example because it happened to me. I was offered a string of entry level, career oriented jobs that would have required me to have a car to get to work. I passed on the jobs because I couldn’t afford to buy the car, and the payments, on an entry level salary, would have been a stretch. I continued to work at crappy jobs with no future for several more years. Eventually I decided something had to change, took a job that required a car, financed a Toyota Corolla, and didn’t look back. Best decision I ever made.

          • frank64 says:

            In your example you should have taken out a loan for a car, however many people use that to justify buying an expensive car, or trading in the car fairly soon. The goal should be to be able to by a car in cash. I know you probably agree with that goal, but many see a paid off car as an opportunity to get a new one.

            Try to save up at least a big deposit, and then when you have the car paid off, start putting the money away for the next one. Not having a car payment saved me from ruin when I lost my job.

  6. eeelaine says:

    I’m not entirely sure about taking the advice of a financial planner who, in the climate of 2012, advocates for “great jobs without a college degree.”

    I take that back. I’m absolutely sure how I feel about taking their advice.

    • Cat says:

      There’s lots of jobs people “could” do without a degree. The only problem is, employers are demanding one for even the most trivial of jobs.

      Where I work, for example, has re-written job descriptions and most jobs now require some college degree. Why? Not because the job actually requires one. It’s so they can say to the people currently in those positions, “Yes, your pay rate is supposed to be $XX.00 an hour, but since you don’t have a degree, we can only pay you $X.00 an hour.” They’re in for a rude awakening when they try to play that game on me – management is so new and clueless here they don’t even know I have a degree.

      Less money for the people that make the company go, so the can give themselves more.

  7. Fubish says: I don't know anything about it, but it seems to me... says:

    “That employer lost out if you ask me. She‚Äôs got her dream and kept her integrity. Sure it will cost her some money and she‚Äôll be in deficit mode for a while but who cares? She‚Äôs got plenty of time to make up for it.”

    She had a sure job and tossed it so she could do some cheap traveling? The writer is an idiot.

    • crispyduck13 says:

      That really is some of the worst advice I’ve ever heard for a recent college grad. Does this guy think no one takes vacations once they start full time salary work??

      • Cat says:

        Does this guy think no one takes vacations once they start full time salary work??

        Lucky vacation taking bastards. I haven’t had a proper vacation in 3 years, since they cut my PTO in half.

    • rugman11 says:

      Word. While she does have 50 years to work, she’s also got 50 years to travel. Do you think my in-laws are enjoying their 6-month sabbatical in the Caribbean any less because they’re 55 and retired than they would have had they delayed (or endangered) their careers by taking a year off after college?

  8. rpm773 says:

    Even in the worst-case scenario, in which you end up losing everything, at least you won’t be troubled by gnawing regret for having failed to take a chance.

    Which is a great comfort when you’re selling apples and pencils on the street corner. Gnawing regret is worse than gnawing hunger.

  9. AtlantaCPA says:

    Hello Misleading headline! The article actually talks about spending more than your earn which is different from going into debt. Their number 3 is basically saying if you have big savings it’s ok to spend more than you earn and dip into your savings.

    Not saying I agree with the article exactly, but the article is not “Justifications for going into debt” it’s about deficit spending – totally different.

  10. Helpful moose is helpful says:

    Business: yes, if you have a solid business plan and need the money to get started. But not if you are going to blow the money on wasteful spending (e.g. super expensive office furniture) or a launch party (aka Pixelon http://www.wired.com/techbiz/media/news/2000/05/36243).

    Travel: maybe, but how much fun can you have if you know everything you spend is racking up debt and causing you to spend even more on interest? Why not take the job and then take your PTO when earned, or even (gasp!) take the job, save up your money, and then take a year off to go travelling?

    Lifestye: yes, obviously you should go into debt to pay for an extravagent lifestyle. Best advice ever. What? No, this is the worst possible reason to ever go into debt. What a crap article.

    • who? says:

      The “lifestyle” example in the article was actually pretty reasonable. There are a lot of old people out there that have a lot of savings and really crappy pensions. Given that most working age people are planning on financing their retirements with 401k’s, this trend is only going to increase. If you do the math, all he’s recommending is that the guy spend the interest he’s earning on his savings. $500k in savings, properly invested, will generate $1500/month in income. I would argue that, depending on the guy’s age and whether or not he feels the need to leave an inheritance for his kids, he could be spending even more, possibly spending down his savings over time.

      • rugman11 says:

        Yeah, the Consumerist title was a little misleading. The article referenced “deficit spending”, not “going into debt”. A retiree drawing the interest from their savings isn’t going into debt, they’re using their savings to supplement their income.

        • Helpful moose is helpful says:

          Just spending your income (whether passive or active) is not deficit spending. That is why the article is crap… it is arguing that “deficit spending” on lifestyle is a good idea (deficit means by definition spendingmore than you have in income). The article then confuses that with (probably justified) spending of passive income or perhaps spending down capital at a controlled rate.

  11. maxamus2 says:

    Amazing, absolutely none of these 3 are good justifications for going in to debt.

    And they missed the most OBVIOUS justification, and that is if you or a family member has a serious treatable illness that you need to pay for.

    Or then again, if you have a non treatable illness, may as well go in to huge debt. Sort of like that old Jerry Lewis movie “Hook, Line and Sinker”.

  12. spectacularisms says:

    It’s downright stupid NOT to take on debt if you’re running an incorporated business. Corporations get to deduct interest paid on debt as a business expense (thus lowering their taxable income), which lowers your cost of capital ridiculously.

  13. RayAllDay says:

    i don’t get it. i expected the reasons to be: food, shelter, employment. those are certainly my reasons.

    if i need a new 42″ LCD this year, it will be employment-related debt since i gotta have a big TV to convince myself to go back to work.

  14. xanadustc says:

    Funny….I was able to start a business and expand into 19 states in 18 months without borrowing money. That borrowing is going to do is strap you later….

    And no, I did not have thousands of dollars piled up, I just went slowly, with cash, without going stupid and crazy and risking my stuff for an idea.

  15. lifeispunny says:

    Nope – the article still didn’t change my mind – there is NO GOOD reason to ever knowingly take on debt.
    There is no such thing as Good Debt, but there can be necessary debt such as a house.

    Unknowingly take on debit is like hospital bills which emergency funds take care of and you still won’t be in debt.

  16. Maltboy wanders aimlessly through the Uncanny Valley says:

    The best time to go into more debt is when you owe the bank about 10 trillion and you need to stimulate job growth. Just borrow another 5 trillion and give it to businesses to hire people because spending money like a psychotic sailor on crank is the best way to get out of debt.

    Signed,

    The US Congress