I have said many times at my other blog that the number one killer of men in the modern era is oneitis. Today I’m going to talk about the second biggest killer: debt.
Debt can and will seriously screw up or even destroy your life. Debt can and will, easily, murder entire decades of your life in terms of wasted time and productivity.
Debt is a threat to the poor, the middle class, and the high-income alike. It’s an equal opportunity killer. If you’ve read my book, you know that in my twenties I got in big trouble with debt even though I was making a six-figure income. I teetered on bankruptcy because of it. It took me years of very hard work and utter wasted time and wasted life to crawl out from under that mountain of debt. It was horrible. Many people who get into serious debt like this aren’t that lucky.
Today I have literally no debt. After taxes, 100% of my income goes right into my pocket, not to a bank, credit card company, student loan company, car finance company, or whatever. I sleep very well at night.
I have no credit cards, no car loan, no student loans (never went to college, thank god), no home mortgage, no personal loans, no medical loans, no back taxes (which is a debt), no alimony (which is also a debt), no nothing. 100% of my net worth is nothing but assets (with the exception of a little real estate stuff).
There are two, and only two, times debt is valid.
One is if you use a credit card and pay it off in its entirety every month. Most human beings don’t have the discipline to do this. Yet I know that some do, and many of these guys use the points on the cards to get frequent flyer miles and things like that. That’s fine… provided you really do pay that bastard off in full every 30 days.
The second is if you have debt secured by an appreciating asset that actually produces monthly positive cash flow. An example would be rental real estate that you’re actually making a profit on every month. Your own home mortgage does not qualify (unless that mortgage was used to purchase an income-producing rental property). Nor does your car or a boat or anything like that. Having debt on that kind of thing is insane, because they’re depreciating assets that suck money out of you instead of paying you, as well as cost you debt and interest.
However, even if you own cash flow rental properties, you should never have more than 50% loan to value on those properties. If you own a rental property where the mortgage is 70% or 90% of the value, you’re doing something I would never do. When the next real estate crash comes (and it’s coming soon), you’re going to be fucked. You’ll be underwater in that property just like millions of other idiots were in 2008.
If you only have a loan on the property that is 50% or less, you’ll be just fine. I have a hard and fast rule that I will not own any real estate if I have to borrow more than 50% of the value to own it. Period. This means I can sleep at night, every night, regardless of what the economy or the marketplace does.
If you have any debt whatsoever (besides perhaps a mortgage payment), after saving $1000 – $2000 in an emergency fund somewhere, you need to stop spending money, stop all investing and saving, stop doing everything except working, and start paying down that debt as fast as humanly possible. Dump as much money per month on your debt, starting with the lowest balance loan first. Most normal people can become debt free in just a few years if they do this.
Otherwise, you will be a slave, probably forever. Being a slave is not freedom.
The Alpha Male 2.0 financial baseline is at least $75,000 per year income. However, the Alpha Male 2.0 also has zero or near-zero debt (other than the two exceptions above). You are not free if you owe a bunch of banks, people, or governments money.
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BUGARI
Posted at 05:54 am, 8th July 2018How do you book a hotel or do online shopping without a credit card?
Gary Chambers
Posted at 06:00 am, 8th July 2018What are your thoughts on this:
1. Net worth of at least, let’s say, $750k or more. Therefore can easily service the debt. (One of your recent articles argued $1 million by 50 is easy)
2. Leverage personal home with a low interest rate mortgage (those of the recent years past).
3. Invest extra cash that would have paid off your house into diversified index fund and bond portfolio (e.g. a robo advisor to keep it super simple)
Results:
– Inflation is guaranteed to reduce the real value of your loan balance over 30 years
– Mortgage interest is tax deductible, therefore dropping your effective interest rate
– Diversified stock portfolio simply needs to produce ~3-4% *nominal* to achieve a profit. Historical nominal growth is ~10% (which I’m sure you expect to be lower into the future).
Over 30 years, isn’t the probability of your stock+bond portfolio outpacing your interest payments on your depreciating loan very high?
Russell Noga
Posted at 06:50 am, 8th July 2018You still need credit cards to keep your FICO high (when used responsibly) because you need to be in the game. But like he said, pay them off each month. I pay mine off as quickly as I can after a purchase. With a better FICO, borrowing money for a mortgage and even having 50% equity at the start, provides you with a far better interest rate on the remaining.
With income producing assets (preferably very high-income producing, from business, real estate, whatever…) there’s always the debate of if you should have a mortgage or not. For people who have a low to moderate income that’s not automated, I don’t believe tying up all your equity in a house is the best solution. Banks don’t call notes anymore, but when a crash or personal emergency comes (laid off, sick) it seems better to have a few hundred thousand at your disposal to keep you floating.
On the flip side, having a high income that doesn’t require you trading 100% life hours for each dollar is incredibly awesome. And having NO debt including no mortgage to go with it, creates a feeling of freedom that is unlike any other.
Raise your income and how you obtain it, and pay off everything and you’ll see there’s a whole entire nother’ world out there!
Mike
Posted at 07:02 am, 8th July 2018When you travel do you carry wads of Euros/Yen/Yuan, etc?
I pay off my cards every month but shop exclusively online including food and when I travel I rely on them almost completely since it is safer than cash.
What is your methodology here?
Stork
Posted at 08:22 am, 8th July 2018By using a debit card.
joelsuf
Posted at 10:27 am, 8th July 2018Use your bank card! This way at least you’re paying for it with your own money. Or put it on a credit card but then make a payment on the card seconds after. That’s what I do.
This is a good companion article to the latest one on the other blog about every man having a net worth of $1m by 50. The only debt I have is exactly one credit card, but I’m nearly $100k in student loan debt. Looking on the bright side, at least I don’t have a massive house loan I guess? I feel genuinely bad for the poor suckers who sign a $450k house loan and are either stuck there for life, or have to refinance and sell the house for tens of thousands less than what it is worse and then have to pay the bank their whole lives. If you want to own, at least rent a place that gives you the option to buy. Same concept, a bit more flexibility.
I still have the freedom to physically travel wherever I want but yeah that loan balance from the department of education is pretty intimidating. But like Caleb says, its nothing I wouldn’t be able to pay off in a year and some change if I make $75k/year. Which I am starting to see is a possibility for anybody no matter how much they think they suck at life lol
Caleb Jones
Posted at 10:51 am, 8th July 2018Debit card. Many of them. The PayPal debit card actually pays you back 1% of your purchases in cash just like a credit card.
No. Anyone putting long-term money into American stocks is fucking insane (in my opinion). America is collapsing (and the stock market is in a bubble).
Now change your #3 to investing in income-producing real estate (preferably real estate outside of the Western world), and now I agree.
Incorrect. A high FICO score is only for someone who needs to borrow more money and go into debt. I’m saying stay out of debt, so your FICO score is irreverent. I don’t give a rat fuck about my FICO score, because I don’t borrow money.
And yes, you can buy real estate without a FICO score. They just use tax returns and bank statements instead. I’ve done it many times.
No, just about $200 worth of local cash and my debt cards. My debit cards work in just about every country, all over the world. I just have to pay a small international transaction fee sometimes (which I just pre-budget as the cost of travel).
Debit cards.
Debit cards guys! Look it up if you don’t know what that is!
Eric C Smith
Posted at 02:20 pm, 8th July 2018lmao glad to hear your motto on real estate. Getting out of debt is my life rn. Everytime I start going after my fullest dreams it isnt long before my debt catches up.
thanks for posting on the topic.
Just finished the final sell off of my music equipment like harry browne suggests, and paid off my 1st credit card. 2 more to go and some loansssss!
BigTime
Posted at 03:44 pm, 8th July 2018Imagine a pile of cash that represents every dollar you will make your entire life. Someone from the future told you what that amount would be and there is no changing it. It includes all your future raises and investment income.
Debt allows you to spend all the money at once, instead of little by little as you earn it. But it has a cost — interest. Imagine taking off the top layer of the pile and giving it to a bank. With debt, you actually have less money to spend. You just get to spend it sooner.
Personally, I’d rather have more than less and I’m willing to wait until I earn it to spend it.
Anon
Posted at 05:01 pm, 8th July 2018WTF?
Starting with the highest interest rate first!
As for credit vs debit cards, I’ve heard the liability rules can be different in case someone manages to perform an unauthorized transaction. What I heard is that sometimes the bank would cover it if it’s a credit card but not if it’s a debit card. If true, that’s a legitimate reason to own and use a credit card.
BigTime
Posted at 05:46 pm, 8th July 2018Yes, credit cards are better than debit because by law you can only lose $50 in the case of fraud.
Banks may say they cover fraud on a debit card, but there is nothing preventing them from re-negging. They may try to claim you were in on the fraud and it could be hard proving them wrong. I had a bank invite me over for a meeting. It turned out all they wanted was my face on their video tapes to see if I matched the purchaser. They are deceptive bastards.
Use a credit card. If you don’t have the discipline to pay it off every month, learn self control today. It’s like an interest free loan. Get one with no annual fee and cash back, and you are winning the game.
CTV
Posted at 05:58 pm, 8th July 2018Yup!
This is why I moved to my folks house to pay off debt (Embarrassing as Fuck I know). I’ve got one card paid, I keep that credit card for work expenses mostly.
Than my other I’m knocking out.
Aside from that I’m just going to get a Hybrid Car like a Prius and pay it off early.. Although I care about the environment and am not for senseless pollution this has more to do with price. I’d love to have truck, but I know that the gas each tank is like $100.00 so no. I’ve had a BMW and I love it but the overhead costs on maintenance.. I’d rather gargle drano. I live in CA so I know exactly how expensive gas WILL GET especially once Newsom take the throne, it might as well be a feudal system.
Than probably look at a condo or smaller house. Being that I’m in CA it’ll probably cost me the same as big property in California, Arizona, Vegas or Texas, but fuck.
Debt is a Yuge liability. In my opinion other than a car, mortgage, or a negligible amount on your credit card it unacceptable.
I got my Vasectomy a couple months ago, so that’s one major liability out of the way. I had to put sperm in the bank so that took a lot of time and money or else I’d my other shit paid off. It was a necessary expense though.
Caleb Jones
Posted at 07:11 pm, 8th July 2018Bad advice for most people. Mathematically speaking, yes, but people aren’t robots. They’ve done several studies (Dave Ramsey, et al) that show that if people tackle loans with larger balances first, they emotionally don’t get the early wins of paying off the smaller ones first and don’t stick with their debt repayment plans.
It is not. Twice I’ve had fraud on my debit cards to the tune of around $600 each time, and both times my bank reversed the charges almost instantly with one phone call. Debit card / credit card fraud is very common and banks have to compete with each other to cover these costs.
It’s true the government doesn’t force them do this, but that fact alone isn’t worth using credit cards if you don’t have the self-control to pay them off in full every month. (And if you do, none of this is relevant anyway.)
McDuck
Posted at 07:23 pm, 8th July 2018I feel obligated to comment because perhaps the best thing about America is the ability to borrow insane sums of money very cheaply. If this is properly leveraged, your cash on cash return can be phenomenal. If you familiarize yourself with real estate, this is low risk as well. For example, if you invest for cash flow, you won’t be hurt by any depreciation caused by the “collapsing west”. Also, I would take the whole Western collapse talk with a grain of salt. Yes, the West is on a relative decline, but there are still many regions and sectors that will continue to grow. Moreoever, any decline should only increase the purchasing power and quality of life for a Alpha 2.0. If taxes are the concern there are plenty of nice options in the West such a Monaco, Switzerland, Andorra, or the Czech Republic to name a few.
Alex Jones
Posted at 08:48 pm, 8th July 2018Honestly, I always though of debit cards as “credit cards for people with no self control.” But perhaps that is too strong. My credit card pays me 2% back on all transactions, so if you get 1% back (which is very rare for debit cards), you are throwing away money. Of course you have to pay your card off each month, but how hard exactly is that?
And BTW, this is why you need a good FICO score, because you can only get the best credit cards if you have excellent credit. (BTW getting an excellent credit score is easy — just pay your f**king bills on time for a couple of years.) FICO is a bit more complicated that that, but do that and you’ll have a score in the “good to excellent” category.
The plain fact is that if you are tightly disciplined and organized you can work the credit system to your advantage. “Zero percent interest for the first 12 months!” If you have the cash to pay for it, put it in a save investment (maybe giving you 2-4%), and pay it off the second the “12 months” is up, you just got a 2-4% discount. If you are buying a $30,000 car, that is $1200 for free.
Of course, since most people can barely pay their bills on time, such discipline is rare indeed, in fact that is why they offer these deals to suck people into the “what happens after 12 months”, or “pay one day late during the 12 months and your interest rate is 24%”. But, in life, if you aren’t a schmuck you can take advantage of these schmuck oriented schemes.
I do this every now and then. I have a separate bank account for it. So when I buy the thing I deposit the cash in, set up the investments, and then set up auto pays to make it all happen perfectly on time. It takes ten minutes to set up. $1200 for ten minutes work seems like a good ROI to me.
However, your advice is sound for the many people who can “barely pay their f**king bills on time.
Investor
Posted at 01:17 am, 9th July 2018About credit card:
– in some countries it is required to do online shopping / shopping abroad. This is because the standard local debit card does not work online. Examples are Switzerland and Netherlands (Maestro electrical card).
– most people I know and I have lived and worked in several countries use credit cards as a debit card: they have a direct debit set up on it which means the balance gets repaid automatically every month. In fact in many countries this is standard. I have only ever come across personally a few people who have used a credit card in a different way than this. Of course the caveat here is that I am usually around intelligent and educated people who all agree using credit card for the credit would actually be insane given the interest rates.
– there can be many benefits to purchasing via credit cards and depending on the card they can be very substantial. For example in some countries all purchases made online are automatically protected against fraud / abuse / items not delivered etc. This is not something that is offered by the card issuer it is required by law in those countries. The bank / card issuer is legally obliged to fully reimburse in such cases. Pretty sweet. I can purchase online without needing to worry about protecting my card detail or who it goes to even about whether the stuff im purchasing is a scam! I have ran into this situation a few times and the card issuer has taken my side every time when I had a dispute with an online merchant. In the case of my credit card I pay a bit for it but have some ridiculous insurance on it, for example all my purchases are protected against theft, damage and loss for an entire year!
Investor
Posted at 01:29 am, 9th July 2018About the real estate, interesting idea with the 50%. I think that makes sense when making advice as general as possible so I agree generally speaking though I can imagine some special cases where it would not be the case. For the rest I agree completely. Ive sent this article to one friend who keeps talking about how hes gonna buy a house on mortage with 0% downpayment.
His arguments are:
– there is no interest
– the repayment amounts are fixed so if the currency crashes he will have a “free house”
– according to his calculation the mortage rate he has to pay is less than what he would pay on rent thus saving him money whilst at the same time getting a free house afterwards as a bonus.
There are two other arguments I have against buying a property with debt that you did not mention:
1) what if you will need to do substantial repairs that you did not foresee? this can have a big impact on the total profitability calculation
2) what if there is a major social/environmental/political event in that location that substantially devalues the housing value? Of course every investment has a risk but unlike in the past where this was negligible in a lot of the west I see that a substantial risk these days for obvious reasons. Of course if I bought the house with cash then its kind like as if I invested in cryptos and those crashed. I lose some money. But if it was in debt I still have to repay the debt. This is the main reason I do not understand how so many people can be buying houses with debt these days in current political and social climate. Did all these people not watch the news for the last 5 years?!
On slightly related topic, what is your opinion generally speaking on investing with leverage? Of course that is a debt in a way but its short term and lets say if you have enough money somewhere else to cover it would it be fine?
Alex Jones
Posted at 05:51 am, 9th July 2018BTW, regarding real estate investing — it is actually unusual in that it gives you complete control over the risk reward ratio. As you know, a general rule is that the higher the risk the higher the reward and the lower the risk the lower the reward. Of course the rule excludes intelligent choice — good choices can increase reward and decrease risk, and poor choices can do the opposite. But it is decent rule of thumb.
Real estate is somewhat unique in that it provides you a knob where you can directly tune your preferred risk reward ratio, almost on a daily basis. High equity real estate is low risk and low reward, low equity real estate is high risk and high reward. You can tune down the risk and reward by paying up the equity, you can increase the reward and risk by taking money out of the equity. Like I say, you can tune it up and down almost daily (if you have an equity line against it, for example).
Of course the coefficients of those risk and reward values depend on other things like — getting a good price, minimizing costs, keeping it rented, making a good purchase in the first place, etc. Nonetheless, you have control of the actual risk/reward ratio in way that is very difficult with other types of investment.
Andrew
Posted at 09:14 am, 9th July 2018I have never been in debt and have always been very very careful with my money. The one thing that I’m worried about is somebody getting me into debt by identity theft.
I’m always very careful with my personal information and I have lifelock. Anyone else have any other suggestions?
Caleb Jones
Posted at 10:16 am, 9th July 2018For you and me? Easy. For a hell of a lot of Americans? Very hard.
Yes, there are numerous advantages to credit cards and I agree with them all… but only if you pay it off every month. If you can, great, do it. If you can’t or “don’t know” if you can, then don’t use credit cards.
Same as I said in the article. Never more than 50% loan to asset value (in my opinion). And it better be a very good, stable asset (i.e. not stocks!).
Lifelock, be amazingly good with your passwords (long complicated ones that you change a on regular basis), scan your computer for malware regularly, shred all paper mail that comes to your house and office with a crosscut shredder. Also read this.
joelsuf
Posted at 10:36 am, 9th July 2018I didn’t know this. Holy crap. I mean I did know you can just buy transportation and real estate with cash, but you can get a home or a car loan with just bank statements and W2 forms? That’s cool.
Caleb Jones
Posted at 11:48 am, 9th July 2018Yep. It takes a little more time and hassle, but banks do it all the time. Be sure to keep all bank statements in your life for at least two years, if not longer.
Investor
Posted at 01:54 pm, 10th July 2018What about this hypothetical scenario:
A mortage on a house that I can cancel with 0 consequences any time for any reason whatsoever. I imagine this would require some special insurance and or arrangement with the bank. But the idea is like this: I buy a house on mortage and if I decide later at any time for any reason I dont wanna do this anymore I just tell the bank they keep the house and our agreement is terminated with immediate effect. Furthermore, the amount I pay the bank should be equal or less than a rent I would typically pay, ideally less so that if I move I can rent it out and pocket the difference. Again, if I decide its not working for me I terminate it and I tel the bank to keep the house (and the tenant).
Yes, these are the conditions under which I would take a mortage and probably only under these conditions.
Prepped
Posted at 10:06 pm, 10th July 2018Debt is slavery — the stupid kind because you sign up for it. The entire financial world is built on debt. Nation states are slaves of privateering world bankers as a result of debt. And the value of your fiat money depreciates constantly as a result.
When I was young and naive, I learned that debt was a mechanism to wealth building. Now, as an older financially independent man, having weather several major financial storms, I know different. The problem is that markets boom and bust, and debit is the anchor that drags you underwater, leaving you to drown in a rising tsunami sea of debt.
Investor
Posted at 12:37 am, 11th July 2018Its not different. What you learned is correct. Its a way to make money – for the lender. You just understood it wrong.
And this actually is how you can turn debt to your advantage provided it was under certain conditions. If you borrowed at a fixed rate then if the currency crashes it was a very good deal because you can keep repaying an actual physical asset in a worthless currency. So for example if you bought a house on mortage with a fixed rate then if dollar completely crashes and you have reserves in other currencies you can easily pay off the house and you get a house almost for free and the lender is screwed. This may sound ridiculous but its sometimes possible to get such deals. Of course if your currency does not crash then its just normal debt.
Anything but. Good luck trying to get your money back from a nation state. Yes they might pay back by printing more money which means they end up paying you less because they just devalued their own currency. But too bad for you as a lender. In many cases in history there were many countries who never paid most of their debt and never will. Lending money to an individual can be risky but lucrative business but lending money to countries is just insane. They treat it as a donation half the time.
Caleb Jones
Posted at 09:23 am, 11th July 2018I don’t do fantasy hypotheticals.
The only time to own a home and not have it paid off would be if that equity is deployed into income-producing rental properties none of which have a higher than a 50% loan-to-value. Other than that, you should pay off your house (or rent forever, depending on your scenario).
Investor
Posted at 10:17 am, 11th July 2018I made a point to see if it can be reality and I wrote an email to a mortgage broker. They told me that it was not possible under the conditions I have stipulated.
Furthermore they also said it is not possible to find one (in this country) where it would be allowed to long term rent it under mortgage, but some banks allow temporary renting such as air bnb. Which is interesting because whilst not for me since it would be a lot of work this could make even (much) more money then just normal renting it out.
I am unclear on your income producing definition because isn’t not having to pay rent effectively income producing? Furthermore the mortgage repayment rates per month are often (much) lower than rental costs. This is in fact one of the main arguments of the people who get mortgages that effectively after years they get a free house plus they saved on rent. Win win, they say, except theres the problem of the debt.
I would imagine if I had enough money on the side to repay the house in full anytime – which is invested in such a way that its producing money somewhere else – and thus is covering the debt it would be a perfect deal under these conditions. Is this what you mean by the 50%?
Caleb Jones
Posted at 07:58 pm, 11th July 2018No. Rental property expenses include mortgage, insurance, interest, vacancies, upkeep, property taxes, and (possibly) management fees. If all those deducted from your collected rents still equals a positive number every month, it is income-producing. Otherwise it’s not.
No. 50% means your total mortgage(s) on that property is no more than 50% of it’s current value at any time, i.e. if it’s worth $300,000, your outstanding mortgage is $150,000 or less. If it’s more than that, you’re stupid, since real estate is in a bubble right now and a crash is coming soon.
Investor
Posted at 12:52 am, 12th July 2018Ah, I see because you think it will lose a lot of the value soon. So its like taking a big debt on something that is going to have much less value compared to after the crash. Yes but in this case its the same if you paid hald of it by cash. Your total costs are the same so its equally stupid.
The advantage of the 50% is that you have pay only the other half but there is a huge disadvantage and that is if something goes wrong then usually the bank has the right to take the whole house no matter how much you paid already. Then you lose your 50%. If you took 100% mortage then paid the mortage for a while at a rate that was less than what would otherwise have been your rate and then you cant pay anymore and the bank takes your house you dont lose anything, in fact you only gained.
Furthermore there is an insurance that you can take for the case that you cannot pay anymore and this insurance pays the rest of the mortage in that case.
However a big problem is that you are not protected for things like government confiscation or that if your property is heavily devalued or you need to escape the country and leave it behind due to for example civil war – things that seem more and more likely in the future unlike in the past. That is the main argument against it for me.
The fact that it is a depreciating asset is irrelevant provided that your repayment rate is less than rental rate and the fact that it is a debt is irrelevant if you can have that covered by insurance for the case you cannot pay.
Of course, if you think that there is going to be such a huge crash that even rental prices will go down a lot thats a different story and in this case the advice should be instead to wait with buying and has nothing to do with getting a mortgage in general (just dont get it now).
What do you think of putting pension money into some kind of real estate fund? I have some pension money in one country that I left years ago and I am not allowed to withdraw all of that money before pension age unless I invest it in real estate. Seems better idea then just leave it there. Though I am not sure where to begin looking for this kind of stuff.
Caleb Jones
Posted at 04:02 pm, 12th July 2018Sure. If you’re very careful and know literally everything there is to know about that fund.