I was shopping this evening, and as I went to check out, the two checkers were discussing with a third party their financial woes.? One was making her payments after a workout, and would be free of her debts in a year.? The other had declared bankruptcy, and it would be eight years (or so) before things would normalize for her.? As for the one making payments, her parents had gone through bankruptcy two years ago.
I talked with them for a little while, and both had reverted to lifestyles where debt was not even an option.? Well, good for them, in the short run.? They are learning discipline (the hard way).
I’m not an ogre on debt.? It can be useful, but you have to be careful with it.? I have been debt-free for the past five years, and have enjoyed the freedom that it has brought me.? I take enough risk as it is, why should I magnify it through leverage?? Borrow for a home?? Fine in the right environment.? My advice would differ in 1998 vs. 2005.? Borrow to finance consumption?? No.? Never right.
I feel the same way about companies that I own.? I prefer companies that are less levered, and companies that borrow on a nonrecourse basis.? When we borrow, we are making a statement about the future — that we can presume that it will be good, hey, even better than today.? That’s a tough statement to make.? Avoid debt if you can, and save your debt capacity for times when assets have been crunched, like early 2003.
PS — One more note: because of the AMT the advantage of borrowing money to buy homes is diminishing, because the AMT erases mortgage interest deduction.
Actually, mortgage interest, investment interest, and charitable contributions are deductions that are generally deductible under AMT. There are rules and limits (of course), but for mortgage interest, see instructions for Form 6251 Line 4 as a start of an explanation.
Again, interesting thoughts.. I especially appreciated “The Nature of a Nervous Bull”. FYI the “No ads on Sunday” column is blank with the ads now moving into the text column.
Theresa
Interest from a mortgage whose proceeds were used to purchase or renovate a home remains deductible under AMT; if the funds are used for some other purpose, the interest is disallowed under AMT.
You’re right, I am wrong here. Question to Ben and Tom, does the deduction phase-out have an effect here? High earners lose the interest deduction, yes?
Muni’s as an asset against mortgage debt i think works for higher income earners. I’ve been building this up as this year’s investment performance in my aggressive account (meaning a real battering) highlights taking profits with the goal of being debt free or at least adding to a low risk asset against a mortgage liability makes sense from a planning perspective. My mom after declaring bankruptcy 8 years ago has worked two jobs, bought her first home on her own, and saved over $200,000. She’ll be debt free in 6 years plus continue saving money. I’m a lucky son and very proud of her accomplishment. I see tons of potential clients that do not have the will to sacrifice and do what is required to get their financial houses in order.
While we are on the subject of AMT, do we lose the income deferrals on royalty trusts and mlp’s? I’d like to see an article on what we can do to reduce AMT if anything. Accountants I’ve talked with are pretty vague about it.
Regarding loss of the mortgage interest deduction – the deduction phaseout calculation is painful and arcane, but the best answer is “it depends.” High-income households, especially those with relatively small deductions, lose some of their interest deduction. The deduction phaseout was scheduled to be eliminated during 2006-2009, but that could change.
Thanks for these comments regarding deductibility Tom
David,
I enjoyed this. You give a tremendous amount of useful information. Thanks again.