Personal Finance, Part 7 — Debt

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.