Bad Debt May 12, 1997March 25, 2012 From someone in San Antonio (geez: am I the only guy on the Internet with a first and last name?): "I read your book; therefore, I know how you feel about debt. However, I’ve read conflicting reports about the so-called ‘high debt load.’ And it puzzles me that one’s ability to repay debt is not given full consideration. For example, I’m able to repay with no problem, I don’t anticipate any job adjustments. Please shed light on this tortuous conflict of interest." I’m not sure I understand the question, but I do understand the answer: Not repaying debt only makes sense if you can earn more on the unpaid balance (after tax) than it costs (after tax) to borrow it. Right? There can be exceptions. (You want to keep the creditor hanging, because he’s your brother-in-law and you just enjoy annoying him. You want to keep your options open, because you might need the money for something urgent and not be able to borrow again.) But basically, from a numbers point of view, this is it. Paying 8% after tax on a loan makes no sense if you invest that money at 9% pre-tax — which is to say just 5% or 6% or 7% after tax (depending on your marginal federal and local income tax bracket). Indeed, paying 8% after tax makes no sense even if you invest at 13% pre-tax, 9% after tax — because the 1% "profit" in this example is not worth the risk . . . and with any investment that returns 13% pre-tax, I promise you: there’s risk. It doesn’t make sense to borrow at 8% to earn 9% unless that 9% is certain. (And what kind of schnook would be lending to you at 8% when he or she could get a certain 9% somewhere else?) Sure, if you can borrow at 5% after tax (because you have a strong balance sheet and are in a high tax bracket), and have an opportunity to multiply your money tenfold in some risky venture, maybe it makes sense to take on a little debt to do it, rather than unload other assets that are illiquid, or that would subject you to high capital gains taxes if you sold. The irony is that — from an investment point of view — it makes much more sense for rich people to borrow than for average folks. Rich people get lower rates because they’re less likely to default, because they "buy the economy size" (banks would rather lend a million dollars than a thousand), and because they’re in higher tax brackets (and itemize their deductions, which a majority of Americans don’t). So borrowing costs them less. Meanwhile, rich people generally have better investment opportunities available to them, are better able to spread their bets over multiple bets, and have the staying power to weather storms along the way. So the people who should borrow are generally those who don’t need to, while the people who should not are generally those who must. Or feel they must. In some cases, if they really, really try, they can get out of debt — and it’s my aim to persuade them to try, because in the long run, not putting it on a credit card will make life 18% cheaper. Some things are worth borrowing for: an education, tools, and sometimes a home. Not much else.