What’s in your debt regret bucket?

When is it ok to carry a balance on your credit cards or use consumer loans?

Inquiring minds want to know. I don’t carry any credit card balances, but have been keeping a fairly large HELOC (i.e. Home Equity Line Of Credit) mostly as “dry powder” to be used in case of emergency or in case an investment opportunity requires having ready cash at hand. It’s partially drawn because we also use it to fund cash flow swings for a family business. The interest rate equates to the Prime Rate, which is 3.25% right now and the portion of the interest applicable to the business is deductible as a business expense. I figure we’d have to pay considerably more interest on a commercial loan, and would have to provide personal guaranties on a commercial loan anyhow. So the HELOC makes for a very cost-effective way to fund the business. In terms of the hazards of borrowing against property (i.e. you could lose your home or property if you default), our loan to value (including the 1st mortgage) would be less than 30%, even if the HELOC were fully drawn, so I believe we’re being prudent.

We have not used the HELOC for personal consumer purchases like cars, boats, etc., because, as a matter of policy, we don’t use debt for living expenses or personal purchases. We don’t carry credit card balances or other consumer debt of any kind, and maintain over 18 months of living expenses in cash in an “emergency account”.

Does that sound a wee bit paranoid to you? Well, in my early adulthood, I endured a sudden and unexpected period of unemployment, which also happened to coincide with large credit card balances on top of a crushing amount of student loans (can you say levered to the hilt and living way beyond your means by age 25….). It was a tough lesson on the temptations of debt and the powerful forces compelling us to spend ourselves into oblivion. And it also drove home the need to be prepared for the unexpected – I realized then and there that there really was no such thing as job security and there never would be in my future.

Well, I eventually got back on my feet, and paid off all of my credit cards and student loans in full – a point of pride. It wasn’t easy, sometimes it was quite painful, and it took a few years, but lesson learned, and fortunately learned early enough, well before my peak earning years, that I could recover strongly from it.

So, to the question at hand, here are some things I regret having carried credit card balances or loans for:

  • Stupidly large bar tabs resulting only from 25 year old me needing to act like a big shot, booze it up, and buy everybody drinks.
  • Costly dinners and recreation, partaken because that’s just what young urban professionals do in NYC when they’re young and it seems as if tomorrow will never come.
  • Expensive toys, clothing and other status markers in order to feel more confidant (i.e. less insecure) and keep up with the Jones. Had to hock the home entertainment system, the Rolex, etc. to pay the bills. In my older age, I’ve become decidedly more downscale.

And here are some things I do not regret for one second having borrowed to finance:

  • The best college education money (i.e. scholarships and loans, lots of loans) can buy.
  • An engagement ring; and subsequently, a honeymoon. Happy wife = happy life.
  • Christmas gifts for family (within reason); In my early adult years, I always received far more than I’d given; It would have been wrong of me to show up empty-handed.
  • A sizable loan to my mom (the funds for which I in turn had to borrow from a bank) to help her buy into a higher early retirement benefit.
  • My first real vacation as an adult – wife and I still talk about it. It was a formative and bonding experience.
  • Start-up capital for our first business venture. Basically, an act of [informed] faith. Fully repaid from business cash flow in 2 years just as the projections had shown.
  • First real estate purchase. Most people need a mortgage to buy that first home. Having toured over 100 properties we knew the market inside and out, and tripled our equity the moment the ink on the contract was dry.

How about you? What does your list of debt regrets vs. no-regrets look like?

22 thoughts on “What’s in your debt regret bucket?”

  1. I haven’t carried credit card debt. I think my biggest debt regret would be secondary, it would be more not saving enough to then be able to put a larger down payment down on my house.

  2. My biggest debt regret was charging up credit cards when we first got out of college. I knew better but it didn’t make a difference.

  3. No, you don’t get it — all of the debt is your kids, none of it is actually yours. Isn’t that the kick-the-can down the road game we’ve been playing all along?

  4. Car and house debt here, nothing to regret though as I look at it in such a way that it is just money spent (spending more than taking in to be precise).

    I could just as easily swizzle the math to make it appear that my home is paid off and I have a mortgage to fund my 401k.

    The trick is juggling accounts and making decisions so that each dollar is maximized, regardless of what the money is actually spent on.

  5. Hey BG, did you ever get that life insurance so we don’t have to throw your bones in the garden? Just looking out for your better half… 🙂

    My only regret is not MARRYING an accountant. I know we would have a higher net worth b/c an accountant would stop and say ENOUGH! No, I won’t have that expensive scotch at a restaurant or tack on those extra days of vacation. But I have learned to let go & try to enjoy life, even if it’s simply savoring a $12+ glass of wine at a restaurant. (And no, I do NOT have a second…I prefer to imbibe on my screened-in porch with my faithful beagle.)

    Like BG, our only debt is our car & mortgage. JLP, this will shock you as I’ve done a 180 on this: we’re currently refinancing from our fairly new 3.87% 15-year to a 3.25%, 30-year fixed (we’ll make extra prin. pmts, just wanted more monthly flexibility with our oldest off to college next year). And BTW, the car is a (used) 2008 “luxury” German sedan–dear husband “had to have it” for work/carting customers around. Now he has a company car and his “old” car mostly sits in the garage b/c I don’t want to take the hit on selling it, plus it is a sweet ride for date night or taking Grandma out for a meal.

    Any eligible accountants out there? 🙂

  6. BG, I tried rereading your comment half a dozen times and still not sure what it means – honest.

    Stacey, I have a close friend who is an account (not my accountant thank goodness), and trust me, he would be the last person to say “enough”. Profession does not equal character… not that you wouldn’t already know that. The guy is a financial train wreck.

    Oddly, I’m finding it easier to restrain myself as I get older – perhaps because I have a more acute sense of what it cost me personally to acquire the wealth – the big risks, long hours, sleepless nights, business travel, etc. I see so much more clearly how hollow so much consumption is, not that I’m not guilty, I’m just a lot more selective than I used to be.

    But, I am finding that so many long-time friends and close relatives seem to be stuck in a high material consumption mode, regardless of their lack of savings or financial well-being. It’s like an addiction. Very disturbing, as we worry about how the people we are close to will survive the future.

  7. BG means if you mentally shift the 401k balance and apply it against the mortgage it’s as if he doesn’t have the debt. Thus the mortgage is financing his retirement so to speak.

    I think a lot of people have reined in their spending & consumption during the “Great Recession” and have become more careful w/grocery shopping, etc… When we bought the car we knew we’d hold it for a very long time (because it would last with that great German engineering!) and that our “baby” would be driving it in his later teenage years. I dislike having the car payment, but I won’t take the money out of savings to pay it off, so I embrace it like all monthly things, and will be happy to see it finally go away 🙂

    Funny what you say about the spendthrift accountant…I am very close to one who lacked adequate insurance & college savings, but certainly has the extra properties on which to hunt, ride the ATVs & backhoe, shoot tons of guns, etc…the epitome of the “guys’ guy”. Sure these things can be converted to cash if needed, but I get so much more pleasure out of seeing our stock investments grow than looking at (or dusting, storing, insuring, etc.) “stuff.” To each his own…if it all goes to $&@* hopefully he’ll supply me w/some deer meat 🙂

  8. Thanks for the clarification on the BG theorem of debt=asset math. We’ll have to discuss this some more sometime.

  9. BG has a point. I could have taken the money I put into my 401(k) and paid off my mortgage.

    Of course, I’d still want to put in enough to get any employer match!

    Also, the return on the 401(k) is much better than what my mortgage costs me!

    Right now, the only debt I have is my mortgage. Which is good because I just got laid off again. :-/

  10. Likewise, Jack, sorry to hear that too. Sigh!

    Re the debt vs mortgage thing, it’s nice to know that you have enough assets to cover the mortgage, though clearly from a financial flexibility point of view, and especially from a tax point of view, doesn’t make sense to use 401k to repay mortgage debt.

    I’m continually struggling with the question of how much debt is the right amount of debt to be carrying. Should I be aggressively repaying mortgage (as I have been doing) or taking advantage of incredibly cheap debt to put cash on the balance sheet to have that extra financial cushion? I’m going to need to decide soon… maybe the subject of a later post.

  11. Miguel) Let me try to clarify my rambling thoughts. In my opinion, what truly matters is networth, monthly cashflow, and risks (not necessarily in any order).

    The question is: should you forgo the 401k, and pay off the mortgage (or some other investment for some other debt)?

    The immediate networth figure isn’t probably affected much (assets – debts = unchanged), but the ramifications of the decision absolutely affect monthly cashflow and risks.

    How monthly cashflow is affected is seemingly obvious: you eliminate a debt, you increase monthly cashflow — but if you skip on a tax-preferred account, then you take a hit in higher yearly tax payments to the Fed.

    How the risks are affected is even trickier: is it worth the risk of forgoing the “opportunity costs” and diversification of a 401k (potential 401k growth rate higher than mortgage interest rate), to have a payed for house? The risk of putting all of one’s networth into a single-unit of real-estate can’t be taken lightly either: turning real-estate into liquid-cashflow (via a refinance) may prove to be impossible if you find yourself unemployed and needing the money.

    What you end up with is trying to juggle multiple accounts (asset and debt accounts) to maximize each dollar (tax consequences), but also taking into account the effects of cashflow and risks for each decision.

    When talking about “spending” on consumable items (TVs, cars, bars, etc): one has to take into account “happy wife, happy life”, heh. You have to allocate money for living and having fun too, otherwise what is the point? (short-term goals / emergencies are an exception here). Our frivolous spending money comes AFTER our saving priorities.

  12. I have a perfect example where I took on new debt just last week.

    Wife needed expensive dental work (roughly $2k in costs), we opened a line of credit with the dental office to pay for this even though we have plenty of cash on hand. Why you ask?

    Because this will allow us to defer the majority of those costs till January, where I can use an accounting trick (math swizzle) to flow those payments through our HSA-account knocking roughly 35% off the cost of the treatment (realized in federal tax savings in 2013). Basically, I’m forcing the US taxpayer to pay me $700.

    This little scheme will only work as long as we won’t have maxed out the HSA in 2013 due to other medical / dental reasons (we already maxed out the HSA for 2012).

    Networth: potential $700 savings.
    Cashflow: roughly $60/month savings if assume we replenish the savings account over 12 months.
    Risks: none. we can pay it in cash today, and we save for these contingencies anyway.

    That’s basically the thought process I go through on these types of decisions.

  13. BG, thanks for the clarification. You’ve clearly put a lot of thought into how you conduct your finances and it makes a lot of sense. Can’t say that I approach each decision with quite the same level of calculation, but I do have a similar thought process on the larger issues. Probably where we differ (owing to different circumstances I suspect) is that since our income can be fairly volatile from year-to-year, I’m less focused on the monthly cash flow, and think about it on more of an annual basis, which is partly why I keep substantial level of cash on hand to help smooth out the cash flow. The good part is that this income volatility has put us in the habit of living at the level of our lowest expectations – so when things are going great, we don’t get too carried away and save for the rainy day we know is probably just around the corner.

  14. Meant to say: “…so when things are going great, we don’t get too carried away WHICH ALLOWS US TO save for the rainy day we know is probably just around the corner.

  15. I didn’t calculate the dental office thing till when I wrote that post, at the time I just knew there were some savings to go that route. Had the dental office not told me about their payment plan option, I would have just paid the cash (and miss out on the potential savings).

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