The “New” Rules of Debt

In the real world, you uncover an opportunity, and then you compare other opportunities with that. And you only invest in the most attractive opportunities. That’s your opportunity cost…It’s your alternatives that matter.

Charlie Munger

In my book, Beyond the Basics: Maximizing, Allocating, and Protecting Your Capital, I encourage individuals to use all capital sources to build their wealth. One such source is debt, which is misunderstood and misused. Some people overdo it, some fear and avoid it. But while we had the low-rate environment that recently ended, it made sense to increase your debt use if you had productive uses for the borrowing and could afford the payments.

Well, now rates are significantly higher.

The prime rate is now 8.25% from a low of 3.25%. 

Mortgage rates that were in the 2’s and 3’s are now touching or exceeding 7% at times.

It changes your opportunity cost calculus and requires some “new” debt rules which we discuss in this episode of the Wealthy Behavior podcast:

• Why you shouldn’t be in a rush to pay off your low fixed rate debt, even if you have a goal of retiring debt free
• How to determine whether you should be making extra mortgage payments if you have a new higher rate loan
• Whether the low rates we had are coming back and how you should think about refinancing opportunities given that they may not
• Paying off variable rate loans that have seen rates jump
• How to build a financial plan and what the most important inputs are to consider as it relates to debt management
• Protecting yourself from bad loans in this environment

New Rules for Using Debt to Build Wealth

Available through the link in title and wherever you get your podcasts

Further Reads

Using Debt Smartly to Build Wealth

Your Financial Planning Checklist

Missed an episode? Catch-up on Wealthy Behavior here.