Debt is an interesting tool.

In general debt is bad for you.  Debt is mathematically a negative bond.  If you own bonds, you should probably sell all of those before taking on debt. All of that said, there are sometimes good deals on debt and occasionally debt isn't a terrible deal.

The math behind debt is pretty easy, for $X of principal, you are charged Y% interest(per year) until all of $X(the principal) is paid off.

Debt is a good deal if you can almost risk-free make more than Y% interest on $X principal.  That's not an easy thing to achieve, but it does happen on occasion.


Some situations where debt can make sense:

  *  If the rent/buy for a house works out to a buy and you can find a good interest rate and you are not over-buying your house, then a mortgage makes sense.

  *  Education, assuming it's in a field that will let you pay it back in a reasonable amount of time.  I.e. debt for a degree in napping probably won't work out well for you.  i.e.  I'm speaking from a debt perspective ONLY. i.e. the math does not work out to take on debt for a degree that has a VERY low chance of even letting you pay off the debt, let alone earn a premium on that debt.  This is a bad mathematical bet.  I.e. the chances of a degree in "napping" letting you earn a premium on that education is low to none, so taking on debt for no expected return is a bad deal, mathematically speaking).  If you still want a degree in napping, the math says, don't take on debt to do it.  But otherwise enjoy all the napping!

  *  True Emergencies(i.e. needing to put actual food in your actual tummy)  Debt to buy Coffee is a terrible idea.

  *  0% interest car loans (assuming you aren't buying more car than you can afford, and you already have a good deal on the purchase price).

## When and how should you pay back debt.

tld for 2020 -> 2030: I'd suggest anything over 4% debt interest one should aggressively pay it back, above 2% interest it's debatable, perhaps split and invest 50% and pay off 50%.  Below 2%, it's a pretty easy case to keep the debt and invest.

The math is actually surprisingly easy. There is also an emotional component, if you emotionally prefer not having debt, then just pay it off aggressively, the math doesn't matter. Onto the math!

When your expected returns exceed the cost of the debt, you should continue investing into your expected returns and pay the minimum on your debt.  As soon as that changes, and your debt costs you more than your expected(or actual) returns, you need to then start aggressively paying down your debt.

How do I calculate expected returns?  Let's say a TSM fund of 6% real happy path - debt = expected return.

TSM 6% - 6.1% interest = -.1% expected return. Answer: pay off debt.

TSM 6% - 2.5% interest = 3.5% expected return. Answer: invest.

Of course, time then gets in the way. Let's say your debt @ minimum payment is due to pay off in 20 years, then you can likely expect 6% real returns over that 20 years, and the above numbers make sense.

If however, your debt is due to be paid off in the next 5 or 10 years.. Suddenly expecting 6% is maybe not the wisest course of action.  We have no idea what the markets WILL return, but all the experts are expecting low returns over the next decade.

Also, I assumed one was invested 100% in TSM.  If you are invested in equities and bonds, then suddenly the answer might change.  a 50/50 portfolio over the next decade is not expected to return 6% even in the happy path.

So I'd venture you lower your expected returns some and keep them on the lower end, since debt interest is guaranteed, expected returns are not.