Hacker News Reader

Comment by pif | Hacker News Reader

TL;DR: having tons of cash is better than having debt.

I thought the "The more debt you have, the less financially resilient you are" was the more important message.

But this isn’t true, one has to consider the debt ratio, not just the debt. Someone with a million dollars of debt is financially resilient if they have a debt ratio of .1

True, but that is not the situation most of humanity is facing.

I read that as an example to illustrate a point: it could also have said debt of $1000 with a debt ratio of 0.1 which is still pretty resilient.

Resilient? Sure. Realistic for anyone with only $10k in assets? Not even remotely. Not in the market we have today. There are too many people who are using debt just to get their basic needs met, let alone something with enough permanence to be considered an asset.

We're just using arbitrary numbers to demonstrate a point, we aren't trying to assess anyone's actual financial health.

That was exactly my point...a million dollars of debt is astronomical for the majority of people, but adding another data point such as DTA or DTI would make for a clearer picture of what the debt load actually is. Its like putting down a 100kg kettle bell and asking a group of people "is it hard to lift"? For the average person sure...but you're going to get a variety of answers if you put that kettle bell in front of kids vs a group of gym rats.

Edit: I guess a smaller amount like 10k USD might be better to illustrate the point.

That's only true if the rest of their bet worth isn't tied up in some high risk investment where they could lose everything. Just because it's financially more optimal to have some debt in some situations doesn't mean that it's also more resilient. Yes, debt ratio plays a role (although a debt ratio of 0.1 is almost like having no debt at all), but no debt is for sure more resilient than debt.

I think my point was more that 1 million dollars of debt is a pretty large sum to most people, but not much to someone who has substantial assets. You can draw up "that's only true" scenarios on basically any situation, so its not very helpful to go back and forth.

I will say the point about having debt limits your future possibilities is very true, and if someone would like to maintain an open future, stay away from large amounts of debt(homes, expensive cars, boats, etc...)

Debt to income or debt to asset is the only way of evaluating if someone's debt is high or low. I thought it was obvious that's what GP meant.

I did not get that assumption from "The more debt you have, the less financially resilient you are". Debt is an absolute value, and debt-to-asset ratio is...not. You can also evaluate debt loads by debt-to-income ratio, which is not to be overlooked as most homeowners buy homes based on their income, rather than their savings. As others have said, debt-to-asset is also not a golden ratio, because if your assets are not liquid and you get called for your debt, you still have a bad situation.

> You can also evaluate debt loads by debt-to-income ratio, which is not to be overlooked

Debt to income is literally the first thing I wrote in my comment. I didn't overlook it.

The absolute value of a debt is a meaningless number so "more debt" should always be evaluated in that context. And that's how I took the comment I originally responded to. Some extremely obvious things are being rehashed for no apparent reason in this thread.

When evaluating relative debt load, asset values should have a multiplier to reflect both liquidity and volatility.

If your other millions are not liquid then the one million of debt is still a potentially significant liability when adverse events happen. If it is liquid then why bother borrowing for something so small? The spent cash can be replenished quickly when there are no debt payments.

Very true, I think the article is pretty high level, and so are my comments. Actual financial health can be difficult to evaluate given that world events are pretty open ended and anything can happen.

It's still true though. If push comes to shove, having no debt will increase your odds of surviving volatility - it the debt ratio just expands or tightens what range of volatility you can survive (which he did write about). Even if you have $5 of debt and $5m in the bank, you would still be measurably better off to have had $0 of debt in financial "survival".

Having both can often be the ideal situation. It’s also really dependent on what the debt is, how is it being serviced…etc. For some people, not having any debt at all is extremely liberating, and that benefit outweighs any of the benefits of getting marginal returns.

>For some people, not having any debt at all is extremely liberating

Indeed. I lived with my parents into my 30s, saved up for ~10 years and bought a nice house cash, no mortgage. Was it financially optimal? Probably not, but the peace of mind of being immune to market crashes or interest hikes (we tend to not have 20+ years fixed mortgages here) is just really nice.

You simply restructured your debt and borrowed from parents instead, no?

That is to say, you owe them for those ten years.

Not saying there’s anything wrong with it. Most people in average circumstances owe a lot to their parents.

>> You simply restructured your debt and borrowed from parents instead, no?

>> That is to say, you owe them for those ten years.

To me that seems like a strange take on it. I saw no indication of a debt owed in the GPs comment.

I think the OP used "owe" in the second dictionary sense:

2: to be attributable an idea that owes to Greek philosophy

This is a very transactional view of it, but I can see the line of thinking. My mom gave me everything I needed to succeed as an adult, and I owe her a lot, so now whatever she needs, I try to take care of it. Hopefully other people come to the same conclusion, but I don't think parents usually expect a financial ROI on raising kids haha.

Reply on news.ycombinator.com