Debt-Free Investing + A Caveat about Short-Term Loans

Photo from here.

In this post, before challenging the assumption that it's necessary to go into debt to invest, I will seek to bust the myth that there's such a thing as "good" debt.

Good debt?

When I was younger, I read Robert Kiyosaki's book, Rich Dad, Poor Dad, several times. In it, he suggests that there is bad debt (used to buy liabilities such as personal houses, cars, etc) and good debt (used to buy assets such as rental property).

While I agree that using other people's money (or skills) via stewardship, partnerships, and the like may be a great idea when investing, I do not believe that going into debt should be recommended for investing (the difference between these things is explained below). This would include bank loans, private "shark" loans, leverage, and similar.

Why do I, who used to believe in the idea of "good debt," say this? Some reasons are because investing with debt:

1. Allows people to invest prematurely. Years ago, I thought I was ready to flip a house. (I didn't do so because of the way our banking system works.) Now I see that I was nowhere near ready to do so.
   I had no idea how to price properties.
   Negotiating was something I didn't understand.
   My knowledge about renovations, though enough for me to start a business, would not have been enough to create a repair budget or know what was needed for a particular market.
   I wouldn't have had a clue how to sell a home, or what to do if it didn't sell quickly.
   If I had been able to buy a house, it almost certainly would have flopped. The same is true of other types of investments.
   I think a lot of people don't understand that value doesn't just come from nothing, and that they must add value in order to earn a profit. If you cannot make money currently, then adding more money probably won't help.
   
   
   "He who is faithful in what is least is faithful also in much; and he who is unjust in what is least is unjust also in much." (Luke 16:10)
   
   
   Do not overwork to be rich; Because of your own understanding, cease! (Proverbs 23:4)
   
   
2. Increases chances of failure. Let's imagine you're netting $400/month over mortgage payments on a rental property. That's great, but what if something goes wrong? Let's say the tenant trashes the place and leaves. In that case, in addition to potentially thousands of dollars of repairs, you'll have a monthly mortgage payment. Things could quickly spiral downward you and might lose the house along with whatever you put into it. If you actually owned the property, failure is far less likely.
3. Makes failure more painful. Let's say that instead of investing the $500 you have in stocks, you've used leverage to purchase $1,500. Now, if the stock drops 20%, instead of losing $100, you'll lose $300. Ouch.

"Yes, but won't taking on debt speed up my path to wealth?"

A faithful man will abound with blessings,

But he who hastens to be rich will not go unpunished. (Proverbs 28:20)

"But those who desire to be rich fall into temptation and a snare, and into many foolish and harmful lusts which drown men in destruction and perdition. For the love of money is a root of all kinds of evil, for which some have strayed from the faith in their greediness, and pierced themselves through with many sorrows." (1 Timothy 6:9-10)

It's not wrong to be wealthy or to want to be a good steward of what God has given you, but wanting to be rich is, in and of itself, not a good goal. Once you're rich, then what? Make more money? That's pointless. Waste your life being lazy? Give to others? The last one is a good goal, but how about giving what time and money you do have now? Remember, it's people doing what God has called them to do (farming, researching, building, instructing others, and resting (in moderation)) that brings about value. If everyone sat around doing nothing, no amount of money would stop everyone from starving.

The soul of a lazy man desires, and has nothing;

But the soul of the diligent shall be made rich. (Proverbs 13:4) 

Before delving into ways to invest without debt, one last objection:

"The people who preach the evils of debt do not understand that debt is essential to the American economy. Whether that is good or bad is debatable, but what is not debatable is that without debt, our entire economy would collapse. Our entire economy is based on steady inflation. And the way in which we encourage that inflation is through debt."

--Robert Kiyosaki, on this page which was accessed on 5/18/20.

That's more confirmation that my analysis of our currency/banking system is correct, but of course, as I noted there, it's not right to try to keep investing in a Ponzi scheme so it doesn't fail. Pull the plug on it. The sooner, the better. Changing from Federal Reserve notes to hard currency might upset the economy, but remember, the real value comes from people doing what God has called them to do. Nobody eats Federal Reservee notes (I hope). Food comes from God's wonderful earth.

Way to Invest without Debt:

The above was very long, so I've decided to keep this part somewhat short.

1. Wait until you've saved up.
2. Work in or research some field for a while until you have enough expertise to see entrepreneurial ideas not requiring much money.
3. Start small. Start with what you have. Be creative. Have a product idea? Don't put tens of thousands of dollars into patents, (I disagree with the patent system, but that's another issue.) manufacturing, equipment, and property. Instead, try to create a few of the products and sell them online.
4. Steward other people's money. If you've got a good idea, try to convince others to allow you to use their money to invest. Rather than borrowing from them, allow them to receive a percentage of your returns (or losses).
   This is much different than taking a loan from someone. When someone stewards money for someone else, they really aren't borrowing it. If the money is lost, the person who owned the money loses it and the person stewarding it doesn't owe anything. If the steward multiplies the money, they'll likely be rewarded, but ultimately it's the one who owns the money who now owns the returns.
5. Partner with others. Similar to the last one, except here the people who invest money with you have some of the control and/or responsibility for the investment.

One concrete example: An investor and I have found several homeowners who want to sell their homes. Rather than buying their homes (a huge cost), we repaired the homes (still a substantial cost) while the owner retained ownership. Then, when the house sold, we and the homeowner took a percentage of the profits. Although profits were not as large as if we had bought the house directly, the investment made (sweat equity by me and money for materials by the investor) was smaller than if we had bought the house directly, enabling investing with no debt.

Ultimately, being able to invest is a gift from God, so ask Him to bless you with this if it's His will. Then keep your mind and eyes open, be diligent, persevere, and trust God.

A CAVEAT ABOUT SHORT-TERM LOANS:

I want to be careful that my views on debt are from the Bible, and one thing I realized is that sometimes specific types of short term borrowing are probably perfectly fine.

For example:

1. You go to lunch with a friend and forget your wallet, so he pays and you tell him you'll pay him back later.
2. Someone you know has something expensive (a tool, let's say) and you need to use it one time. Borrowing it certainly seems reasonable.

What's different than "normal" debt in these cases:

1. The borrowing is very specific (of a specific thing/amount, for a specific time, etc).
2. It's a short-term loan.
3. Repaying the loan should be easy/low risk. In the first case, you have plenty of money but just cannot access it, but as soon as you can access it, you pay off the debt. In the second case, you'll return the tool, unless it breaks, of course, which does show there's still a risk involved.

A biblical example of this is 1 Kings 4 (which I mentioned earlier in this series). A widow who was in trouble due to debt and Elisha told her to “Go, borrow vessels from everywhere, from all your neighbors..." Although it's possible this may fall into the category of a poor/emergency loan, it seems different because she borrows something specific (jars) for a specific purpose (to fill with oil). After she sold the oil, it would be easy enough to return the jars.

In 2 Kings 6:5, a man borrowed an ax for a specific purpose. Of course, when he temporarily lost it, he indicated the loss was worse because it was borrowed, but anyway.

As noted earlier in this series, the Bible does discourage debt, but it doesn't say all debt is always wrong, and I don't want to do so either. There are some questions I don't know the answers to. In this series, though, I do want to discourage debt (as the Bible certainly does) and suggest positive and realistic ways to live debt-free.