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Today on the show, I'm going to share with you a resolution that I've reached in my mind on how and why I think about debt and debtlessness. It's been a conflict here in my thinking and in my advice, and I think I've finally resolved the issue. Let me share it with you.

♪ Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less. My name is Joshua, and I am your host. We're going to wade into the debt versus debtlessness conflict.

This is a conflict that I think we've all faced, including in our own advice for ourselves and for others. ♪ If you start talking about the world of debt, you wind up opening up a can of many different opinions, many different perspectives. People look at the situation from very polarized ideas.

For example, at one end, you have people who say, "Never borrow money for any reason whatsoever." On the other end, you have people that say, "You should do everything with other people's money. After all, if you can do something with other people's money and save your own, you'll come out better ahead in the long run." And there are people all through the middle.

You have people who talk about good debt and bad debt, consumer debt and investment debt, housing debt, fixed-rate debt, variable debt, et cetera. How much debt is enough? How much debt is too much? How much debt is ideal? The opinions are numerous. My problem is I see many of the different arguments, and I've always struggled with how to reconcile these.

I noticed this very significantly about a month or two ago on a Friday Q&A show. I had a caller that called in and asked a question about paying off student loans and mortgages towards financial independence. And I gave conflicting advice in my answer, and I heard myself change my advice to her in the middle of the call.

The scenario was that she was in her middle age, I don't know, 50, 60, something like that, and she had recently gone back to school, gotten a degree in a more advanced field that would open up to her a higher earning opportunity. And she and her husband at this point had student loans from her new college degree that she had gotten and a mortgage on their house.

They had not saved a lot for retirement, and so they were kind of sitting down and making a new plan. Her question was, "Should I pay off my student loans and my mortgage aggressively, or should I focus on my 401(k)?" And in the beginning of that call, I specifically said to her, "Well, if I woke up in your shoes, I'd pay off my debt as quickly as possible." But then I started asking more questions, and as I asked more questions, I came to a very different conclusion.

I found out that the student loans and the mortgage had been refinanced at low rate fixed-interest mortgage payments. I found out that she and her husband had some goals to travel and do a few different things. I found out that they had no children or other dependents that they were responsible for.

I found out some more details of their situation. And by the end of the call, I had changed my advice. I had given her advice that said, "You should probably just pay the minimum payments on your student loans and on your mortgage payments and focus on saving and investing." And my rationale to that advice was her mortgage payments are a secured debt, secured by the house.

It was very favorable mortgage terms, fixed rate, low rate, possibly tax-deductible if they itemized their taxes. So it was under favorable terms, and it was backed up by an asset. Her student loans had been refinanced at a low rate, fixed rate. The student loans, of course, are not backed up by a hard asset, but they're also debt that she incurred personally for herself, so therefore it wouldn't be inherited by anybody.

And there would be opportunities for her to save into her 401(k), which would be protected from the claims of creditors. And she also and her husband would be receiving Social Security income. So from a worst-case scenario, they would put themselves in a situation where their assets were going to be protected from the claims of creditors, even including that student loan.

If they were to somehow fall behind, they were in a situation where Social Security payments are safe, and also they would have their money in a 401(k). And if she had plenty of income, they could cut service this debt, and the rates were relatively low, they could just plan to pay for those over time.

So I gave the advice that said I would just pay the minimum required payments and save all of the extra. But I went away from that call really thinking about it, because even though my advice was, I believe, technically correct, I was very unsettled about it. Because I felt like, well, if I woke up, I would be extreme about getting those student loans paid off.

And I thought, but why? I can talk about something from an analysis perspective and very rationally work through things, but I still have this deep emotional hatred of debt. And the impact of debt on my life and on your life. When pondering that for the last few weeks, I've come to recognize that the answer is found in the use of different factors of analysis.

In short, we can consider the use of debt on a mathematical basis. That's one measurement. And a measurement of mathematics and mathematical analysis is what I'll label financial risk, a spectrum of financial risk. Or we can consider debt from a lifestyle risk. And often this is not measured with numbers.

Let's start with the financial risk spectrum and measure it with the math. The answer of whether you should take out debt in the first place or the answer to the question of whether you should keep debt, whether should I pay off debt or should I invest, is purely a function of mathematical advantage.

If you're measuring on the basis of financial risk. It always comes down to where do you have the higher earnings. And there is no exception to that that I can find when you measure something purely on the basis of financial risk. So if you ask the question, should I pay off my mortgage or should I put money in the stock market, which one has a higher expected return?

If paying off the mortgage saves you a 4% interest payment, whereas investing the money in the stock market makes you an 8% net rate of return over time, you're always better off putting it in the stock market. And I can find no exception to that mathematical rule. I really can't.

It's also important to note that the power of leverage when it goes in your favor is immense. You can run various scenarios and if you take into account the leverage on an investment activity, if an investment activity is financially leveraged, the returns will be astronomical compared to the returns of a financial investment opportunity that's not leveraged.

You just can't make the scenarios even up. Debt is superior when measured on the financial risk spectrum. The problem is the financial risk spectrum doesn't tell the whole story. Hey, Radicals, I've got to interrupt myself here and talk to you about Wonder Capital. I spent some time on the phone last week with a representative from Wonder Capital and I was really intrigued to talk to them and find out about what they are doing over there at this relatively new company.

Obviously, when they reached out to me to do an ad, I talked to them, immediately got in touch with them and kind of just tried to learn about and do a little bit of a vetting process. And I was really fascinated to learn about their business model. The solar energy marketplace has really taken off in past years as equipment has gotten cheaper, et cetera.

Many more people are adopting – been tremendous progress in the solar energy market. But the founders at Wonder Capital saw a problem that there was lots of stuff happening on the homeowner scale, the individual scale, and there's probably lots of stuff happening at the massive industrial scale. I see government buildings and whatnot around me constantly putting up huge solar arrays.

But as far as the large commercial scale, there wasn't a lot happening in the marketplace. It's just not really growing. And they figured out that the major problem there was capital, capitalization. It was hard for business owners to find the financing for solar projects. And even though there were good savings there, it was also hard for them to figure out how to underwrite those loans and how to do it and pull it out of cash flow, et cetera.

So they came up with a simple financing model where basically they're providing loans for business owners and commercial projects that want to put in solar into their facility. And the great thing about it is because of the savings of solar, there is a net net profit where the business owner wins because they can borrow money under good terms from you through the Wonder Capital platform.

And they can save money on their electric bill. They don't do the loans unless there's a positive financial incentive. It's also a win for you as an investor because you can earn a decent return on your money up to 8.5% in one of their two funds for what could be a decently safe opportunity.

Of course, I got to be careful with saying a word like safe. But in reviewing their materials and things like that, it has some compelling characteristics. So if you have any interest in potentially investing in the solar marketplace, earning a good solid return on your money up to 8.5% in one of their funds, you can get started with as little as a thousand bucks.

So very, very reasonable way to get your way into the solar industry as a direct investment. Go to wondercapital.com/radical. Again, Wonder is spelled with a U. You know how a company in 2017 starts, they can't spell their name normally because all the good URLs are taken. Wondercapital, W-U-N-D-E-R, wondercapital.com/radical.

Again, wondercapital.com/radical. I like the tagline, "Do well and do good." Debt is superior when measured on the financial risk spectrum. The problem is the financial risk spectrum doesn't tell the whole story because we all know that there are risks that go outside of what we can predict, and there are risks that could impact us significantly.

And these risks are not perfectly captured into a spreadsheet. I don't personally know how you can take a non-mathematical risk and use it in some sort of risk adjustment formula. Of course, there are some measurements that the financial analysis industry has come up with that can be useful for measuring risk, but in general, they don't line up with the needs in your life and my life.

They're broad-scale, long-term measurements. I don't know how to do that and adjust it to an appropriate scale for you and for me. And even if I did know how to do it, even if I were an expert in the formulas, I simply wouldn't trust them. I don't believe that the wizards are as wise as they would like to be perceived as.

When I was in college, I studied the affair of the long-term capital management fund, which almost destroyed – depending on who you believe – at the very minimum, destroyed Southeast Asia and almost brought the world global financial system to its knees. And it was a fund that was built by some of the smartest people in the world.

And they thought they had measured all of the risk perfectly until something went outside of their risk model. More recently, of course, you can look at what happened in the 2001 global financial crisis and you can look at the brilliant mathematicians and the brilliant investment managers at – specifically, I'll start with AIG – and you can see that although their mathematical prowess was unparalleled, they missed a few important factors.

And global history seems to be a combination of these crises. Just systematically over time, people go beyond what they can see. We, as humans, are not omniscient. And we, as humans, do not control all of the factors and variables in the universe. So bringing it specifically to a personal finance context, we face risks to our lives and to our lifestyles.

And these risks range from moderate to severe. But it's on the basis of these risks that aren't accountable in a spreadsheet that we have to think. In my head, these risks look like two different sets of variables. The first variable is a risk that could lead to a problem in my ability to make debt payments.

For example, I can't predict with certainty whether I will or will not be laid off in my job. I can't predict with certainty what will happen in my business to cause revenues to change significantly. I can't make those predictions with certainty. But those things that can happen in life – I could get laid off from my job, I could wind up sick or hurt and unable to work, my business could fluctuate due to something that's completely outside of my control – as those things happen, they would impact my ability to make debt payments.

And the impact on those debt payments could then bring additional risk to my life and my lifestyle. In Episode 421 of Radical Personal Finance, I interviewed a lady who had become a real estate investor through the 1990s. And she and her husband had used leverage and they thought they were being careful and wise.

That was their impression of their decision. They had used real estate as a tool to help them to build financial independence. They had invested in real estate. Her husband had run a mortgage company and they had built things up. Then they faced the crash of 2001. They fought and fought and fought and fought their way through and fought their way out of it on the other end.

And she spent the last decade putting things back together – not last decade, 60 – she spent the last period of time – forgive me, I just realized that earlier I said 2001 twice and what I meant was 2008 – through the crash of 2008. And so through the last decade, she's fought her way out of it.

But the depth of the personal financial crisis that she and her husband went through brought such severe strain to their marriage that they wound up divorcing. Based upon her account of it – go listen to episode 421 if you did not hear it – based upon her account of it, it was just a brutal process.

Horribly difficult for her and for her husband and for their children. That lifestyle risk is massive. How do you account for that? How do you account for even if the strain and stress doesn't lead to divorce – and it often does – a leading cause of divorce and stress in marriages is financial problems?

But even if it doesn't lead to divorce, what does that stress cost? What does the stress cost when a business is deep in the red and husband and wife have to sacrifice years working late into the night, working on the weekends to save the business? What does that cost?

What about the stress on children? Perhaps everything was flowing along great but then things start collapsing. Well, stressed out moms and dads often are not quite as patient with children as they would like to be. I find that in the best of times with my children, my patience has tried.

Chalk in bad day after bad day, pile on the stress, and all of a sudden you start snapping left and right. You start barking and yelling. Think about what that does to our children and the long-term impacts of that on our children. So financial stress may translate over into them.

Think about what the impact of financial stress – think about the impact that financial stress may have on somebody's health. It's my understanding that there's good evidence to say that somebody's stress levels have an immediate and long-term effect on somebody's health, a person's health. The corrosive effect of financial stress could shorten your life or it could make the experience of years of your life less enjoyable.

How do you measure that effect? How do you measure the effect of your decisions on the stress that you bring to other people's lives? One of the worst business mistakes that I ever made when I was a financial advisor, there was a point in time at which I needed more help in my business for me to be able to grow.

So I hired staff, but I didn't have the money coming in, the revenue coming in, in order for me to be able to make the payments – sorry, in order for me to be able to cover all of my expenses and my own income and my staff. So I started borrowing money for a portion of my expenses.

I had planned that it would be a very short-term move, that I quickly would be able to use the expanded capacity of my team in order to make more money. And quickly I would be out of the hole and we'd be in a more profitable position. But due to my own mistakes and my own errors, I didn't actually complete that plan.

After a time, I woke up and realized how stupid I had been to make a decision like that, and I had to lay off my staff. It was extremely painful because now my foolishness is bringing stress to somebody else who's now unemployed. That's bringing stress to their life, and it brought great stress to me for the coming – I don't remember how long it took me to pay off that debt, but months and years, I don't remember the exact number.

But it brought great – more financial stress to me for a period of time to pay off the mistake that I had made. How do you account for the spiritual effect on somebody's soul, for them not paying their creditors, falling behind on their bills and not paying their creditors, causing them to sin?

How do you account for that with a mathematical formula? The Bible teaches that to borrow money from somebody and not make the payments as agreed is wicked and sinful because it's a breaking of your word, and more importantly, perhaps, it's a form of theft. You're stealing from your creditor.

Well, most people don't wind up in that situation by intention. They don't wind up planning to do that. Certainly some do. They say, "Let me go and borrow as much money from my credit cards as I can and then declare bankruptcy and not pay back my creditors." Some do that.

But my experience – I've never worked with somebody who's been in that situation. The vast experience – all of the experience that I've had working with people who were in financial stress, it's always come about to some degree unintentionally. I've always drawn the comparison between the circumstance with King David, the Jewish king in the Old Testament.

He didn't wake up planning to commit adultery on the day that he did with Bathsheba. He wasn't where he was supposed to be at that time. He wasn't doing what he was supposed to be doing. He's being unwise to watch her bathing and then he goes and commits adultery with her.

He didn't wake up that day planning to go and murder her husband. But yet he did. Lack of intention doesn't absolve us of responsibility and it's the same with debt. What is the impact? How do you measure the impact on your life of the cost of paying back the results of a foolish decision?

My grandfather when he was a young businessman – I don't know the exact age but I'm going to guess 30s, early 40s – had built a construction company. He and his business partner had taken a contract to build roads in Texas. They had and owned various power equipment, steam, graders, bulldozers, etc.

Well, they had taken this contract not realizing that the sand and the dirt that they were building roads with was going to destroy their equipment. As they were building this road system, their equipment was destroyed by the abrasion of the sand that destroyed the tracks and basically they had to completely rebuild them by brand new equipment to be able to finish the job.

They had used the money. Some of it was in debt. Farmers are notorious for doing everything on credit. They had borrowed some of the money and I believe they had to borrow more money to make the contract good and to finish out the contract that they had agreed to.

Put them deep in the hole. My grandfather's partner walked away, declared bankruptcy. My grandfather spent the next, I believe about 30 years of his life paying back the creditors on the job that he had lost money on. He didn't escape from paying back those creditors until he was in his mid-70s.

What's the impact of that stress over decades? All of these many examples are connected to the financial risk of debt, but none of them can be factored into the spreadsheet. So what I've come to realize is there are two different scales. One is a financial measurement scale that measures financial risk only.

The other is a lifestyle scale that measures lifestyle risk. I don't know how to connect these scales. And frankly, I don't know if they ever could be connected. It seems to me like we think either on one scale or the other based upon where we are in life. When I was a young man, I didn't think in terms of lifestyle risk.

I was a man and so I perceived myself to be invincible. And I just simply thought in terms of financial risk. But even there, I wasn't thinking very much about the risks. I was thinking about the rewards. I was thinking about the fact that I didn't have a lot of money and I had to be the richest person in my peer group.

And so therefore, I needed to take big risks to make big wins. And I didn't have much of a conception at all of that scale of lifestyle risk. Fast forward a few years into my marriage. My wife doesn't care how many millions of dollars we have. She doesn't care whether we're the richest people on the Internet or I'm the richest financial podcaster able to show everyone my balance sheet and say, "Look how well we're doing," and show off to my friends.

She just wants to be together with me and have peace in our home and no stress. This seems to be the pattern that I've observed in other marriages as well. Often, as men, we husbands think in terms of financial risk and we calculate a little bit our ability to make the payments, but we have this undying confidence and sense of ability in the fact that no matter what, we'll be able to get through.

And we don't perceive the cost or the potential cost of our actions very clearly. On the flip side, it's been my experience that most of the time, our wives don't think primarily in terms of financial risk, but they think more in terms of lifestyle risk. My wife is unimpressed by our balance sheet, but she's very impressed by my presence.

She's very impressed when I can focus on her. It doesn't matter to her whether we spend $300 on dinner or whether we go to a local park and sit on the bench. She wants me and she cares about the lifestyle. So the question is this, is there a solution?

Is there an absolute standard? I don't know what that absolute standard is, if it exists. I do know that I have a much greater appreciation of lifestyle risk than I ever had when I was younger. And I've come to the point where there's almost – where I find it very hard to perceive the value of the financial risk by using debt, by using leverage.

I find it hard to perceive any value in that. And I find a huge amount of value in lowering those risks to my lifestyle. There may be a couple of factors at play here. Number one, there's a concept in psychological research, especially as it relates to money, called loss aversion.

And the basic premise of what the researchers believe is true is that we seem to experience the risk of loss much more intensely than the desire for gain. The measurements that various researchers try to apply to that disparity vary. But in general, it seems like we experience the risk of loss with much greater emotional intensity than we enjoy the risk of gain.

If that's true, we should pay attention to it. It certainly has been true for me. If I think through the pain of the many financial mistakes that I've made, especially those ones that were exaggerated in their impact by borrowing money, that pain was deep. Whereas the pleasure of good decisions, those times that I've made great investments and had great leverage, is small.

As such, I've come to appreciate the lack of pain more than the pursuit of massive increase. I think the second factor has to do with the utility of wealth. There is a level at which the lack of money is deeply painful. You and I are not at that level.

There are hundreds of millions of people throughout the world who are at that level, whose stomachs are hungry and who are sleeping on the side of a street or under a cardboard roof or a tin roof of some kind. I have a couple of friends throughout the world right now who – I have one friend who is in the process of becoming a refugee in a foreign country.

He's desperately trying to sell his house. It's in the process of being taken over by the local government, and it's just an awful situation, being targeted. I desperately wish I could help him, doing everything we can. There are people who are at that level of pain. You and I aren't there.

Now, on the flip side, the benefit of additional wealth, the psychological researchers seem to be in pretty good agreement of the fact that there is a limit at which – beyond which greater wealth does not make that big of an impact. And many of us are there. Whether it is – what is it?

$76,000 a year or not, I don't know. But I do know that if you have more money at the end of the month than you do bills, you're probably there. It's very limited. I don't get a lot more pleasure out of buying $150 steaks at a fancy restaurant than I do out of buying a $10 steak and cooking it myself.

In fact, I usually prefer my own cooking. And that's the place that you and I are. So why take risk? Why take more financial risk that could significantly impact our lifestyle risk? Most of us, if we're conservative and prudent and diligent, most of us will have no problem being multimillionaires within a reasonable number of years.

And all along the way, we can enjoy the peace of a life lived without debt. All along the way, we can enjoy the peace that comes with a low-risk approach. I've had financial planning friends and I, we've gone round and round on Dave Ramsey. And usually it comes down to this question of debt.

And a lot of times you won't get financial advisor to give you a straight story. But at the end of the day, most of us come down to the point of saying, "You know what? You can't go wrong with not borrowing money. You can't go wrong. It's hard to screw it up.

And even if you do screw it up, at least you're not clawing your way back from the red. You're just adjusting. You can't go wrong if you don't borrow money." I know for me, I'm a very different person today than I was 10, 15 years ago. And you, I would imagine, are hearing that clearly in today's show.

But I've come to the strong conclusion that there's very little benefit from basically ever borrowing money. And a whole lot of downside. What you should do with that, I don't know. There are – we all have to make individual situations. And I still can't get to the point where I take a hard line stance on it on an arbitrary bright line basis, never borrow money.

I can't get there. I'd like to get there. It'd be a lot easier to have a hard line stance. But I can't get there because I can't justify and support that position. But I think for me, I'm always going to ask myself in the future, "Am I calculating here a financial risk or a lifestyle risk?" And when I'm talking with people who are struggling to decide this question, I'm going to ask them, "Are you more on the bent of the financial benefit or risk, or are you more concerned with the lifestyle risk?" There's a time to think with our emotional brain and a time to think with our careful mathematical brain.

Just because I'm emotionally scared of riding on an airplane doesn't mean I should always submit to that fear. There's a time to sit and calculate the actual risk of riding on an airplane. The flip side doesn't mean I should ignore that fear just because I calculated with my logical brain.

How to make those calculations, I don't know, but I believe there's value in both sets of calculations. Here's my final bonus tip in today's show. I have decided and have learned there are ways that you can get the benefits of leverage with less or no financial risk. There are many forms of leverage, and not all forms of leverage require you to commit yourself to paying back money.

Simple example, my grandfather who had the construction business, he could have capitalized his business with investors who were willing to share in the financial risk rather than by borrowing money where he was solely responsible for the financial risk. If he had used investors and he'd been able to recruit some people who would share in the profits and also share in the risk of loss, he would not have had a moral obligation to pay them back when they lost all their money.

They would have all gone in together, willing to bear the risks together. That type of structure could well be your ticket out. Why commit yourself to a moral obligation of paying somebody a certain amount of money on a certain schedule if you can find another way to capitalize your business by sharing the risk with other people who go in with eyes wide open?

Why presume upon your future that way? And I've learned that in general, by avoiding debt, I make better decisions and I find more interesting ways to leverage my actions. That's a topic for another show, but I hope today's show has been useful to you. I'd love to hear your thoughts on what I've shared with you in today's show.

Come on by at RadicalPersonalFinance.com and share them with me. I don't know how to reconcile these things. This is in some ways kind of a draft idea, but it's something I've realized in my own mind, that I'm operating on two different scales that have a hard time touching. If you know of a way to reconcile these things or if you know some sort of mental model that would be useful to me, come on by RadicalPersonalFinance.com and tell me about it, and I'll be back with you soon.

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