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Are the really the same? In the first case you're taking on added risk, in the second case you're maintaining the status quo.
I'd definitely do the latter. Would I do the former? Sure, if:
A. The loan size was worth the trouble.
B. the transaction costs and interest rates were low enough, and
C. the length of the loan is long enough
If the loan had no transaction costs, a fixed 2% interest and was payable over 20 or 30 years? I'll take that any day of the week, even if I had enough cash to pay for the vacation 50 times over.
Like others have said, debt is a tool. We have tens of thousands in student loans that we could've paid off years ago, but at a 2% interest rate, it makes no sense for us to pay it off early, since our investments (simple index funds) will easily outperform 2% over the length of the loan. We've already recorded enough gains on the payoff value from 2010 to pay for all of the interest for the remaining life of the loan.
From what I can tell from the posts in this thread is that some view vacation as a necessity and some view it as a luxury.
The way I see it.
I could have a load of cash in the bank, full portfolio of investments, zero debt, live like the poor and be miserable.
I could also life it up and spend big, accumulate debt, end up in the poor house, and again be miserable.
Or I can take a sensible approach.... save, spend, live in moderation.
I don't think debt is good nor evil. Its a tool to be used with responsibility. Do I think vacations are important enough to go into debt... no. If a once-in-a-life-time trip pops up as an opportunity... sure. I would regret it if I passed on that.
From what I can tell from the posts in this thread is that some view vacation as a necessity and some view it as a luxury.
The way I see it.
I could have a load of cash in the bank, full portfolio of investments, zero debt, live like the poor and be miserable.
I could also life it up and spend big, accumulate debt, end up in the poor house, and again be miserable.
Or I can take a sensible approach.... save, spend, live in moderation.
I don't think debt is good nor evil. Its a tool to be used with responsibility. Do I think vacations are important enough to go into debt... no. If a once-in-a-life-time trip pops up as an opportunity... sure. I would regret it if I passed on that.
I have an uncle that is rich but lives like a poor man. I don't get that and I wouldn't do it. Then there are people who live it up today and when it comes crashing down point and blame the everyone else. These are the types that if given a pardon for all their debt and given money would end up in the same place down the road.
I am saying to set up a financial foundation and goal toward your freedom and yes live a little too. Since I have done this I can and do go on very nice vacations paid in full.
I don't think debt is good nor evil. Its a tool to be used with responsibility. Do I think vacations are important enough to go into debt... no. If a once-in-a-life-time trip pops up as an opportunity... sure. I would regret it if I passed on that.
The OP was an interesting question and I think a lot of people are missing it.
Most people are adamant that they would never go into debt to go on vacation. Yet they also say that they would not forgo all vacations until their debt is paid off.
Consider an alternate example. Bob uses his credit card for everything and pays the balance off in full every month. Bob refuses to go into debt for a vacation, but he also can't afford to go on one right now.
Bob has a loophole though. Instead of charging he vacation to his credit card, he only pays the minimum on it this month. Now he has all the cash he would have used to pay his CC bill this month. Technically he didn't acquire any new debt for his vacation, he's just not paying off old debt. So he got to go on his vacation without going into debt... because he was already in debt.
That's the OP's argument. Only instead of a credit card, consider it a house/car loan.
This is why personally, I think the argument against going into debt for anything is pointless. What you should consider is the interest expense associated with doing what you're doing. It's not a matter of avoiding all interest expense, it's a matter of avoiding interest expense that you don't think is worth paying.
If I go on vacation for $1,000, that $1,000 could have been used to pay down my mortgage. After the tax deduction though, my mortgage rate comes to a little over 2.5%. Am I willing to pay that interest on a vacation? Technically though, that's compounded over the life of the loan, so it is something you need to consider, at 2.5%, that comes out to a little over an extra $2,000 by the time my mortgage is paid off.
But going on a nice vacation at 30 while I'm healthy is more valuable to me than having $3,000 when I'm 60. So I would go on a vacation instead of paying off my mortgage faster.
At the same time, if you re-ran these numbers using credit card interest rates, I'd say you're a fool to go on vacation at that cost. So no I wouldn't go on a vacation instead of paying off credit card debt.
Not to p** in your cornflakes but what if you get sick, what if you lose your job? So much can happen. I know people who went on vacation every year, spent money without a care in the world. Now they fell on hard times and are losing the house. They thought the good times would roll forever and didn't even have an emergency fund.
I get what you are saying but just a thought.
I'm not worried about emergencies. I have a decent-sized emergency fund in cash and an investment account I can tap if need be. It is an entirely different scenario if one doesn't have an emergency fund.
Someone else asked, but yes, I'm planning to live in my house for more than 15 years. Our goal is to live here between 20-25 years. This is our 4th house and should be more than adequate for our needs over that timeframe. Then we'll be near retirement age, kids out of the house, ready for the next phase of our lives, and we can downsize and pay cash for the next house.
I'll echo the poster above - it's about moderation. Live well within your means. Have an emergency fund, save for retirement and college and the next car and just because. But enjoy your life as well. It's not good to live paycheck to paycheck...but it also isn't good to deprive yourself of everything. There is a nice happy middle ground, and many of us have found it.
The OP was an interesting question and I think a lot of people are missing it.
I think we are saying the same thing with minor differences. We both agree that how important is the expense being considered has to be weighed against the cost of the interest. In my post I mentioned if it was a once-in-a-lifetime vacation opportunity, I may just go into debt for the experience.
If Bob defers payments to the CC by paying minimum only (Bob usually pays off his balance every month) and uses the cash for vacation, Bob believes he is not accruing "new" debt. This is a fallacy because he is accruing new debt. It is the revolving balance that goes into the next billing cycle. The revolving balance that would have been zero under normal circumstances. Interest on revolving balance is accrued.
If Bob pays the balance on CC and then uses the CC again to go to vacation, then the cost of the vacation will be the revolving balance to the next billing cycle. Interest on revolving balance is accrued.
Similarly, if Bob has revolving balance month to month on that CC and his payment schedule has him paid in full in 2 months, each of the scenarios would delay that payoff. Interest accrued. This is similar to the case of having an outstanding mortgage on a house.
Furthermore, I don't think CC and taking a loan against a paid house is quite the same. House loan has your home as collateral.
So really the only difference between your post and my post is the amount of interest that is worth it. In my case a vacation is worth exactly zero percent interest. In you case, its some amount of interest. It really just boils down to preference and one's personal situation.
If Bob defers payments to the CC by paying minimum only (Bob usually pays off his balance every month) and uses the cash for vacation, Bob believes he is not accruing "new" debt. This is a fallacy because he is accruing new debt. It is the revolving balance that goes into the next billing cycle. The revolving balance that would have been zero under normal circumstances. Interest on revolving balance is accrued.
If Bob pays the balance on CC and then uses the CC again to go to vacation, then the cost of the vacation will be the revolving balance to the next billing cycle. Interest on revolving balance is accrued.
Similarly, if Bob has revolving balance month to month on that CC and his payment schedule has him paid in full in 2 months, each of the scenarios would delay that payoff. Interest accrued. This is similar to the case of having an outstanding mortgage on a house.
Furthermore, I don't think CC and taking a loan against a paid house is quite the same. House loan has your home as collateral.
So really the only difference between your post and my post is the amount of interest that is worth it. In my case a vacation is worth exactly zero percent interest. In you case, its some amount of interest. It really just boils down to preference and one's personal situation.
Technically, bob has took on the debt at the time he chose to swipe the card. That's the same way you go into debt when you take on on a mortgage. When he chooses to use the money to pay for vacation instead of paying off the debt, he isn't actually taking on new debt, he's just allowing existing debt to incur interest.
The same is true for your mortgage. When you choose to go on vacation, you're choosing to allow your existing debt to incur interest.
You may think that you vacation has 0% interest, but really every dollar you spend is a dollar that could have been used to pay off your mortgage. That means that at any given point, a dollar spent is generating interest equal to the highest interest rate you're paying on your debt because you could have avoided paying that interest if you paid down your debt.
Bob may have "technically" avoided going in debt for the vacation, but that's only from a definition stand point. He still wound up paying credit card interest rates for his vacation. If you go on vacation while you still have debt outstanding, you're doing the same thing.
That's not to say that I don't think it's acceptable to do so. I just realize when I'm doing it.
Bob may have "technically" avoided going in debt for the vacation, but that's only from a definition stand point. He still wound up paying credit card interest rates for his vacation.
Not if he saves up and pays cash!
Or if he puts it on the CC and pays in full.
That's why me going on vacation is independent of my mortgage amount.
IF there is a crazy deal for a flight to Europe and hotel, I would "borrow" to go on vacation. In essence, it is just using a 0% credit card and pay it off in a few months.
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