To borrow or not to borrow; good debt, no debt

The Federal Reserve is considering capping bond rates at very low levels. Interest rates on savings, certificates of deposit and money markets are at an all-time low.

The policymakers’ objective is to revive the post-COVID-19 economy by encouraging consumer spending.

Stated another way, the recovery will take place on the backs of the savers.`Saving used to be admired, borrowing was frowned on. In Aramaic, the language ancestral to today’s Semitic languages and used in the administration of empires, the word for “debt” and “sin” is the same.

How things have changed!

Almost every government, state and municipality borrows by issuing bonds and debentures. In the corporate world, borrowing is simply an aspect of doing business. Companies set up their obligations so as to maximize profits as well as financial resources.

Investors can borrow by setting up margin accounts with their broker. The Monday Morning Millionaire Program recommends against that because brokers can change margin requirements anytime. If an investor’s holdings drop below a certain level, brokers will sell them at a loss to the investor, to protect themselves.

Investors can set up a low-cost line of credit loan with their bank to use for investing. To benefit from such borrowing, the following four characteristics need to be in place:

  1. The debt should be low-cost.
  2. The borrowed money should be used to invest in tax-advantaged portfolios.
  3. The interest on the debt should be tax-deductible.
  4. The borrowed money should be used to invest in a potentially appreciating asset.

Borrowing at credit card interest rates to buy a car or a holiday or some consumable, does not meet any of the above requirements.

The first three points above are easy to ensure today. In the longer run, say five years or more, the fourth point is highly likely.

Many people would not be comfortable borrowing to invest. Based on history, over the long run, by investing in an exchange-traded fund which parallels the S&P 500, they will likely do well without borrowing.

However, younger investors should keep the magic of compound interest in mind.  Money invested early in life can grow significantly by  retirement time. By lowering investment contributions to pay down debt, people can get the satisfaction of retiring debt-free, but they can miss out on the prospect of larger gains resulting from many years of compounding.

The foregoing encourages borrowing to invest.

We recently interviewed a member with a $20 million portfolio who never borrowed. He is a dentist who graduated in 1985 and got his education through the Navy. For “education through the Navy, ” read “at no cost to him”. He worked as a Navy dentist for seven years then he associated for three more. Using the money that he saved from his income, he bought a 3-operatory practice. He kept expanding the practice from the savings obtained from his income.

He now runs a practice with his two dentist nephews, six hygienists and a team of fourteen — testimony to doing well without borrowing.


The Monday Morning Millionaire Program contains compressed investment opinions. Over the last two decades, these have outperformed over 90% of portfolios including professionally managed ones.

The program does not provide any investment advice or endorsements.

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Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me

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