Debt Is a Tool — So Are Handcuffs

I have an ongoing back and forth with a friend at work (the pancake guy) about debt. Obviously, I’m against it, but he is very pro-debt and constantly uses the phrase, “debt is a tool–the math proves it”. He is always saying, “If I ever have $1M of net worth, I hope to have $300k in debt.”

The other day he made the statement that if I would give him $700,000 he and his heirs would pay me and my heirs $2,000 per month forever. Of course, I don’t have $700,000, and probably wouldn’t take this deal if I did. It is basically an interest only loan at the rate of ~3.4%. However, if I had, say, $7 billion, this deal may be tempting for me.
So I made him a counteroffer…

I offered to loan him $7 today with interest only terms. Basically, he and his heirs would have to give me and my heirs $.02 each month forever. Additionally, there will be a 15% charge on the outstanding amount due for late payment. In order to terminate the deal he must pay a pre-payment penalty of the $7 adjusted for inflation based on the US government’s quarterly announced rates, plus 5% of this number.

He’s considering my offer right now. He claims to be doing things based solely on mathematics, but isn’t the math the same whether we’re talking about $7M or $7? Move the decimal and you’re done, right?

Why is this a good deal for me? It’s not. But that’s okay. I’m obviously not trying to make money here. I’m trying to drive home the point to him that by accepting this deal he will have to answer to me for the rest of his life. In a sense, he has lost a part of his freedom, even though it is only a small part–$.02/month.

It is worth the $7 to try to get through to him. If I could convince him of my point through a conversation over a lunch I paid for, the outcome would be the same. He’d be at least $7 wiser, and I’d be $7 poorer. But I would have helped my buddy out.

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!