As I have outlined in my most recent Net Worth Update, I changed my mind about taking out low interest credit card debt to invest. Instead, I'm in the process of actively paying off all my non-student loan debt. A reader asked me why I had this change of heart. Let me explain.
What I Used to Do
I used to leverage my credit to the max. Take out the maximum amount of balance transfer allowed at 0% APR and $0 fee, use that money to invest, sit back, relax and laugh all the way to the bank. It seemed logical - if the average stock market returns 9.6% per year and I can borrow money for FREE, why not? In addition to the benefit of free money, credit card companies are increasingly offering larger and larger sign-up bonuses. It became a game for me to spend just enough money to get the bonus (see manufactured spending). I never considered myself a churner as I almost always kept my cards open unless there was a hefty annual fee, but I sure enjoyed playing.
What led me to change
Well you've seen my writing, so you know bullets are coming. Here are the reasons why I decided it's no longer worthwhile for me to borrow to invest.
- Turns out the average return of something is exactly that - an average. The day-to-day performance of your investments may vary drastically from what that "average" is. I learned my lesson the hard way - see I Quit.
- I've become a big fan of financial guru Dave Ramsey and his brand of "tough grandpa" money tips. This is what Dave thinks of credit cards and I respect Dave's opinion.
- Borrowing money free for 1 year (sometimes up to 15 months if you're lucky) is by definition "short term". I am trying to get myself into the habit of long term thinking.
- As credit card companies increasingly offer bigger and bigger sign-up bonuses, I have become harder and harder to impress. Don't get me wrong, when a great card bonus offer comes along like the Chase Sapphire Reserve Card, I'm all over it. But the average credit card offer just doesn't get me excited anymore.
- Here is the biggest reason - I don't WANT to. Between income from residency, moonlighting and Future Proof, MD, I have enough to live the lifestyle I want (not that extravagant) and invest to my heart's content. And I don't know if it's the Chinese in me, I simply hate the idea of owing - see Chinese Grandma vs. American Grandma, Which One Are You?
I will continue to use my credit cards for daily purchases, but I no longer care to borrow against them for the purpose of investing.