Up until about a year ago I was against debt. Most debt I had encountered was opportunities to buy things one couldn’t afford, which didn’t appeal to me, or situations I couldn’t make use of, like borrowing to finance business activities that would return a profit.
Recently, though, interest rates have dropped so low that it’s very easy to make good use of debt. With rising inflation it’s now against one’s interest to hold cash, so for the first time in my life I am negative cash, meaning that the balance of my cash accounts (banks and brokerages) is negative on purpose.
There are annoying technical reasons why I can’t do this, but in an ideal world I would be at zero or negative cash on every account. If this sounds scary, it might be because you’re scared of the wrong things.
The most basic example of why you should be negative cash is this: you can borrow cash for 1% and reinvest it in stable safe investments to make, say, 8%. That means that if you could borrow $100k, you could get $7000 per year with almost no risk. For this reason, you should probably borrow as much cash as you can at low rates and invest it at higher rates.
I have a personal connection to a real estate developer who pays me a guaranteed 8%. I know him well and have seen many examples of his integrity and character, so I characterize this as a zero risk investment (other than the risk of not being able to access my money, since it’s a fixed term loan). Anyone could buy stable coins and earn interest on them, which I would also characterize as extremely low risk.
If you buy that premise, that you can net 7% on borrowed money, how much money should you borrow? As much as you can borrow without incurring negative consequences. That number is probably larger than the amount of cash you’d have sitting in your checking account, thus you end up with a net negative cash balance.
The primary way you get this borrowed money is by taking portfolio margin loans against stocks. If you have any non-retirement stocks you should move them to M1 or Interactive Brokers and take a margin loan against them. Interactive Brokers charges 1.6% or less and M1 charges a bit more. Stocks can and do go down, so you don’t want to borrow too close to your limit.
I go a step further and use Interactive Brokers as my main bank. Credit cards are automatically paid from it, increasing my negative cash balance every month. Income goes into it, which offsets the cash balance. I have an ATM card that gives me cash and increases the negative balance.
It is really scary to see a huge negative cash balance at your bank at first, but eventually you get used to it.
Anything that you could pay cash for, you can also try to finance. For example, I always paid cash for cars in the past because I believe you should never buy a car that you can’t pay cash for. But just because you can pay cash doesn’t mean that you should. Rather than using $15k in cash or taking up margin that could be used for investments, I financed my car at 3%.
I don’t keep an emergency fund, since that’s just uninvested cash. If I needed cash for an emergency I’d just pull it out of the margin account.
The danger of debt is that it allows you to buy things you can’t afford. I would never do this and wouldn’t advocate that anyone else does it (except possibly for a house where your net cost [lost return on down payment + mortgage payment] was the same or lower than a rental). What I’m advocating is paying banks a small amount to use their money to make a larger amount.
I’ve been really into investing and financial stuff recently, but I don’t write much about it because I don’t want this to turn into a financial blog. The reason I wrote about this is because I think it’s counterintuitive to think of having a negative cash balance as being financially prudent, and it’s a good example of why it’s important to think for yourself rather than do what everyone else is doing.
I am in Alaska on a cruise now! It feels so amazing to be cruising again.
Photo is a ceramic centerpiece made by Zsolnay in Budapest.
If you want the lowest Interactive Brokers interest rate, go to stockbrokers.com and use their link. It starts you at just around 1%.