Shortly after moving back to the US in mid-2021, an extended COVID-19 hangover meant excessive economic angst for large swaths of the population.
People responded to economic woes in a number of ways – some worked extra hours or took on side gigs, others cut back on expenses, perhaps eating out less often or vacationing near home.
We did neither. Instead, I loaded up on debt.
Debt as a Recession Tool
Over the past few years I have been loading up on as much debt as the banks would give me.
I wrote previously about how I got a mortgage we didn’t need and invested most of the proceeds. 30 years at 2.75% is basically free money.
In addition, I now have about $100k in credit card debt from paying our normal bills (about 1 years’ worth.) I pay the minimum each month so the balance continues to grow. This is all with 0% interest.
And finally… when we installed a new heat pump HVAC system in August 2022, I borrowed from our HELOC at a 5.24% fixed rate for 15 years. We save more on gas and electricity than the loan payment ($126/month) so this could be considered an investment rather than an expense (but I still have the debt.)
The common theme here… markets were down, so rather than sell stock to pay our bills, I pushed all payments into the future.
Pushing it Forward
Around the time I was motivated to reduce our home’s indoor temperature, VTI was trading at about $204/share. At the time, I could have traded 77 shares for the new HVAC system.
Instead, I wrote a check from our HELOC and locked that expense in at 5.24% for 15 years. Since short term treasury bills were at a similar rate I have not been in a hurry to pay this down.
Over the past 2+ years interest has totaled about $1,700 on the original loan value of $15,689, and I still owe ~$12,364.
However… by not selling at the low low price of $204, I’ve been able to ride the tide higher to the recent price of ~$297.
77 shares of VTI is now worth ~$22,900. Including dividends (~$606), pushing the expense into the future has resulted in a (non-realized) profit of over $6,000, or nearly 40% of the HVAC cost.
The $5,000 in outgoing cash flow has effectively become part of the $100k of credit card debt I have accumulated in parallel
Assuming a reduced gain through dollar-cost-averaging, choosing to accumulated 0% credit card debt has probably “earned” an additional $20,000 +/-.
Overall, I’m pleased with the decision to use debt as a recession (avoidance) tool.
Carry it forward?
I could now close out all positions, effectively locking in a substantial gain. Or I could think of this as a $25k+/– reduction in cost of living throughout the downturn.
If this tool has been so helpful, why not carry it forward?
In theory I could keep the HELOC loan for another 12-13 years. The interest burden goes down over time with inflation and the amortization table.
With the abundance of 0% credit card offers available, many with 18-21 months 0% periods, I could also carry the $100k in credit card debt forward. Or perhaps even grow it. Every $10k simply parked in short term treasuries could still earn $400+ per year. That will lessen as the Fed lowers rates
But free money is free money, and I certainly wouldn’t complain about receiving an extra $2k – $3k.
However… I don’t want to enter the next downturn loaded to the gills.
We are now in a period of positive economic vibes. Supply chains have come back. Huge infrastructure investments have been made. Inflation is back to “normal.” Interest rates are declining…
There is no longer a need to avoid selling at the bottom. Because the market growth has been strong… the gains of pushing it forward have been great…
But there is the risk of pushing it too far forward, where we enter the next inevitable economic / market downturn with a high debt burden and high debt maintenance costs, and have therefore neutered the option of using debt as a recession tool.
Ergo, I am now unwinding these positions – selling stock and paying off credit card balances (when the 0% apr period ends.)
Summary
Low APR debt is great. It can be used during economic / market downturns to push expenses into the future, allowing us to sell assets at a time when markets are higher.
In the example above we were able to get a 40% plus gain over a 2 year period by using a combination of a low-rate HELOC and 0% credit cards.
Using debt requires a great amount of discipline and organization. You have both in abundance. We have only dreamed about using debt in this manner. It is hard for us to break the mindset that debt was to be avoided at all costs. But I now see this as the way forward. Apparently using other people’s money has been a long known tool to obtain even more wealth. Thanks for the examples of how to properly succeed with this process.
Have you read Sweet, Sweet, Debt?
Debt is a tool that can create or destroy. Like a hammer. No license required.
As long as interest rates are low during the recession this tool should work great. It’s conceivable we could have a recession where there is high inflation, high interest rates, and a depressed stock market. I believe such a scenario happened in the late 1970’s through 1981.
This makes perfect sense mathematically, but at what point do you deem the time and mental load no longer worth the savings? If you enjoy the game and do it well – more power to you, but I choose to focus on simplicity and living life to the fullest.
Living life to the fullest cannot be overrated. It’s even easier with an extra $30k.
I have a blog about money and financial optimization so I do enjoy it. But how much time to you think I am spending on this process?
What are you doing during the hour per year that I spent clicking the apply for credit card button that makes life so much richer?
Of course I have read that post where you are using other people’s money (OPM) to subsidize your living expenses until you can pull money from your 401k without penalty. You have a sweet deal going there where your money keeps growing.
We have only used 0% OPM on cars and cards, but never on a home or business. Makes me think we are leaving money on the table.
Thanks GCC for the great example on optimizing your debt. Do you have a system for determining when is a good time to sell VTI? If you read the financial press, there are so many conflicting messages. I was wondering if keeping it simple like, “is VTI within 5% of an all time high” might be a good measure.
I don’t read the financial press. It’s too depressing because fear and drama create clicks.
If you look at a long-term graph of the SP500 the market is often/usually at all time highs. So if the market is down significantly from the most recent high (20%+) and interest rates are low (0%) then that seems like a reasonable time to delay sales by using debt.
The low interest debt is a wonderful tool especially in moderate to high inflation recessions like 1970s and 2020, but the debt that is 2%+ above inflation isn’t so great in long deflationary recessions like 1929 and 2008.
I love all of your moves at the time especially for someone still bringing in some income. But at the moment, I would pass on the 5%+ debt right now for a non-working retiree unless you had a super low SWR. Inflation is back under 3% and fed funds rates should be down to 4% by the Summer. Its better to save that moderate interest debt to avoid selling shares down >20% like you did in 2022.
Fair summary of what I wrote above.
I always love your posts and marvel at how you take complex thought processes and make them understandable. Some people get MBAs to hone their thinking like this. Guess that’s what being a mathlete is all about. What are your (speculative) thoughts on inflation going forward? Jason Zweig wrote a great article on buying TIPS at this juncture (threat of tariffs/protectionism). And I’ve made up my mind to lock in some gains from the last week, even though my husband and I are still working. Keep up the good work. Love reading about your unconventional conventional life. I hope you keep writing for a long time.
Tariffs are a tax on US residents that do make things more expensive. On top of a small 2% base inflation I’m not sure I would worry about it all too much.
The best long-term inflation hedge is stocks so that is what I will continue to hold.
Hello. Another excellent post, thank you for continuing to write meaningful content! Wondering how are you able to lock the rate on your HELOC. Are you closing the HELOC and flipping the balance into a fixed rate loan?
This is a feature of the HELOC that I have. Any sum $5k+ can be setup as a fixed rate advance.
https://www.becu.org/loans-and-mortgages/home-loans/home-equity
Great post. We are following your lead and have been using 0% CC offers to cash flow expenses over the past year while getting 5% on TBills and CD’s (equivalent to the CC balances) for some nice, risk free arbitrage.
One thing to note for readers who are “not” residents of California – insurance companies can pull your credit and subsequently raise your premiums if credit score or balances are deemed too high. California prohibits this, but in other states you may give up some arbitrage in the form of higher premiums :(.
Remember when you were doing this after you purchased the house and thought it was great timing. Reminded me of when Warren Buffett was recommending people to do similar probably around 2009-2010 or so.
I did it on a much smaller scale years ago when purchasing a used vehicle from a very small dealership attached to a service station. Was just going to pay cash and dealer told me he could get me a rate of 1.75%, no additional fees or closing costs, thru a local credit union. Was a no brainer with long term stock market averages being 8-10%.
Turned out making additional money besides the spread between the loan rate and the market appreciation. The credit union was taken over by a larger one and paid bonuses to all members. The bonus was more than the total interest on the loan.
Free money….one of my favorite things.
Wow, this is a beautiful story. Brings a tear to my eye
Assuming markets stayed flat or declined, how much time do you feel comfortable riding the debt train? At some point would you cut your loss and pay off the debt?
The 5% debt… normally I would have just paid cash for something rather than borrow at 5%, but because the loan payment was less than I calculated our energy savings to be… I figured, why not? So that I could also keep forever.
With 0% debt there is no loss, so I could ride that forever / until markets go up. Or more likely until credit card companies stopped offering 0% rates, and then I would be forced to close out the debt.
Early 2022 I refinanced 2 small loans about 90K each on some real estate. They were both 1st lien HE loans. I remember closing on the 2nd one and specifically asking….how do you make money doing this as my rate is 2.5%. I was more lucky than smart, or else I would have refinanced my primary home as well. In addition he gave me 2 $100 visa cards as a promotion. I don’t think I’ll live long enough to see rates that low again……and if I do we as a country / world is likely going thru a pretty rough time.
Those were crazy times when long-term rates were lower than inflation.
I did similar with debts but have a financial illiterate spouse who thought that meant he could go on spending sprees to rack up consumer debts. I found myself selling the marital home and filing a divorce two months ago after discovering all the debts he racked up behind my back, traces of money being spent on another woman and drug abuse.
I’m sorry :(
Great Article and just empowered me to go into debt to make money.
I was thinking to get a HELOC as well on our paid off home for 4 years and invest it on a strong monthly dividend that gives 16%. Even if I was given a HELOC rate of 8, 7 or 6% interest rate, the difference of an extra 10% in my pocket from dividends sounds enticing. Any thoughts?
Well… anything that offers a 16% rate should be approached with extreme caution.
where do you get 0% credit card loan. usually you have to pay upfront fee for 0% credit loan.
Most cards have a balance transfer fee (3-5%) but no fee on purchases (or even cash back!) You want the latter or a very long 0% period on the former. 80%+ of my 0% credit card balances are from purchases.
2 examples of recent transactions:
– Citi Double Diamond card – 3% balance transfer fee for 21 months 0% interest. I’m ok with a sub-2% apy (or anything less than inflation rate.)
– Bank of America Customized Cash Rewards – Pays $300 after spending $1k AND 0% on all purchases for 18 months
I used the $300 bonus from the CCR to offset the $3xx fee on the DD, and am almost done maxing out my credit line with mostly “online shopping” which is my 3% cash back category. I’m going to ask Citibank to raise my credit limit on the DD and if they agree will transfer more.
To close out these positions I will hold short-term treasuries until the 0% period ends.
Wonderful post! What’s your strategy in rolling over 0% APR debt when the APR offers expire?
I have around 50K in 0% APR credit card debt with different offer expiration dates. So far, it has been straightforward rolling my balances by doing balance transfers from Bank A to Bank B, but I’m wondering how you manage balances once you’ve exhausted all available banks’ 0% APR credit card offerings?
Some methods I’ve employed:
– Do a BT to newly-opened 0% APR cards for P2, or to P3.
– Employ a sub 7% APR margin loan from IBKR using VTI as collateral (this isn’t ideal as it erases your long-term gains)
– Employ a yen-carry trade by borrowing JPY at sub1.5% on IBKR (converting the JPY into USD, but this is subject to currency risk)
Whats your long-term strategy for this financial wizardry? I would love to see a post on this ;)
This post IS the one you are looking for :)
I don’t have a strategy for loading up maximum debt – I view exhausting all available banks 0% APR offerings as a healthy natural limit.
Most of what I have done is to get his/her cards that have 0% offers on purchases. I max those out with natural spending.
When it is approaching time to pay off Card A, I get a new Card B and start spending on it… building up cash by paying the monthly minimum only. Then I just pay off Card A.
Now that markets are back to a new high, I will pay down debt to near zero / zero.
We love buying things with 0% financing for 1-3 years. We are still in accumulation phase but bought a new hear pump with 12 mos at 0% and new furniture at 0% for 3 years. Then we put a fair chunk of the money into an interest earning fidelity account at 4-5% and just make payments (automated of course) out of that. We could make more in the market but this is really just kind of dabbling. We also do this with our property taxes. We just put a little in each month and when its time to pay, we have it ready plus interest. There are much more aggressive approaches but this is very low risk and works for us.
These 0% offers are the best and should always be done. If you have the cash earning interest on the side there is zero risk.
We’ve been similarly strategic with 0% interest ccard debt this past year, choosing instead to invest what’s owed in 5%+ CDs.
The one “risk” that should be noted is that your credit score will take a hit. Ours was high enough beforehand that the impact was manageable, but if someone’s score is less than excellent, they may wish to be careful with how much new debt they take on and hold, even at 0%.
Your comment in graphic form:
You must still be near 10% debt to total credit. My wife and I embarked on this journey this year and we are seeing a much larger hit to our credit scores (-75 pts.) but our debt/credit is close to 30%. If it’s not too personal what is your debt/credit and your avg. age of loans?
If it is too personal, can you give us an example of how to avoid the credit rating hit?
I think it is a little over 20%. Since the percentage is what matters, it helps to just have a ton of available credit. I have 22+ open accounts and my wife has many as well, and our open balances are somewhat evenly split between us. Also one of our big 0% cards is a business card, which doesn’t impact personal credit score.
I get the 0% APR on cards, I always tell people to look into those before you take on higher interest debt. Where it gets dangerous is because it’s 0%, people may buy things they don’t “need” because it’s “free” money. Kind of like how people get excited when they save 30% on an air fryer, but probably didn’t need one in the first place.
Markets and interest rates have served many people well, and it’s good you see that you don’t want to be saddled with too much debt when things are not as rosy.
Probably some truth to that… the majority of my purchases are wants.
Did you deduct the interest as margin interest (which reduces income dollar for dollar) since you used it for investments, or mortgage interest? Seems you could do margin interest but I am not well versed in this.
Yes and no. The interest on the heloc is, in theory, tax deductible (since used for home improvement.) But it requires itemizing deductions.
With the standard deduction being so high I don’t itemize, so heloc or no heloc makes no difference to our taxes.