The Illusion of “Cheap Debt”

People who had invested instead of paying down debt suddenly faced a brutal situation: their investments were down, their jobs might be gone, and mortgage payments were still due. I remember watching friends forced to sell investments at huge losses just to cover living expenses.

The spreadsheet says: 3.5% mortgage vs higher market returns.

Real life sometimes looks like:

market down 40–50%, income uncertain, and debt that doesn’t disappear.

Cheap debt works best in stable systems. In 2008, the U.S. lost 8 million jobs. The problem is we rarely know when the system will stop being stable.

My Personal Experience - "Cheap Debt" turned out to be quite expensive

During the crisis, J.P. Morgan Chase agreed to purchase Bear Stearns on March 16, 2008, in a weekend emergency deal. I was told I would have to reapply for my job. At that point, I had 20 years with J.P. Morgan. With a wife and two kids, I went home that night deeply concerned. I consulted my trusty budget spreadsheet: How long can we last?

We had no debt—no mortgage, no credit card debt, nothing. My wife and I are both debt-averse and prefer modest, debt-free lives over possessions. Thankfully, the spreadsheet said we could last a very long time. No debt meant a low monthly expense run rate, and at that moment, it was a great place to be. Meanwhile, friends of ours faced job loss and, not long after, lost their homes.

Lessons From The Data

Research confirms this widespread financial stress. A National Bureau of Economic Research study found:

“Nearly 40 percent of households experienced financial distress at some point during the crisis period.”

Distress included:

• unemployment
• falling behind on mortgages
• homes worth less than the mortgage

Preparing for Uncertainty

And today, we’re entering another period of uncertainty, with Artificial Intelligence potentially reshaping job markets. If I were dependent on a corporate job right now, I wouldn’t be making any significant discretionary purchases.

Being debt-free isn’t just comforting—it’s insurance against a world that rarely behaves like a spreadsheet.

Source: The Effect of the Economic Crisis on American Households