Last year, 50% of my cost of living was related to preschool fees and childcare expenses.

This cost can be a source of anxiety, especially when faced with a grumpy toddler. Interestingly, the only cure appears to be: (a) train morning and night; and (b) write an article during the day. If I do that then life seems pretty good.

Another way to counteract the anxiety is to raise enough cash so that I’ve funded my childcare expenses from now until my youngest is in school, five days a week.

I’ve been looking at borrowing against an investment property. Even though it is irrational to borrow (now) to reduce anxiety about a future expense, I’ve been thinking about putting a loan in place.

Here’s my advice to myself. You might find it useful as debt markets improve for borrowers.

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Should I borrow?
Generally no.

However, there are some exceptions that have worked for my family.

Housing – A 30-year fixed loan for a well-located home that has a cost of ownership (mortgage, taxes, insurance, repairs) that is materially less than your cost to rent. If you are unlikely to move for a decade then this type of loan can be a great deal.

There’s a lot in the paragraph above: location, buy vs rent analysis, likelihood of staying put and ability to hold long-term. To stack the deck in your favor, each of these characteristics is essential.

Saving – some folks struggle to save. So a mortgage, particularly a shorter duration one (like 15 years), is a form of forced savings that would not otherwise happen. Still, being locked into a location for 15 years is a big commitment, and inappropriate for most young people.

With real estate, on average, I’ve sold within three years. As a result, the investment return is greatly reduced by the large fees and expenses. To encourage myself hesitate, I assume that I’m losing 10% of the purchase price immediately after I buy. This makes it much more attractive to rent, and if that goes well, then buy small.

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The freedom that comes from a debt-free life is empowering and, my willingness to do “no deal,” has saved me from many expensive errors.

My hit rate on offers has been less than 35% and I’ve been fortunate to miss out on some deals.

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Borrow to buy income

Borrow for specific purpose, say, in advance of money coming in later that will repay the loan

Borrow early in one’s career to buy assets that can be used to good affect and which will likely appreciate – eg home mortgages // but remember that being able to move at short notice can be a great way for rapid career advancement

Borrow to avoid selling assets at a bad time market wise – this one is huge and why I like to have a line of credit available to my family (as well as at least one year’s living expenses held in cash)

Borrowing to supplement cash flow is dodgy unless you know how cash flow is going to increase thereby enabling you to repay – this is the classic way the we end up underwater with credit card debt.

In private equity we had a saying – never fund operating losses. In other words, force yourself to cover your cost of living. If you can’t do that then scale back your living. With my childcare costs, I’ve been running an operating loss for five years and it is a source of stress. More debt, to facilitate more spending, is rarely a cure for financial anxiety.

It’s tempting to borrow when the debt markets are good. I’ve found debt to be most useful when:

• It sits in a company and is non-recourse
• It is fixed-rate and used to purchase assets that can generate a significant premium to my cost of finance

Where things have gone well, I’ve tended to take a binary approach. I will either invest in a highly leveraged company or, in the case of my personal portfolio, invest in the assets directly, without additional debt.

The key thing to remember is you don’t need to borrow and it’s awful to trade your freedom for something that doesn’t cure your condition.

Aside from professional education, most ‘things’ don’t make a difference – especially when compared to the health benefits of living a lower stress life.