What is everyones thoughts on debt repayment?
Like many people in their early 30's, I have a substantial debt load. This includes Mortgage, student loan, and car notes, but no revolving consumer debt. I also am fortunate to own my own business (which will crash and burn when car use declines), and have a decent amount of disposable income after meeting my monthly obligations. Although in normal times I would be inclined to minimize expenses and savings in order to pay down debt, these are not normal times in which we live. Ths past year I have used disposable income to secure a core position in PM's. Does it make sense to continue to build PM and cash reserves as a cushion against future hard times and /or hyperinflation, or to work on paying down debt? Everything besides some private student loan debt is fixed rate, all below 4%. Private student debt is variable LIBOR +3.75%, but I have sufficient cash reserves to pay it off if the rate spiked. I am inclined to continue to stack PM's because of the upside in the event of hyperinflation. Additionally, and this may be offensive to some of you, I REALLY like that physical possession removes the wealth stored in PM's from the reach of the market, the tax man, and my creditors. Possession is, after all, 9/10ths of the law. If the waste hits the oscillating cooling device, and the situation requires me to go "off the radar", I would prefer to have the gold than a letter showing my fiat debts were paid. The further I go down the monkey hole, the more paranoid I get, but there it is. Let me know your thoughts everyone.
I see that your post was some time ago and you have received no responses.
I too have wondered why crisis commentators (included CM) have recommended to pay off one's debts as quickly as one can. I can understand this advice to free yourself from the paper system and to protect your physical assets, importantly your home.
However if one has enough funds now to easily pay off say, mortgage debt, at any time, why would one rush to do this especially if that loan is going to become a lot cheaper with inflation? Why not use those funds to purchase PM's and wait for the collapse/inflation to unfold then pay off the debt and buy a few more properties to boot?
I'm still new here and finding my way around but answers to quite simple questions such as this seem rather elusive.
I'm in a very similar situation except that at current rates of income it would take me several years t pay off my private student loans. I doubt very much that I have that much time. My strategy has been to be long cash, hold a smidge of PM as a hedge and pay the bare minimum on all debt. I also spend a good deal of time thinking about what will happen when things fall apart and how to position myself to leverage those events to continue to pay off debts if that is still necessary. For example. If there are supply chain interruptions, my job would quickly go away, however we could also anticipate food shortages. If I could quickly scale up growing staple crops I might be able to continue to meet my obligations. My guess is that at some point in all this mess the banks will quit counting or loose track of who owes them what. They can take a lot of homes, but they can't take every ones. The trick is to keep enough dry powder to be able to out last them. That may be a tall order, or we could get lucky and a hacker could wipe their records tomorrow…..no one keeps paper records anymore.
If you pay ahead on a debt, the lender will still expect next month's regular payment. So make it your first mission to build enough cash reserves so you could cover all your required payments for a few months if your income were disrupted.
Once you have at least a three-month cushion (more is good), pick one of your loans and start paying ahead on it. Pay the minimum on other loans, but pick ONE and systematically focus on getting rid of it.
If you're carrying credit card balances, they likely have your highest interest rates so make them your first target. Other than that, if there are only small differences in your interest rates, pick the smallest loan first and keep at it until it's paid off. Then pick the next.
The goal here is not just reducing overall indebtedness, it's to reduce the number of compulsory things in your monthly cash flow. Every payment that you can eliminate will give you more flexibility going forward.
When you're comparing the merits of paying ahead on debts with other ways you could use the funds, be sure you're comparing after-tax dollars.
In normal times I would agree with you. I used your strategy to pay off all reasonably sized debt to free up cash flow. The two things left in that column of my balance sheet are the mortgage on my house (30 year) and a private student loan that, unfortunately is enormous. Even if I directed 100% of my free cash to that and liquidated all investments I estimate it would still take me ~5 or more years to pay it off in full. (A large part of my income is commission which fluctuates so it's hard to make firm forecasts.)
Paying it off would just take me to break even and as you point out, if something happened to my income during that time, the bank is not going to be more forgiving just because I've been paying ahead on the note. I will have reduced future losses to interest, but I expose myself to huge risk. Student loans are one of the few classes of debt that are not dischargeable in bankruptcy. That law was passed under Bush II to protect government backed loans. The private banks issuing student shackles…I mean loans…liked the idea so much that they got their lobbyist to include them in the protection racket as well.
Instead, I consider the interest a penalty for not understanding the lunacy of taking on debt earlier in my life and I put everything I have into, a.) preps b.)cash and c.)PM's in that order.
Per CM's comments several times recently, the accumulated debts of the world are too large to pay off, so they won't be paid off. At some point in the future, debts are going to be redefined, some (but probably not mine) will be discharged. Others will be restructured. If between now and then I pay down 50% of what I owe, but I have no reserves I am wiped out. However, if I can stay in good standing and I have only paid down 10% of the balance, but have 40% of it in unencumbered reserves, I have a stronger position to negotiate from.
Any decision I make is a gamble on a future where someone else gets to write and re-write the rules mid-game, but after much consideration, I am comfortable with the strategy I have chosen. I am interested to hear what others are doing.
Side note: If some wealthy benefactor takes a liking to this poor young debt slave and wants to buy me out as farm labor I am open to negotiations. Upon payment of my debts I come with 3 acres of land that is already well on it's way to perennial production which can you in comfort well into your old age along with humble accommodations for my young family. /sarc….kind of
[quote] reduced future losses to interest, but I expose myself to huge risk [/quote]
Yes. Getting caught with no reserves when something disruptive happened would be a bigger problem than having some interest to pay. It's good to retire debts but not necessarily at the expense of everything else in your life. I do advocate taking action to pay debts off early, but that doesn't mean the project should absorb every last dime you've got. There's a balancing act here.
Paying off your debts within five years might be theoretically possible, but likely too constricting for other things you feel are important. But a goal like knocking several years off that 30-year mortgage might be quite doable.
If you have two loans, I would still advise that early payments be primarily applied to one loan rather than split between both. Your choice might depend on factors such as how the interest rates compare, tax treatment, bankruptcy rules, each lender's policies/procedures regarding early payments, and so on.
Tallest Man, I'd wager you've already done this, but to anyone else reading this I say, find an online calculator and play with possibilities such as "If I paid X or XX extra per month, or whenever, how would that affect the length of my loan, and total costs?" Many people find it surprising how much impact even small extra payments can have, especially if you can make them early in the life of the loan.
I agree with that list but I'd also add early debt repayment, a modest plan steady over time. I'd consider it as important as PM's.
I'm also in my early 30's. I have a pretty typical mortgage taken a few years back, I have one car loan (2 years left) and revolving credit card debt. No student loans or other kinds of debt. My family has four incomes. I have two good FT jobs and my spouse has one mediocre PT and one poor PT job. The problem arises that both of my two good jobs are in such specialized fields that I was as close as one can get to lose one of them in the aftermath of the Great Recession, so when the next crash comes it's a given that I will at least lose one of those jobs, maybe even both. My spouse's mediocre PT job is in the same field, so it would be gone as well. Needless to say, I'm in a hurry.
Typically my philosophy surrounding debt is to not take it, and repay whatever you take as quickly as you can. In this conundrum I'm not sure that it's the best thing to do. One one hand I can see the reason to keep tons of debt (like the German industrialists did in the 1920's and 1930's), but on the other hand getting that debt liquidated through inflation is tricky, because high inflation/hyperinflation isn't the same as low inflation on steroids, instead, it's an utter collapse of confidence, meaning that a lot of jobs will be lost and institutions (including banks) will become dysfunctional. Even if your debt would be cheap due to hyperinflation, you may not have the income to pay it back. Even if you have the income you may not be able to pay it back because the institutions are too dysfunctional to accept payment and properly record it. And even if they would accept and record your payment, it's fully possible that the governments would simply rule in the benefit of the banks and state that any debts paid in period x will have to be paid a second time. I think that the only semi-sure way to get the debt to work in your favor is to become an industrialist of sorts, who owns a factory, thousands of housing units or hundred thousand acres of land on debt, and due to your sheer size and political clout could then force your way through the courts/political institutions and get the debts erased from the books through hyperinflation. I don't think it will work for us ordinary people, which is one of the main reasons why analysts, including Chris as far as I understand, don't recommend that you try to play that game.
I'm personally in a situation where I could pay all my debts back (including mortgage) in 4 years if I wanted to. I don't think I'll have 4 years before things come unglued. I've resorted instead to split all extra money I make into three buckets: 1) dept payment, 2) cash, 3) building resilience through improvements to my primary residency, land, tools and my spouse's poorly paying PT job, which is a business that we own. In practice this means that I end up paying for six extra months of mortgage payments per year. I'm also trying to add resilience by chopping the remaining mortgage payment down by doing a second refinance. I refinanced originally from a 30 year 4.5% to a 30 year 3.25%, and my plan is to refinance to a 15 year 2.0% mortgage, while eliminating the PMI in the coming year or so (if that opportunity arises – it doesn't make financial sense to do this with higher rates in my case).
At nearly 60 years old, and since we are in the "basement" of the forums, where controversial topics rule, just let me tell you that i read a book on the coming years when I was in my teens that really made me want to get out of and stay out of debt. In that book, some dude named Solomon said that "the borrower was servant to the lender." And the last thing I wanted to be was someone's slave.
The three things my folks told me were okay to go into debt for were tools to work, transportation to get to work, and education in a field that paid more than the loans to get into it. I looked for work in a field that would not evaporate due to a changing economy (automation, outsourcing, and obsolescence being the big pitfalls) and too many people taking the same thing so the competition is too stiff. A good, recent example of an oversold career would be how many lawyers are being educated at the moment. The economy cannot absorb them all, any more than it could absorb all the teachers when I was in my 20s and abortion became legal right when ZPG was fashionable, halving the number of kids.
I started college and left after 1 year when I realized I did not have the innate skill for a career in nursing. So I paid off that year and went to work. I ended up going into debt anyhow, because I married a man who was bad with money. When he left his parting gifts were a bankruptcy and a foreclosure. I went into debt, again, to buy a car to get to work in a new field that had a shortage and paid well. I got free training for a license in my field (NYC Site Safety Manager). I went to school while working, the boss paying for the last few courses. I had student loans. I slowly paid the car and the student loans off.
I finished paying them off with an inheritance which sped things up. I have not gone back into debt since. I refuse. I am finally free.
To a younger person who is is debt I cannot speak highly enough of Dave Ramsey's Financial Peace University, or failing that just getting his books and following his advice. I used his book, not the FPU courses as they are more recent. I had my budget on a spreadsheet, but I love spreadsheets. It helped that I could hit a button and show the family as a pie chart where the money was going, and why we could not afford certain things they wanted.
Well it took a few years, but thanks everyone for your responses. In the time since the original post, the world has stubbornly not collapsed, and I continue to follow my original approach of making minimum payments on mortgage and student loan debt (cars are now paid off) and sack away the rest into cash and PM's, and preps. I expect to continue to plod along the same way until the situation fundamentally changes. Thanks again for everyone's input.