My work comes with a free gym membership, but I prefer to get my exercise outside of the gym (play with the local soccer club, etc.).
A friend told me about the state of things in Kansas. Apparently the only thing to do there is go to the local Hometown Buffet and eat. Then, they go play softball. (Which, you have to admit, isn't overly energetic.) the end result? Almost every block has a Hometown Buffet and a sports medicine clinic, and the people are still.. well... "cornfed".
SQT, why is being debt free so special? We still have to buy food and pay for other necessities. These are all streams of negative cashflow, just like debt repayment.
I think it’s psychological. To be able to allocate funds where we want to vs. where we have to. Obviously there will always be necessities, but as long as we can budget ourselves an keep our purchases well within our means, we don’t have to pay interest on them. Debt free to me means that we can save and make cash purchases rather than put everything on credit.
I agree and would go one further: it's not just psychological. Being debt-free gives you much more power over your life and the freedom to make life/career choices you otherwise could not.
If you're $100K in hock thanks to B-school student loans, plus another $600K in hock thanks to your San Diego 2Bdm condo, are you going to take a job sabbatical and join the Peace Corps for a couple of years? I don't think so. For that matter, are you going to quit and retrain with the long-term aim of getting a better job/career, which has the potential to make you happier or materially better off in the future (but much poorer in the short run)? Not likely. And as a result of your artificially limited choices, both you and society suffers.
You're a slave to your debt, plain and simple. Either you pay down your debts or otherwise get rid of them and voluntarily downsize your lifestyle, or you stay where you are --enslaved to your creditors. And that's just the way the Fed/Pols/lenders want it.
Partially hydrogenated fats and HF corn syrup will be dealt with only when the food industry sees them as unprofitable to use. Unfortunately, they are still seome of the cheapest ways to produce foods with long shelf life. The one glimmer of hope is a groundswell against these two by consumers.
Excellent point, Skibum.
Unfortunately, there aren't really any good substitutes for hydrogenated fats in terms of it's ability to provide long-shelf life for packaged foods (yet). Of course, resistance to decay on the shelf is one of the reasons why it is so bad for you --it takes forever to break down in the body, and easily converts to artery spackle. I'm not so sure about HF corn syrup --I see no reason why it cannot easily be replaced right now with Splenda or Stevia.
I agree with what HARM and SQT say, except for circumstances when you:
* have all or most of the cash (rather liquidity) to pay the debts should something unexpected come up
* are fairly optimistic about your ability to service the debt, and your optimism is reasonable (for example a new grad can expect their salary to go up by inflation or faster for the first few years of employment)
* the interest rates are low, probably fixed, and you can earn equal or greater amount with low or similar risk by putting your money to work elsewhere
Example, when we bought my wife's new car recently, I found that the cost difference between a new car with factory financing (0.9% fixed 3year loan) and buying the car outright, even assuming we'd buy a used model in that case, we still come out slightly ahead by using the debt. If we get in trouble, we'll just pay off the loan, but using the loan we purchased a brand new car for slightly cheaper (total net present value) than buying a used one outright.
SF Woman wrote:
"Does anyone have suggestions? Batteries? Tie to grid and just put in an automatic propane back-up generator?"
Stay away from batteries (big PITA)... Propane or diesel generators are nice, but if you just want to run a fridge and some pumps the best bang for the buck comes from a couple little Honda gas generators (that's what all my friends with homes in the mountains use)...
1. Never use long-term debt to facilitate short-term consumption
It's just a real good idea to try to match durations wherever possible. Don't get a 5 year loan on a car you'll want to sell in 3 years, etc. If you need to to afford it, you can't.
This raises an interesting issue that has come up as I've been scenario-stress testing "the Bubblizer". I believe I've quantitatively (re)proven the credit-bubble cause for rising house prices. (I say that sarcastically...I should have known better).
I can demonstrate that, because of tax benefits (both interest deduction and no cap gains), you are better off as a home debtor paying off minimal principal, owning minimal equity, and staying in your house for the fewest number of years. What!?! That is crazy talk, you say.
Well, the problem is that there is no priced-in risk adjustment for "what about if/when the music stops?" I tried to do this in the last version, but it's tough to do without Fewlesh-style (Fewlesh is an uber-quant semi-regular poster here) full simulation. In my model, you still are always better using crappy financing because taxes favor you being irresponsible.
I'd say a person have to take on some debt (in the form of low fixed interest rates and good 0% balance transfer deals) to stay ahead in this so called low inflation economy. The borrowed amount gives me some liquidity to play with if things get ugly.
Duration match is an old technique at banks before the popularization of derivatives, my first summer job was to sit at a Japanese bank's treasury dept of a local regional operation tallying all commercial loans and sorting them by duration, of course that was almost 20 years ago.
Nowadays, I heard no more commercial banks do that, you can always derivitatize or securitize the hell out of your loan portfolio.
No way one oddball sale is going to make a difference and know way you'd ever talk anyone else into buying into this idea. The market will correct of its own accord, so there's no reason to worry about it.
Personally, if I lived in a bubble area, I'd sell it pronto before values come down any further. I'd sell it for market price and feel *no guilt whatsoever*. The specuvestor a$$holes who drove prices through the roof on me & millions of other working class people felt ZERO guilt about maximizing their return, so why should I?
I am a bit surprised that no one has ventured to securitize student loans. Ivy Leauge student loans bundled with AA rating, UC system A...Then of course 10 years down the road, we have enough statistics to tell if the Ivy graduates are living up to their reputation, at least in the loan-repayment aspect.
Nah, you're just risk adversed. However, be careful about holding bonds because while you're almost certainly assured of a nominal dollar yield, that amount may be less valuable due to inflation.
I wouldn't sell below market clearing price to pop the bubble. But if I was owning in this bubble, I would sell a little below current market clearing price just so I'd sell to realize a tidy sum from the sale that I can take to the bank. The security of knowing I won't be stuck in a down market makes me a little less greedy about asking price.
Given the big number of houses on the market and their ever lengthening DOM, I think a lot of current RE sellers are thinking just the same thing as I am in this hypothetical.
I doubt it. UC students would have lower loan amounts. They're also more likely to have a low key life style. I think that would make UC students a better bet than the Ivies.
Student loans are not dischargeable in bankruptcy anyways, so the only way they wouldn't be paid is if someone becomes severely disabled or dead before the loan is up. That's a pretty good risk profile, unless a particular school is full of Sylvia Plaths.
OK, I buy your arguement. See, one more revenue stream for the ibanking industry. I was half joking there.
However, I do have an idea for securitization, and I hope someone will do it. Lots of international students come to this country to do law school and business school, in the hope of getting into high paid jobs and staying here permanently. Now, some of them will succeed, some will not. In any case, they usually have a problem accessing the traditional student loan pool, for example, only international students admitted to top business schools can get financing from a commerical bank, those who are shunned from the top schools can get no financing here. I understand perfectly why the commercial banks deny them loan access, because those who graduate from mediocre professional schools with hefty student loans are more likely to default, if they cannot find a job in the US and have to go back to their native country where the pay is significantly lower.
However, if one can pass on that risk back to, say, international investors, there is money to be made in that bucket for international student school loan. As long as these student loans can be packaged up and sold to a third party, preferably overseas, who cares if they can pay back or not.
However, the MBS shit that may blow up any time seriously dampen the possibility that such a securitized loan can be launched into the market.
That is an interesting idea. It would be a valuable service for highly able international students without deep family backing. As you pointed out, this is primarily a problem for professional schools. I can see some value on such contracts. Essentially, an investor is betting that a large enough proportion of them become successful and stay in America, to pay them the principle and a good return...there might be a moral hazard there to encourage more students to go home rather than tough it out in America, but it is an interesting idea.
I fear too MBS and MBS equivalents will soon be a ugly word on Wall St. This is quite unfortunate, since these securitized loans can be highly valuable tool in the right hands.
Funny, as I was writing the earlier reply to your first post, I was thinking about how colleges and universities essentially accept candidates as calculated gambles. Starving poets = $ 0, Bill Gates = $1 Billion. Pool them together and you have an endownment. That's actually not so different from what you're proposing, except the potential generosity of an appreciative and wealthy alumni is potentially limitless.