Author Topic: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?  (Read 7870 times)

John Galt incarnate!

  • Handlebar Stache
  • *****
  • Posts: 2038
  • Location: On Cloud Nine
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #50 on: April 02, 2020, 08:11:57 PM »
Thoughtful posts to all.

The one thing I've considered is that you either have to just instantly crush a debt, or pay it slowly.

In other words, for my car for example, say the balance is $10,000.  It does not make sense for me to throw $5,000 at it because the payment is still there.  However, if I can crush it in one fell swoop, then boom, the payment is gone, and my cash flow has an instant increase if another "black swan" even occurs.

I've always been a fan of attacking debts in a way that most quickly improves cash flow. While, again, not mathematically optimal in most situations but does provide far more financial security for these types of events. It's something you have to run the numbers on and make a judgement call on what is most important to you: Optimum use of funds vs. financial security.

Deployment of funds or not, is optimal if it maximizes  one's satisfaction.

mistymoney

  • Handlebar Stache
  • *****
  • Posts: 2417
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #51 on: April 03, 2020, 07:15:46 AM »
It's a more complex question than it seems on the service. I know a lot of people on this board have lived frugally and saved a high proportion of their incomes over the years.

It isn't really risk/reward like we always talk about. Like if you take the risk you get the reward. It is Risk OR Reward - and it's a casino bet really with very good odds. However - now we are in real Risk territory - and everything invested over the past 4 years is riding a loss and it might continue to dial back further. If we get to everything invested over the past 10 years is a loss, it is going to get difficult to deal with that - emotionally as well as financially.

I've always wanted no debts, paid off everything and a sizable investment portfolio. And a lot of cash for a cushion. But over the years I've struggled to get any of that in place. Thought I was at least doing well on the investment side - until now.

So - now we learn the lessons of more cautious generations. Generations where luxury and even security were hard to come by.  I do think about older relatives, those who lived through the depression. Some of those who lived it as children are still around even.

Have I changed my feeling about debt? Not really. But it's pretty sobering to see the roulette wheel change from black to red. I'd likely make some different choices if I had some foresight. If I whether this crisis, I will try to put myself in a more secure position for the next one.

« Last Edit: April 03, 2020, 07:18:44 AM by mistymoney »

LWYRUP

  • Handlebar Stache
  • *****
  • Posts: 1059
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #52 on: April 03, 2020, 07:26:14 AM »
No, but I was already very debt adverse.

It is shifting how I feel about the 4% SWR, however. The fact that someone eating a bat has put the world on the brink of depression has made my "number" increase significantly.

Oddly enough, I would feel more comfortable with 4% SWR.  Markets were pretty highly valued before, now they are less so.  But I'm still several years away (even more now) so I suppose that's all hypothetical.

The_Big_H

  • Stubble
  • **
  • Posts: 168
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #53 on: April 04, 2020, 11:03:09 PM »
It has only solidified my general distaste for debt.  Yeah, a 15 mortgage is acceptable, modest student loans happen, maybe one car note per life time, other than that.. count me OUT.

I do not subscribe to the "invest at 7% with money borrowed on <7%".  That math does NOT account for different levels of risk. That 7% return is not guaranteed, that 1-6% APR on your debt IS guaranteed.

Entering a recession debt free also makes one a lot more tolerant of the huge 'losses' in ones investment accounts... because you KNOW you don't need the money.  This offsets ones natural urge to panic sell.

When you are investing using leverage (lets be honest, choosing to invest while having debt IS LEVERAGING and IS RISKY) you will naturally sweat downturns a lot more.

and when it comes to leverage, well.... "the market can remain irrational LONGER than you can remain solvent". Investing in stocks is plenty risky enough for me.  Investing in stocks 'on margin' is a whole different level of risk.

Oh and being debt free means your emergency fund can be ALOT smaller, which is nice cause now you have less cash sitting on the sidelines.

Psychstache

  • Handlebar Stache
  • *****
  • Posts: 1594
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #54 on: April 05, 2020, 07:53:53 AM »
It has only solidified my general distaste for debt.  Yeah, a 15 mortgage is acceptable, modest student loans happen, maybe one car note per life time, other than that.. count me OUT.

I do not subscribe to the "invest at 7% with money borrowed on <7%".  That math does NOT account for different levels of risk. That 7% return is not guaranteed, that 1-6% APR on your debt IS guaranteed.

Entering a recession debt free also makes one a lot more tolerant of the huge 'losses' in ones investment accounts... because you KNOW you don't need the money.  This offsets ones natural urge to panic sell.

When you are investing using leverage (lets be honest, choosing to invest while having debt IS LEVERAGING and IS RISKY) you will naturally sweat downturns a lot more.

and when it comes to leverage, well.... "the market can remain irrational LONGER than you can remain solvent". Investing in stocks is plenty risky enough for me.  Investing in stocks 'on margin' is a whole different level of risk.

Oh and being debt free means your emergency fund can be ALOT smaller, which is nice cause now you have less cash sitting on the sidelines.

While this may reflect your feelings, they are just that. I have not experience a single extra bead of sweat from my finances, and I just did my quarterly update and saw how much money I have 'lost'.

ambimammular

  • Bristles
  • ***
  • Posts: 424
  • Age: 46
  • Location: Indiana
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #55 on: April 09, 2020, 07:31:11 AM »
Covid-19 has helped us confirm that we really CAN handle investing aggresively. (Not selling, not afraid, long time thinking.) We hadn't been put to the test before. The only change has been the toggle from spare dollars going into Vanguard instead of or low rate student loan. When the market is high flying again, we'll switch back.

Our remaining mortgage and st. loan debt only come to 43k. I'll be glad when they're over, but they're not too scary.

ctuser1

  • Handlebar Stache
  • *****
  • Posts: 1741
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #56 on: April 09, 2020, 09:19:43 AM »
I noticed this thread some time ago, but wasn't exactly sure what my position is. So I was ignoring it. After much thinking over tea and cookies (I've run out of Brandy) - I think I've settled on how I ought to think.

I don't "feel" any differently about debt:
- I still dislike it.
- I still would use it when it is mathematically optimal in the expected case, without adding an unreasonable amount of worst-case risk.

However, my relationship with debt might soon change dramatically.

I am scouring the internet with baited breath for the mortgage rates to hit below 2%. As soon as it does, I will do a cash out refi and extract almost $70k out of the home equity. < 2% non-callable leverage is just too good to pass up, and it overrides my dislike of debt.

For me, the mathematics wins over feelings in this case.

---------------------------

Coming back to the original question - I don't think someone's feelings should change about a certain financial instrument because of a specific market situation. Recessions and market panics happen at regular intervals and you are guaranteed to face a few of them over your investing lifetime. Your financial strategy should not change due to anticipated market gyrations.

JLee

  • Walrus Stache
  • *******
  • Posts: 7512
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #57 on: April 09, 2020, 09:59:18 AM »
It has only solidified my general distaste for debt.  Yeah, a 15 mortgage is acceptable, modest student loans happen, maybe one car note per life time, other than that.. count me OUT.

I do not subscribe to the "invest at 7% with money borrowed on <7%".  That math does NOT account for different levels of risk. That 7% return is not guaranteed, that 1-6% APR on your debt IS guaranteed.

Entering a recession debt free also makes one a lot more tolerant of the huge 'losses' in ones investment accounts... because you KNOW you don't need the money.  This offsets ones natural urge to panic sell.

When you are investing using leverage (lets be honest, choosing to invest while having debt IS LEVERAGING and IS RISKY) you will naturally sweat downturns a lot more.

and when it comes to leverage, well.... "the market can remain irrational LONGER than you can remain solvent". Investing in stocks is plenty risky enough for me.  Investing in stocks 'on margin' is a whole different level of risk.

Oh and being debt free means your emergency fund can be ALOT smaller, which is nice cause now you have less cash sitting on the sidelines.

You might.  I don't.

The only thing I'm struggling with now is not finding ways to put even more money into the market while it's down -- as I do my absolute best to avoid market timing, I am simply staying the course.

You appear to be extremely risk averse - which is fine. Just don't go around telling everybody else that we're the same as you.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 22319
  • Age: 66
  • Location: NorCal
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #58 on: April 09, 2020, 10:16:59 AM »
@ReadySetMillionaire, how big is your EF? I think that's the very first issue to address.

I find my comfort with debt is proportional to the size of my EF. Even in my pre-FIRE days, I was constantly calculating how many months worth of expenses my EF would cover. The bigger, the better.

What's most important is how long you can stay afloat without selling depreciated assets.

If you use a windfall to pay off your mortgage, as cited above, but you don't have enough liquid to pay the rest of your bills in the event of a job loss or other calamity, have you really made the best move?

NorCal

  • Handlebar Stache
  • *****
  • Posts: 1464
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #59 on: April 09, 2020, 03:36:50 PM »
It has only solidified my general distaste for debt.  Yeah, a 15 mortgage is acceptable, modest student loans happen, maybe one car note per life time, other than that.. count me OUT.

I do not subscribe to the "invest at 7% with money borrowed on <7%".  That math does NOT account for different levels of risk. That 7% return is not guaranteed, that 1-6% APR on your debt IS guaranteed.

Entering a recession debt free also makes one a lot more tolerant of the huge 'losses' in ones investment accounts... because you KNOW you don't need the money.  This offsets ones natural urge to panic sell.

When you are investing using leverage (lets be honest, choosing to invest while having debt IS LEVERAGING and IS RISKY) you will naturally sweat downturns a lot more.

and when it comes to leverage, well.... "the market can remain irrational LONGER than you can remain solvent". Investing in stocks is plenty risky enough for me.  Investing in stocks 'on margin' is a whole different level of risk.

Oh and being debt free means your emergency fund can be ALOT smaller, which is nice cause now you have less cash sitting on the sidelines.

Well said. I keep banging the drum on this, but not many seem to listen around here. A MAJOR component of the EMH is that expected returns come with increased risk. This can be proven mathematically.  Comparing the returns on a risky investment with your risk free rate is mathematically incomplete.  It can absolutely work for some people some of the time. I just come away knowing that many people don’t actually understand the risks they’re taking.

Fuzz

  • Bristles
  • ***
  • Posts: 421
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #60 on: April 09, 2020, 04:09:15 PM »
It's all relative to income and wealth for me. Having $2600/month in fixed expenses is NBD, if you have a secure income greater than 2-3X your payment. Same if you have the wealth to pay off the debt in full.

If anything, the recession has me increasing investments and cash on hand, rather than paying down debt.

TheOldestYoungMan

  • Pencil Stache
  • ****
  • Posts: 778
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #61 on: April 13, 2020, 01:26:39 AM »
It's changing my view of how the U.S. collective consciousness views debt.  The FIRE community is probably closer to rationality, but the idea that Congress is going to need to borrow gazillions of dollars so millions of people can make their debt payments is...

It's an abomination.  But 30 million evictions is also an abomination.

I would hope that people wake up and we enter a century of everyone getting their shit together, but it's bailout after bailout and inflation will fix it in the end.  I guess.

Grateful that I have a job making crazy money now so no matter how it ends up I'll be fine.  Little salty about the six figure tax bill but whatever.

Help your neighbors folks.  Lots of people bout to go totally broke.  If you've got enough money to be asking these questions right now, hire someone to do something for you.  Based on what I see about what the U.S. is struggling with, get yourself a bidet attachment on at least one toilet.  If there's one thing being in Asia has taught me, it's that the U.S. is behind the times on proper bum care. 

If you were wondering what it would look like, the right time to help out?  Here it is.  If you can help, do. 

MayDay

  • Magnum Stache
  • ******
  • Posts: 4953
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #62 on: April 13, 2020, 10:03:23 AM »
I wouldn't say it is changing things because we were already debt averse after going through multiple layoffs during the great recession.


LoanShark

  • Stubble
  • **
  • Posts: 128
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #63 on: April 16, 2020, 03:36:12 PM »
I've been part of the anti-debt crowd for a while now, and this re-affirms it for me.

Part of this is due to me beginning my career in the middle of the financial crisis.

I understand the simple math of 7% equity returns > ~4% cost of debt (or whatever it is for you). 

However, this math can very easily fall apart under even moderate scrutiny.  Some of the biggest examples:

1. This assumes forward returns on equity are 7% at all phases of the economic cycle.  This is beyond ridiculous.  If you invest in a recession, you should expect returns well above 7% and if you invest late in a bull market, you should expect returns well below 7%.  While I guaranty you can't time the market, a rational observer should be able to identify whether you're investing in a time of fear or a time of irrational optimism.

2. In Efficient Market Hypothesis terms, you are comparing an investment with high risk with a risk-free return.  When comparing paying down debt, you should be comparing your cost of debt with the lowest risk bonds in your portfolio (you do have bonds in your portfolio, right?)

3. Increasing debt always carries risk.  How much risk you're willing to take on is a personal decision, but it is worth being more thoughtful about it than 7%>4%.  What does your income situation look like?  Do you have other assets you could sell in an emergency to cover the debt?  There is no rule-of-thumb here, other than to have a plan.

Because of these considerations, I chose to sell investments last summer to pay off my mortgage.  While I have no magic ability to predict the market, I could reasonably see that forward 10 year returns would likely be significantly lower than 7% from those levels.  A guaranteed return of 4% seemed like a better value than the stock market.  If assets truly go on sale in the next few years, I may consider taking out a mortgage again.

Couldn't have said it better. Peace of mind to me is worth the 3% (7-4%).

Alternatepriorities

  • Handlebar Stache
  • *****
  • Posts: 1635
  • Age: 43
  • Location: Alaska
  • Engineer, explorer, investor
    • Alternate Priorities
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #64 on: April 16, 2020, 04:41:50 PM »
Does it bother any other debt adverse people that in times of crisis many governments shovel money to debtors while the debt adverse are left out? There is much peace in knowing I can take care of my debt free self, but only helping the over extended (especially the wealthy over extended) feels like being penalized for building my wealth more slowly and responsibility.

John Galt incarnate!

  • Handlebar Stache
  • *****
  • Posts: 2038
  • Location: On Cloud Nine
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #65 on: April 16, 2020, 05:52:22 PM »
It has only solidified my general distaste for debt. 

1. I am, and have been,  averse to debt because I know that the future is unknown.

2. An unknown future includes the possibility of black swan events in which I don't ever want to be burdened with debt.

The occurrence of the COVID-19 catastrophe  proves 1 and 2.


Monerexia

  • Bristles
  • ***
  • Posts: 309
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #66 on: April 16, 2020, 05:56:58 PM »
Best of both worlds is getting taxable above debt. There's another thread devoted to this--a noble aim

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8684
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #67 on: April 16, 2020, 06:47:03 PM »
So, when all of this subsides (hopefully soon), I am probably going to take a second look at my strategy.  Because I'd be feeling a lot better right now if these debts weren't here.

I don't feel any different now about debt than I did pre-COVID-19. Unlike you OP I don't have a car loan or a student loan. So just the mortgage and the dang thing is so low in terms of monthly payments that it's stress free to service. So if you ask me would I rather continue to pay my mortgage or instead sit on an extra $300K locked up in equity, but no mortgage payments than I'd stick with my mortgage. I don't really see a scenario where I'd be better off being $300K poorer and own my home.

The key is I can afford this mortgage easily, I have no other debts and my basic spend is low compared to my assets and my potential income.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 22319
  • Age: 66
  • Location: NorCal
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #68 on: April 17, 2020, 11:13:54 AM »
[Snip]
Couldn't have said it better. Peace of mind to me is worth the 3% (7-4%).
Here's the thing many people don't yet understand. It doesn't get talked about as much because it totally sounds like humblebragging. When you have a giant ball of money, that way exceeds your mortgage balance, you feel amazingly bulletproof. It's a fantastic feeling! I was never a high wage eaner and always lived in a HCOLA. After years of scrimping, budgeting, saving, and investing, this unexpectedly giddy feeling of unfettered buoyancy far outstrips the fear I felt in the early days of accumulation. Even short-lived thrill of paying cash for a house pales in comparison to hitting FI. The current pandemic really underscores this feeling of confidence. That's the reason I stay and promote the road less traveled. You won't know until you get there how amazing it is. Failing to experience the magic of compound interest is not something you want to miss, nor can you recapture the opportunity once it's gone. The time value of money is real and powerful.

Alternatepriorities

  • Handlebar Stache
  • *****
  • Posts: 1635
  • Age: 43
  • Location: Alaska
  • Engineer, explorer, investor
    • Alternate Priorities
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #69 on: April 17, 2020, 11:41:47 AM »
[Snip]
Couldn't have said it better. Peace of mind to me is worth the 3% (7-4%).
Here's the thing many people don't yet understand. It doesn't get talked about as much because it totally sounds like humblebragging. When you have a giant ball of money, that way exceeds your mortgage balance, you feel amazingly bulletproof. It's a fantastic feeling! I was never a high wage eaner and always lived in a HCOLA. After years of scrimping, budgeting, saving, and investing, this unexpectedly giddy feeling of unfettered buoyancy far outstrips the fear I felt in the early days of accumulation. Even short-lived thrill of paying cash for a house pales in comparison to hitting FI. The current pandemic really underscores this feeling of confidence. That's the reason I stay and promote the road less traveled. You won't know until you get there how amazing it is. Failing to experience the magic of compound interest is not something you want to miss, nor can you recapture the opportunity once it's gone. The time value of money is real and powerful.

Well put Dicey. I especially like the conclusion. I've hosting a small group of friends (now digitally) every couple of weeks for the last year trying to drive this very idea home while they still have time on their side.

aetheldrea

  • Stubble
  • **
  • Posts: 195
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #70 on: July 11, 2020, 09:32:31 AM »
In the 3 1/2 months since this thread was started, the S&P500 is up about 28%.
I feel really sorry for the people mentioned in the anecdotes who threw a bunch on money at their mortgage instead of investing, based on "feelings" or "peace of mind."

Michael in ABQ

  • Magnum Stache
  • ******
  • Posts: 2626
Re: Is COVID-19/Economic Shutdown Changing How You Feel About Debt?
« Reply #71 on: July 12, 2020, 12:38:55 AM »
Does it bother any other debt adverse people that in times of crisis many governments shovel money to debtors while the debt adverse are left out? There is much peace in knowing I can take care of my debt free self, but only helping the over extended (especially the wealthy over extended) feels like being penalized for building my wealth more slowly and responsibility.

Yes. But I'll take personal responsibility over a handout. I have a small side business and I could potentially have applied for a PPP loan based on that. However, I don't need it as the business is doing fine. I personally benefited from the stimulus funds as I have a lot of kids and there was $500 for each one, plus the $1,200 a piece for my wife and I.

I'm bothered by the federal government routinely spending 20, 30, 40% over budget every year and putting us deeper in debt. But that's out of my control. How I handle personal debt is within my control. Control the controllables and don't waste time worrying about the rest.
« Last Edit: July 12, 2020, 03:57:39 AM by Michael in ABQ »

 

Wow, a phone plan for fifteen bucks!