Preparing for the Crash: Cash or Debt Payoff

[jtriplett]

So assuming sometime in the next few years we get a pretty spectacular economic crash.  And if you have doubts about that there are a lot of resources pointing towards it, check out http://economyandmarkets.com and a few others.  Anyway, with that assumption for a moment. 

What would be the best course of action?  Create a Cash Horde, or pay off $80k of consumer and student debt?  I'm curious for the Mustachian point of view, I'm very torn on this. 

[MDM]

And if you have doubts about that there are a lot of resources pointing towards it, check out http://economyandmarkets.com and a few others.

If you can handle more doubts, see http://www.cbsnews.com/news/harry-dent-and-the-chamber-of-poor-returns/.

The snarky answer to "What would be the best course of action?" is "go 100% to short options the day before the crash."

A more reasoned answer is "determine your desired asset allocation, then rebalance as events move you away from your targets."

[humblefi]

What would be the best course of action?  Create a Cash Horde, or pay off $80k of consumer and student debt?  I'm curious for the Mustachian point of view, I'm very torn on this.

May I ask what is your plan for the cash accumulation? We know the other choice...debt reduction. What is the cash for?
If you can clarify, you may get more opinions.

[jtriplett]

What would be the best course of action?  Create a Cash Horde, or pay off $80k of consumer and student debt?  I'm curious for the Mustachian point of view, I'm very torn on this.

May I ask what is your plan for the cash accumulation? We know the other choice...debt reduction. What is the cash for?
If you can clarify, you may get more opinions.

Good point.

Cash can be used for:
A Buffer in case my consulting practice becomes difficult to keep busy during the crash.
A chunk of money to buy some real estate at fire-sale prices.  Especially because I like the bay area, I see the real estate here in major bubble territory, and would love to buy at 50% off. 

And potentially to have some money to:

"go 100% to short options the day before the crash."

[Bateaux]

Leave a few thousand dollars as a cash buffer and pay down the debt.  Having no debt is the ultimate survival tool.

[humblefi]

Good point.

Cash can be used for:
A Buffer in case my consulting practice becomes difficult to keep busy during the crash.
A chunk of money to buy some real estate at fire-sale prices.  Especially because I like the bay area, I see the real estate here in major bubble territory, and would love to buy at 50% off. 

And potentially to have some money to:

The first thing one has to do in a downturn is survive. So, an emergency fund is of utmost necessity. You mention the Bay area...I will assume the San Francisco Bay area. Living expenses are no joke in this area. So, I would create a very healthy (say 9 months) of monthly expenses for a downturn, which includes your mandatory minimum debt payments. Your mileage may vary depending on your commitments....family, kids, debt, etc etc

Once that is taken care of, you have two options: fund your "fire-sale" cash fund and/or debt reduction. To decide on this, it depends on the interest rate on the debt.
Say you set aside $50K for the fire sale fund. This is $50K not spent for debt reduction. Once a downturn starts, the real estate prices do not fall that fast...say it takes 2 years to bottom out to 50% lower prices...what it the debt hit for those two years? Based on that, pick a percentage that you are comfortable with and attack both fire-sale cash fund and debt reduction....say 60/40? 70/30, 30/70, .....i.e. hedge your bets based on some framework. If

Hope that helps.

[Monkey Uncle]

And if you have doubts about that there are a lot of resources pointing towards it, check out http://economyandmarkets.com and a few others.

If you can handle more doubts, see http://www.cbsnews.com/news/harry-dent-and-the-chamber-of-poor-returns/.

The snarky answer to "What would be the best course of action?" is "go 100% to short options the day before the crash."

A more reasoned answer is "determine your desired asset allocation, then rebalance as events move you away from your targets."

My god, people, please read the article that MDM linked.  Harry Dent is the consummate snake oil salesman.  Any time some newsletter salesman is trumpeting an imminent crash/boom/hot stock/economic transformation/whatever, your bullshit detector should start blaring like the disaster alarm on a nuclear submarine.

I remember reading Dent's "Great Boom Ahead" and "The Roaring 2000's" back in the day.  Luckily I didn't fall for it.

[clifp]

Preparing for the crash/

About $100k in diamonds and gold coins. 

5 Assault rifles Ak-47 or AR-15 or similar
10,000 rounds of ammo
2 hunting rifles with scopes for fresh meat.

2 years supply of MRE, or similar food
Several first aid kits, a couple of years worth of antibiotics
Lots of water, a well, and chlorine tablet/iodine or similar water purification system

About a 1,000 gallons of gas.
200 gallons of diesel for the generator.   
Either a PV system or Windmill depending on climate.
Lots of rechargeable batteries.

Store wikipedia on flashdrive.

[surfhb]

Preparing for the crash/

Store wikipedia on flashdrive.

This is fantastic advice.   When the crash comes I'll be the wise old Wizard of my clan.   Telling stories about the pinnacles of our annestor's existance before The Great Crash. :)

[Retired To Win]

It makes a difference whether one is preparing for a crash or for THE Crash.

Either way, we've set up Emergency Reserves that address both:

[]  one year's expenses in cash accounts
[]  two years expenses in cash in investment accounts
[]  several hundred thousand dollars in available credit
[]  several thousand dollars in cash at home
[]  4000 silver dimes at home
[]  six months-plus canned and dry food reserve
[]  guns and ammo (yup)
[]  an electric generator
[]  our own well
[]  geese, chickens and rabbits
[]  a vegetable garden
[]  first aid and medical supplies cabinet

If THE Crash comes, we've done everything we could to deal with it.  If it doesn't come, so much the better.

If a crash comes, we've got cash to cover our expenses so we don't have to sell our investments at huge losses.  And we have investment cash and credit lines to take advantage of other people's need to sell off their stuff at bargain prices.

It does help, of course, to already be debt-free and FIREd.

If I were in the OP's place and seriously thinking that a crash is coming, I would first make sure that I had one year's living expenses set aside (in case of getting laid off, etc) and establish a goodly number of credit lines now while he/she still can.  Then I would address the student debt because it stays with you even after a bankruptcy.  Once all that is achieved, then revisit and rethink next steps.

Good luck (everyone!)

[plantingourpennies]

If you're gullible enough to be reading/citing a snake oil salesmen like Dent, a downturn is gonna be tough on you regardless.

http://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect

[surfhb]

If you're gullible enough to be reading/citing a snake oil salesmen like Dent, a downturn is gonna be tough on you regardless.

http://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect

HaHa!   Word

[LalsConstant]

Leave a few thousand dollars as a cash buffer and pay down the debt.  Having no debt is the ultimate survival tool.

Yup.

The thing is, if you're debt free, the worst thing that can happen to you is you have to adjust your lifestyle.  If you're caught on the winds of misfortune, and you have to do something radical to get out of that situation, you just have so many more options if you're not already obligated.

[Prairie Stash]

Pay off consumer debt, it's always a great choice. It's pretty easy to replace cash piles when you have no debt. Just curious, how much money did you spend in 2014 servicing your debt? How much will you spend by the time the crash happens?

[frugledoc]

The fact that so many of us are hoping for a crash so we can buy equities, property, whatever a lot cheaper means it is unlikely to happen.

I still can't stop myself hoarding a large cash pile just in case though.  If you are happy with your equities exposure just stay diversified and take what comes.

Nobody, not even the most respect economics professor on the planet (in fact especially them) really knows what is going to happen.

[bootyman]

move stocks to bonds?

[mydogismyheart]

I have very minimal debt right now, only about $6K (down from the original $30K) and I also have $15K in savings.  Yes, I would like to get the debt paid off, but as a real estate agent I'm too nervous to just take all my cash and pay off debts and so forth.  While I don't believe I will struggle much in the next few years, I do know anything can happen and if I am not selling real estate I am not making money.  My goal is to have more than that in savings, but it's all about baby steps. :)

[MoneyCat]

The number one thing you should do to prepare for the crash is to buy lots of ammunition to fight off the living dead.

[GetItRight]

Leave a few thousand dollars as a cash buffer and pay down the debt.  Having no debt is the ultimate survival tool.

^ This, to be prepared for the most likely crashes or downturns. In a hyperinflation scenario cash will not get you very far, diversified assets such as gold, silver, booze, cigarettes, ammo, and firearms are a few items what will retain value and be stable or grow in relative value in a large crash. You cannot effectively prepare for the crash until your debt is paid though so that should be the primary goal with $80k of unbacked consumer debt hanging over your head.

[stlbrah]

well, you could always move to thailand or something for a couple of years

[I'm a red panda]

Store wikipedia on flashdrive.

Probably be safer to print it out. Just in case the computer won't work.

[caliq]

Store wikipedia on flashdrive.

Probably be safer to print it out. Just in case the computer won't work.

Well the power grid will obviously be down, and you can't rely on a generator forever (nor should you be wasting fuel on a computer!).  Printing out is definitely the way to go ;)

[TheMoneyBadger]

As many have said, pay off consumer debt.  Outside of that, I'd strongly advise against a cash stash outside what you want in an appropriately sized emergency fund.  You're basically asking how you should time the market.  Short answer, don't try to time the market.  The world is filled with people who have tried and failed, generally missing out on huge upside or locking in huge losses.  Snake-oil salesmen were predicting a huge crash at the beginning of 2014.  If you pulled out of the market then, you'd probably be regretting it now.  For now, keep calm and keep investing.  There will be a crash/correction/recession/depression at some point.  When that happens, keep calm and keep investing.

[clifp]

Store wikipedia on flashdrive.

Probably be safer to print it out. Just in case the computer won't work.

I thought about that, but how in the world would you organize a paper version of a wikipedia to find anything.  It is 4.7 million articles and 35 million pages (holy shit).  I did a bit of investigating (using wiki off course) and The text of wiki is about 40 Gigabyte.  I am assuming that my PV system/generator would still work in the event of the economic crash, even if the internet goes down.

On the other hand 35 million pages could probably provide fuel for your furnace or wood burning stove for 5-10 years depending on your climate and house size.

[FrugalSpendthrift]

I'm going to prepare the same way that I'm preparing for the subsequent boom.

[jmusic]

What I'm surprised at is that no one mentioned having ACTUAL cash, not just cash accounts.  The biggest issue I see with "The" crash is that there's no way to reliably make money off of it because any brokerage you use will likely implode.  If things got bad enough, so will the banks.  The rates are low enough anyway that banks are only worthwhile for the convenience factor anyway.

[EarlyStart]

I'm going to prepare the same way that I'm preparing for the subsequent boom.

This.

If you invested $10,000 at the peak of the last bubble in a total market fund like VTI, September 07, it'd be worth $16,148 with dividends reinvested or $15,336 without dividend reinvestment. Next time could be better or worse, but do you think you can time it that well? That sounds like a really stressful task.

[RetiredAt63]

Exactly.  I was just surprised at how many people commented before this came up.

What I'm surprised at is that no one mentioned having ACTUAL cash, not just cash accounts.  The biggest issue I see with "The" crash is that there's no way to reliably make money off of it because any brokerage you use will likely implode.  If things got bad enough, so will the banks.  The rates are low enough anyway that banks are only worthwhile for the convenience factor anyway.

[aj_yooper]

A stock market crash could occur in an inflationary or deflationary environment.  Leverage in inflation can be very beneficial; however, in deflation it is a problem.  Consumer debt is poison and student loans a steady drain and investment brake.  If you adjust asset allocation down (more bonds), you reduce your portfolio beta (and maybe your returns), but you are protected somewhat from a crash, should it come.  You also could be forsaking gains in equities.  So, I think the question "Preparing for the crash: cash or debt payoff?". is solved by an appropriate asset allocation and periodic portfolio rebalancing (according to the individual investor) and eliminating obvious bad debt.  Cash or cash like alternatives are necessary to purchase bargains in the market along with regular additions to the portfolio from income.  When the market crashes, it is also necessary to know if one is buying  at or near the bottom or riding the anchor to the bottom.  But that is not knowable.

Personally, I am concerned that deflation is a possibility, maybe in Europe or US.  My strategy is lower beta in the portfolio and more cash like instruments.  No debt. 

[Bateaux]

I've been in this market since the early 90s and there have been rough days.  Every single ime in history it has recovered and gained ground.  History is on the side of the winners thus far.  You can be contrary if you want that is your choice.  I'll remain bullish.

[okonumiyaki]

The number one thing you should do to prepare for the crash is to buy lots of ammunition to fight off the living dead.

Nope.  The sound of gunshots will just attract more.  Crossbow and katana for the win. 

[Geldsnor]

An economic crash could also mean hyper-inflation, not just the stock market collapsing. In that particular scenario, having debts and fysical gold would be win-win.

Till today in history no fiat (paper currency based on trust) has survived. It will be the same for the dollar, euro etc. But nobody knows when. Knowing this it is kind of ironic to feel save with a bunch of paper with a printed dollar sign ;)

[marketnonsenses]

I used to think that if a huge crash came it wouldnt matter if you were in debt because so would be everyone else. But after reading a lot about the great depression and current recession. Big debts are really what destroyed people. Cash would be nice but not owning the bank would be better in my opinion. With no cash you can still trade for stuff.

[I'm a red panda]

What I'm surprised at is that no one mentioned having ACTUAL cash, not just cash accounts.  The biggest issue I see with "The" crash is that there's no way to reliably make money off of it because any brokerage you use will likely implode.  If things got bad enough, so will the banks.  The rates are low enough anyway that banks are only worthwhile for the convenience factor anyway.

But you need to have a currency that people care about.  So having something like bullets or food, or probably even gold, are going to be a lot more useful than having a bunch of meaningless dollars if the US goes belly up.

So it just depends what this hypothetical crash looks like.

[Bob W]

Leave a few thousand dollars as a cash buffer and pay down the debt.  Having no debt is the ultimate survival tool.

Disagreed -- Cash is king.   Let's say you have 80K in actual hundred dollar bills.  The economy sinks and your business closes.  You can grab you brief case full of Benjamins and head for Belize for a decade or so.  Debts will dissipate.  "lender beware." 

Of course you will be giving up all the potential gain before the crash.   

That said,  try to negotiate all debts down in interest rates while the economy is hot.   

While you may feel the heat on the west coast here at the central coast the economy continues to muddle along.  No heat here.   No flying real estate prices.  Since the rest of the world is in an economic slump I doubt that your bubble extends much past major urban areas.   

[dycker1978]

you guys all have it wrong... If there is a crash of the magnitude that we are talking here money of any kind will be worthless...  learn how to survive and provide using the land.  That is what will get you through.   Money really is nothing, survival and happiness when it is worthless is key.

[Bateaux]

I live in the swamps and I survived Katrina and a dozen other storms.  I got beans, bullets and bandaids.  When the shit hits the fan its the almighty government that is the main threat.  You keep them at bay being debt free and having cash to fix whatever needs fixing.  I alao been in the position to help others when the shit hit the fan.

[jmusic]

The cash question really depends on one variable:  Whether the currency explodes due to hyperinflation or implodes due to deflation.  Either one could happen, and both have happened within the 20th century.

Hyperinflation:  Germany after WWI (I think?), where it took wheelbarrows full of money to buy a loaf of bread.
Deflation:  US Great Depression, which was caused by a speculative bubble and easy money in the 20's (sound familiar?).

The things that we do as "Mustachians" are supposedly part of the cause of deflation, by retiring debts we reduce the supply of money, and by keeping money in savings we reduce the velocity of money as well.  Yes, we invest in the markets, but many companies are either sitting on the cash, or doing stock buybacks because they have little else to do with the money. 

Currently it seems that the various governments in the world are trying desperately to stave off deflation through dovish monetary policy.  The trouble is that all its accomplishing is shuffling it around from one country to another, termed as "exporting" deflation.  Right now the Dollar is very strong due to "safe haven" status, but as of yet it hasn't dramatically impacted the stock markets.  It will...

[jmusic]

you guys all have it wrong... If there is a crash of the magnitude that we are talking here money of any kind will be worthless...  learn how to survive and provide using the land.  That is what will get you through.   Money really is nothing, survival and happiness when it is worthless is key.

Good thought, but that would also require owning land. 

[Grande]

  And if you have doubts about that there are a lot of resources pointing towards it, check out http://economyandmarkets.com and a few others.

My doubts point to the credibility of the "resource" you cite.

Might this be a website that uses fear based tactics as a motivator to push sales of newsletter subscriptions? I wonder.

 

[Left]

I've made myself doubt my AA these days (yeah, not very much) but instead of chasing the yield, I just remind myself that yes, I "lost" money since the new year, but since I haven't sold any shares yet, I haven't actually "lost" my shares. And when I think about my money in terms of shares instead of dollar signs, I feel better. When the dollar price is lower, I can buy more shares which make me happy.

So to prepare for a crash, I just remind myself of this, and then think about my job being stable and that I'll be able to buy more shares so I do nothing different. I may build my emergency stash back up, I had it at $30k but then dropped it to $10k ($20k into investments), but I may put the tax refund/next investment deposit on hold until I rebuild my buffer to around $15-20k (around mid year or so). Then when the crash happens and I still feel okay about having a job, I'll move this amount to investments and rebuild "cash" stash

A chunk of money to buy some real estate at fire-sale prices.  Especially because I like the bay area, I see the real estate here in major bubble territory, and would love to buy at 50% off. 

Not sure what to make of this. You mentioned you have $80k in debt, then talk about buying a house in a crash? Um, if I'm mistaken about how big the bubble is there, even at your 50% off price, the houses are still going to be expensive right? So why add a mortgage to the debt on top? Or is $80k debt not that "much" to you and you can pay it off at anytime without batting an eye at it? Since I don't know how much you make/have so maybe you are keeping the debt for a reason? But why ask to pay it off in that case?

[JLee]

My tinfoil hat is not big enough for this thread!

If I lose my job, it'll be because the banking industry goes flat (we keep banks running). If that happens, we're probably all screwed anyway. :P

[dycker1978]

[/quote]

you guys all have it wrong... If there is a crash of the magnitude that we are talking here money of any kind will be worthless...  learn how to survive and provide using the land.  That is what will get you through.   Money really is nothing, survival and happiness when it is worthless is key.

Good thought, but that would also require owning land.

Not really... if society crumbles no one will own anything... modern society as we know it will not be here... anarchy will prevail

I've made myself doubt my AA these days (yeah, not very much) but instead of chasing the yield, I just remind myself that yes, I "lost" money since the new year, but since I haven't sold any shares yet, I haven't actually "lost" my shares. And when I think about my money in terms of shares instead of dollar signs, I feel better. When the dollar price is lower, I can buy more shares which make me happy.

So to prepare for a crash, I just remind myself of this, and then think about my job being stable and that I'll be able to buy more shares so I do nothing different. I may build my emergency stash back up, I had it at $30k but then dropped it to $10k ($20k into investments), but I may put the tax refund/next investment deposit on hold until I rebuild my buffer to around $15-20k (around mid year or so). Then when the crash happens and I still feel okay about having a job, I'll move this amount to investments and rebuild "cash" stash

this is probably better advise though :)

[Left]

But you need to have a currency that people care about.  So having something like bullets or food, or probably even gold, are going to be a lot more useful than having a bunch of meaningless dollars if the US goes belly up.

What good is gold/silver in this case? Are you going to "pay" a gold bar for a can of food? Or just rob them at gun point? Gold/currency only work when people can agree on a value of it.

[Tetsuya Hondo]

It's your lucky day. I happen to be selling The Crash insurance.

Just hand your soon to be worthless dollars and stocks over to me and I'll provide you with a penthouse apartment for life in Bartertown. You'll also have morning well access, a weekly ration of gasoline, two servings of gruel a day, and box seats to Thunderdome. Best of all, you'll have the security of knowing that you live within the safety of Bartertown's walls after The Crash occurs.

[Tetsuya Hondo]

But you need to have a currency that people care about.  So having something like bullets or food, or probably even gold, are going to be a lot more useful than having a bunch of meaningless dollars if the US goes belly up.

What good is gold/silver in this case? Are you going to "pay" a gold bar for a can of food? Or just rob them at gun point? Gold/currency only work when people can agree on a value of it.

You can use gold bars to club people over the head.

[Bateaux]

They are speaking end of world not shit hit the fan. Hurricanes,  floods, solar flare power outage, dirty bomb, etc.  You need to survive weeks or months.   Those things happen.  There is recovery.  In the proper position you profit.

[capital]

Fiat currency backed by nothing at all, not even the government that printed it, can hang on a long time based on simple utility:
http://en.wikipedia.org/wiki/Iraqi_Swiss_dinar

[Indexer]

So assuming sometime in the next few years we get a pretty spectacular economic crash.  And if you have doubts about that there are a lot of resources pointing towards it, check out http://economyandmarkets.com and a few others.  Anyway, with that assumption for a moment. 

What would be the best course of action?  Create a Cash Horde, or pay off $80k of consumer and student debt?  I'm curious for the Mustachian point of view, I'm very torn on this.

The website you link says there is suppose to be a stock market/real estate crash..... in 2014.   He also predicted the DOW would peak at 17k.  Its already past that, BUT even more important only reporters and people who want to sound smart(including reporters) actually look at the DOW.  The DJIA(what is commonly referred to as the DOW) is tracked using the 'stock price' of 30 stocks.  Its a joke left over from times long since passed.   The people who follow the market as part of their job never look at the DOW.  They look at the S&P500 for large caps or the total market index(there are a couple) which are all big market cap weighted indexes which do a better job representing the actual market. 

Trying to predict the future is a fools errand.  Dent is the king of fools.

So just plan long term.  Pay credit cards down to zero first, but keep them open(they can serve as EF till you get one).  Build an emergency fund of at least 6 months expenses.  Then pay down debts.

[I'm a red panda]

But you need to have a currency that people care about.  So having something like bullets or food, or probably even gold, are going to be a lot more useful than having a bunch of meaningless dollars if the US goes belly up.

What good is gold/silver in this case? Are you going to "pay" a gold bar for a can of food? Or just rob them at gun point? Gold/currency only work when people can agree on a value of it.

I don't think the human tendency to hoard is going to go away. I think gold would be more valuable to barter with than USD if the US crashes.  But bullets and food will be #1.

Not to mention if the crash is localized, the gold could be used to purchase other currencies when we determine which one still has value.  Otherwise you'd just have to go buy them all and hope you get lucky.