Is COVID-19/Economic Shutdown Changing How You Feel About Debt?

[ReadySetMillionaire]

One of the longest running debates on this forum (and in personal finance generally) is the investing vs. debt payoff topic.  I have generally subscribed to the long term view, that it is better to carry low interest debt and invest as much as you possibly can.

But I'm not going to lie, this complete economic shutdown has the possibility of changing my opinion.  My wife has basically lost her job, but luckily, we live well under our means, my income should cover *most* of our expenses (not quite 100%), and we have a decent cash reserve.  But man, I would feel so much better right now if we were not carrying any debt.

I have a mortgage at 3.625%, a car loan on a used Honda at 1.99%, and my student loans at roughly 6.05% (combined).  I've basically always chosen investing over paying these off, so now my debts are approximately $2,600/month.

If we did not have that debt, our monthly expenses would be about $2,100 per month.  My take home pay -- even maxing deffered comp -- would basically cover this.

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.

[FIPurpose]

I'm not sure I've seen anyone on this forum saying that you should invest over paying off a 6% loan. Unless you have some very special circumstances that should be near the top of your list. Especially if you can pay off the higher interest parts first.

[ReadySetMillionaire]

I'm not sure I've seen anyone on this forum saying that you should invest over paying off a 6% loan. Unless you have some very special circumstances that should be near the top of your list. Especially if you can pay off the higher interest parts first.

This is a complicated debate due to income-based repayment strategies, which lower the effective interest rate much lower, and can result in loan forgiveness.  We could nuke this whole thread talking about that strategy and all its details and implications, so I'm talking about the broader picture.

[thesis]

Personally, I prefer the no-debt way of doing things. But some people don't and that's fine, as long as they aren't snobs about it :-). Honestly, though, this event is a black swan, and the low-interest debt method is still very likely to be statistically sound. It could still be worth it for someone IF they have continued employment or cash reserves to pull them through, or just a huge stache. But we all take risks in life. Just because this one (keeping low-interest debt) will bite some people in the butt doesn't mean it's a bad thing to do, it's just nobody really saw something like this coming. You could have prepared your entire life for 'the virus' and then died last year and never saw it. That's how rare this sort of thing is, so I don't think this proves that methodology wrong by any means.

[wellactually]

People regularly say not to pay off student loans around 6% on these forums. I've seen that countless times. The investment order is "2. pay off any debts with interest rates ~5% or more above the current 10-year treasury note yield."

Over the last couple years, the 10-year treasury yield has been 1.5-3%. So the advice would not implore one to pay off 6% student loan debt if followed exactly.

This downturn/pandemic/crisis has not changed my view on debt because I already was on the side of prioritizing debt payoff. We only have the mortgage at 3.375%. And we bought a lot less house than we could have intentionally both to have less leverage against us and to hedge against financial crisis.

I'm 30. It took me months to find an $8/hr part time job when I was in college during the great recession. My husband experienced three months of unemployment back in 2015. We have a very low risk tolerance.

Now, the key for us was that we attacked our 54k in student loan debt incredibly aggressively and never bought anything on credit ever. Then we didn't allow much lifestyle inflation and turned quickly to ramping up retirement. So paying off debt created our discipline and then we turned that discipline to saving aggressively and it only delayed our savings by 21 months.

We feel good about having as much cashflow freedom as possible all the time, but especially these days.

[Fire2025]

If anything this situation has made me feel better than ever about my personal choices.  These situation are very personal, so you have to engineer your personal finances to suit your personality. 

I have been laid off.  I can live and pay all my expenses with unemployment and a small subsidy from my EF.

I have a mortgage at 3.5% and a student loan at 4%.  I have never paid extra on either debt.  Every extra penny has gone to the market and a reasonable EF.

I'm so glad that I have a big, for me, pile of assets sitting there, as the ultimate EF.  I didn't start investing just 3 years ago or 5 years ago.  I have been investing for a decade +, so half my assets are still at full strength and/or still up. 

I get that this choice is not binary for a lot fo MMMers, but it was for me, I could have assets or I could have these bills paid off.  I'm personally still happy with my choice to have assets.

What if these bills weren't paid off yet AND I had no assets?  Then I would be freaking out about money instead of being able to focus on the real issue, the people I love staying safe.

[Laura33]

Don't ignore the other side of the equation:  how much money have you invested or saved that is now available to help you cover those higher payments?  At this point, we're pretty much back where we were at the beginning of the Trump presidency, so depending on how long you have been investing, you could still even be in the black.  It's not (yet) the end of the world, just the end of a massively extended bull market. 

The answer is different if you are looking short-term or long-term.  Your decision to invest may not pay off in the short term -- that is, your current annualized return on your investments may be below the interest rates on your loans.  But long-term, you will be better off keeping that money in the market.

The big short-term consequence, of course, is if you lose your job(s), your investments crater, and then lose everything because you can't cover your bills.  In that case, yes, you'd have been better off with lower costs, and/or a substantial emergency fund.  But as long as you are in a situation where you have enough income and/or cash on hand to continue paying your bills, you will still be better off long-term if you stay invested in the market.  And that, as they say, is priceless.

IOW, this is the classic case of balancing greed and fear.  When the market is good, it is very, very tempting to focus on maximizing your returns.  It's only when the shit hits the fan that people are reminded that you need to have your ass covered sufficiently that you don't crash and burn when things inevitably go down.  This was always going to happen -- maybe not this specific thing, maybe not this quickly, maybe not this severely.  But the market was going to go down; the economy was always going to dip; we weren't going to have essentially no unemployment in various sectors forever.  A good plan will keep you prepared for that.

This is also why I have a significantly larger cash 'stache than is recommended here -- BT, DT, don't ever want to do it again.  That cuts down one major worry.  I mean, I'm still worried a about the economy in a macro sense and how what happens from here will affect our long-term plans.  But I don't have to spare once single brain cell worrying about losing our jobs or covering our bills.

[ReadySetMillionaire]

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.

[martyconlonontherun]

I think it made me re-think emergency fund versus debt. As long as you have equity in the house and car (accounting for 30% hedge if the market tanks), I'm still comfortable with debt.

But cash flow is king. I was comfortable with limited emergency fund since we can live off one salary and are in different fields, but my risk tolerance is really tested since who knows who will have a job next month.

I only have a 2-3 month emergency fund (liquidating fun accounts like Robinhood, Coinbase, savings, etc---Maybe an extra 2 months if I take after-tax Roth contributions out tax free). That is a little scary.

[HPstache]

I think an event like this certainly must bring into question the "Don't Pay off your Credit Cards" thread, which unfortunately has been locked:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/don%27t-pay-off-your-credit-cards-club/

In my opinion, it is completely wrong to apply the principles of LONG TERM returns of the market to a short term gamble.

[martyconlonontherun]

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.

Depending on the situation though, there are grey areas. If you car is worth 10k and the debt was worth 9k, that $5k puts you in a position where if needed you can sell the car without being underwater and share a car with a family member. Granted this is just shuffling money around and not very different than keeping that $5k in an emergency fund. Really depends on a persons risk tolerance.

Paying down a mortgage also can be a prepayment so you it gives you an extra month or two before your next payment. Or if you paid down a substantial amount, you are more likely to be able to refinance with the bank or sell the house and move into an apartment.

[Alternatepriorities]

This is a fascinating and complex question for me.

I learned to be debt adverse when I was young but I've become less so because of the math. Still, we only have mortgage debt after prioritizing paying off student loans the last couple of years. In light of the bill being argued in congress that may include forgiving $10k in student loans I might really regret that choice. There is talk of deferring mortgage payment for up to a year which probably wouldn't apply to us, but could help a lot of people. If it does apply to us, then I'd probably just invest the extra cash into equities. I am really thankful not to have a payment on a car I have no where to drive right now, but that was true before. Every day is a good day not to have credit card debt... However I may consider using one of the many 0% CC loan offers to buy stocks if they keep dropping. That would be a first for me.

As others have mentioned this is a black swan event. The lesson I'm learning here as in 2008, is that uncle sam will bail out the right kind of debt in black swan events because it's "too big to fail". The same lesson corporations learned in 2008. Yes it's a moral hazard, and yes I suspect it is still probably the best option the government has. Maybe we should create a "to big to fail" tax after this is done.

[wellactually]

A MASSIVE consideration here is that people have different levels of job security. I have a bachelor's degree that is different from the field I work in, but I also have about 7 years of experience in that field. I'm in a much better position than I was in 2008, but I'm not indispensable at my employer. My husband works in the mortgage industry.

If you're in a career in a high-demand field, you can make different choices here than if you're in a service sector or something or you have a riskier career situation generally.

We have a lot of high earners here with many employment options. There is a privilege to that positioning that might allow you to tolerate higher risk.

[Alternatepriorities]

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 argued this with several friends over the last few years. If the SHTF it's better to have a 100k mortgage balance and 50k in the EF than to have a 50K mortgage balance and much less cash to make payments with. Even if the Mortgage is zero there are still taxes in most places. If the goal is financial security and that is defined by the time you can last without needing income then it makes sense to keep some debts and have a larger EF even if it isn't the most efficient thing on average.

[bigblock440]

I certainly wish I had higher cashflow and didn't have the debts (student loans and mortgage), but I'm glad I found the DPOYM club and have more liquid assets.  I'd much rather have the couple hundred in student loan payments and the couple grand saved that I can pull from if needed than I would have having no payments but also no savings.

[Kris]

Nope, because I have always been more of a proponent of paying down debt as aggressively as one can while still investing as well.

And yeah, my mind is much more at rest during this turbulent time knowing that my mortgage is paid off, I have no car loans, and I own everything I have free and clear.

[MilesTeg]

One of the longest running debates on this forum (and in personal finance generally) is the investing vs. debt payoff topic.  I have generally subscribed to the long term view, that it is better to carry low interest debt and invest as much as you possibly can.

But I'm not going to lie, this complete economic shutdown has the possibility of changing my opinion.  My wife has basically lost her job, but luckily, we live well under our means, my income should cover *most* of our expenses (not quite 100%), and we have a decent cash reserve.  But man, I would feel so much better right now if we were not carrying any debt.

I have a mortgage at 3.625%, a car loan on a used Honda at 1.99%, and my student loans at roughly 6.05% (combined).  I've basically always chosen investing over paying these off, so now my debts are approximately $2,600/month.

If we did not have that debt, our monthly expenses would be about $2,100 per month.  My take home pay -- even maxing deffered comp -- would basically cover this.

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 went through this in '08-'09. I was pretty heavily exposed on debt (condo, car, school loans) and all my investments were in stocks (incl. index funds). Truth be told if I had lost my job I would have been in deep shite.

What that taught me was what my current debt strategy is:

* Never go all in on stocks. You NEED a big EF or a reserve of stable investments (bonds, CDs, etc.).
* Never acquire so much debt that you can't handle the debt load + minimal living expenses with a very low end income.

Right now, we have a two income household with two high demand fields, which realistically provides us with a fairly high capacity but it was much less in the old days.

No, this is not the mathematically optimal long term strategy in most cases. But, when the shit hits the fan like it does now it provides us with the security to know we won't likely have to take a huge financial hit selling off depressed equities/etc. to keep the lights on. And, as usual with the TSHITF, everything goes at once (stocks, real estate, employment opportunities, etc.)

[MilesTeg]

Personally, I prefer the no-debt way of doing things. But some people don't and that's fine, as long as they aren't snobs about it :-). Honestly, though, this event is a black swan, and the low-interest debt method is still very likely to be statistically sound. It could still be worth it for someone IF they have continued employment or cash reserves to pull them through, or just a huge stache. But we all take risks in life. Just because this one (keeping low-interest debt) will bite some people in the butt doesn't mean it's a bad thing to do, it's just nobody really saw something like this coming. You could have prepared your entire life for 'the virus' and then died last year and never saw it. That's how rare this sort of thing is, so I don't think this proves that methodology wrong by any means.

I don't agree with "this kind of thing" being rare. While the cause is different each time, everything tends to go to hell in a hand basket about every 10 years.

just things in my lifetime:

S&L crisis in the 80s
Black Monday
dot com boom
great recession
now covid-19

[MilesTeg]

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.

[Psychstache]

A MASSIVE consideration here is that people have different levels of job security. I have a bachelor's degree that is different from the field I work in, but I also have about 7 years of experience in that field. I'm in a much better position than I was in 2008, but I'm not indispensable at my employer. My husband works in the mortgage industry.

If you're in a career in a high-demand field, you can make different choices here than if you're in a service sector or something or you have a riskier career situation generally.

We have a lot of high earners here with many employment options. There is a privilege to that positioning that might allow you to tolerate higher risk.

+1

My feelings about holding debt are completely unaffected, mostly due to the near recession proof nature of mine and my wife's work.

[the_fixer]

Personally, I prefer the no-debt way of doing things. But some people don't and that's fine, as long as they aren't snobs about it :-). Honestly, though, this event is a black swan, and the low-interest debt method is still very likely to be statistically sound. It could still be worth it for someone IF they have continued employment or cash reserves to pull them through, or just a huge stache. But we all take risks in life. Just because this one (keeping low-interest debt) will bite some people in the butt doesn't mean it's a bad thing to do, it's just nobody really saw something like this coming. You could have prepared your entire life for 'the virus' and then died last year and never saw it. That's how rare this sort of thing is, so I don't think this proves that methodology wrong by any means.

I don't agree with "this kind of thing" being rare. While the cause is different each time, everything tends to go to hell in a hand basket about every 10 years.

just things in my lifetime:

S&L crisis in the 80s
Black Monday
dot com boom
great recession
now covid-19

Exactly I started investing in 1999
Dotcom bust
9/11
2008 recession
Now Covid-19


Sent from my iPhone using Tapatalk

[Schaefer Light]

This is also why I have a significantly larger cash 'stache than is recommended here -- BT, DT, don't ever want to do it again.  That cuts down one major worry.

Same here.  I always try to plan for the worst.  Even when times were good, I was thinking about how I would pay my bills in the event I lost my job.

[maisymouser]

Yeah, this situation has made me much more grateful that my partner and I are debt free. I have worried about how paying cash for our house may not have been the most financially strategic decision in the world but the security I have is so much more pronounced emotionally.

[JLee]

People regularly say not to pay off student loans around 6% on these forums. I've seen that countless times. The investment order is "2. pay off any debts with interest rates ~5% or more above the current 10-year treasury note yield."

Over the last couple years, the 10-year treasury yield has been 1.5-3%. So the advice would not implore one to pay off 6% student loan debt if followed exactly.

This downturn/pandemic/crisis has not changed my view on debt because I already was on the side of prioritizing debt payoff. We only have the mortgage at 3.375%. And we bought a lot less house than we could have intentionally both to have less leverage against us and to hedge against financial crisis.

I'm 30. It took me months to find an $8/hr part time job when I was in college during the great recession. My husband experienced three months of unemployment back in 2015. We have a very low risk tolerance.

Now, the key for us was that we attacked our 54k in student loan debt incredibly aggressively and never bought anything on credit ever. Then we didn't allow much lifestyle inflation and turned quickly to ramping up retirement. So paying off debt created our discipline and then we turned that discipline to saving aggressively and it only delayed our savings by 21 months.

We feel good about having as much cashflow freedom as possible all the time, but especially these days.

That's the rate to pay off before maxing tax-advantaged retirement accounts.  For investing past tax-advantaged accounts, it's 3% above the 10yr yield (#7).

[wellactually]

@JLee yeah, I get that. The second poster questioned if anyone on this forum has advised people to not pay off 6% loans ahead of investing. That’s literally the order of investment if you follow it to a tee, so yes, people have advised that posters invest before paying off debt at that rate.

[FIPurpose]

@JLee yeah, I get that. The second poster questioned if anyone on this forum has advised people to not pay off 6% loans ahead of investing. That’s literally the order of investment if you follow it to a tee, so yes, people have advised that posters invest before paying off debt at that rate.

I was only considering post tax-advantaged accounts money. OP seemed to be implying that they were already maxing out those accounts and was placing extra money into a regular brokerage. Should've been a bit more specific.

[former player]

Personally, I prefer the no-debt way of doing things. But some people don't and that's fine, as long as they aren't snobs about it :-). Honestly, though, this event is a black swan, and the low-interest debt method is still very likely to be statistically sound. It could still be worth it for someone IF they have continued employment or cash reserves to pull them through, or just a huge stache. But we all take risks in life. Just because this one (keeping low-interest debt) will bite some people in the butt doesn't mean it's a bad thing to do, it's just nobody really saw something like this coming. You could have prepared your entire life for 'the virus' and then died last year and never saw it. That's how rare this sort of thing is, so I don't think this proves that methodology wrong by any means.

I don't agree with "this kind of thing" being rare. While the cause is different each time, everything tends to go to hell in a hand basket about every 10 years.

just things in my lifetime:

S&L crisis in the 80s
Black Monday
dot com boom
great recession
now covid-19

Exactly I started investing in 1999
Dotcom bust
9/11
2008 recession
Now Covid-19


Sent from my iPhone using Tapatalk

I've lived through all of these too, and none of them had any effect on my personal finances because I had a secure job, a manageable mortgage (after the first year which was a bit tight), no other debt ever, no need to sell my house in a downturn and now a secure pension.  I'm happy to admit that there was some significant luck in being born where and when I was, but it has also been about choices made and with a fair number of unfavourable tortoise/hare comparisons having been made in the boom times.

[Michael in ABQ]

Nope, because I have always been more of a proponent of paying down debt as aggressively as one can while still investing as well.

And yeah, my mind is much more at rest during this turbulent time knowing that my mortgage is paid off, I have no car loans, and I own everything I have free and clear.

Same. Been debt free for several years with the exception of small balances on CCs that get paid off monthly. Very happy with that decision over investing it.

At the end of the day the only things I have to pay are rent and utilities. Every other recurring expense could be cut off tomorrow and we'd be fine. Granted, rent and utilities are still about $2k a month and we generally spend well over $1,000 per month in groceries (family of 8). But when we were still in debt $30,000 or so 5-6 years ago the minimum payments on student loans, a personal loan (refinancing a student loan), a car loan, and some minimal credit cards was probably $800 per month.

[FLBiker]

I've always (43 years old) been in the invest and keep low interest debt (<~4%) camp.  I wouldn't say this has changed my opinion, but I would say it's made me take emergency funds more seriously.  Fortunately, we have a big (for us) one right now because we're planning an international move in the next few months (US to Canada).  (Obviously, moving has gotten a bit more complicated, but that's a separate conversation.)  We have ~6 months in our EF (maybe more like a year if we really tightened up), plus we recently got approved for a $80,000 HELOC (with the plan to use that for the down payment on our new house) which would cover us for ~ a year and a half.  I feel better having those in place, and those aren't normally there (we typically have more like 3-4 months in our EF.

I always kind of shorted our EF because we both have had very stable jobs (the move has made these much less stable) and also sizeable 457s (deferred compensation).  However these 457s are 90% stock, so drawing from them now wouldn't be ideal.  Although, looking at mine, I haven't lost a ton - I started doing it in 2016, I've put in ~$79K and it's currently at $76.4K.  Still, the plan is to leave that alone until retirement (since it's pre-tax w/o an age limit).

I still don't plan to pay down our debts any differently, HOWEVER I will revisit that as we transition to FIRE.  The move will likely change this timeline a bit (as might the recesssion) but we're expecting that in 5-7 years.

[wellactually]

I was *this* close to finally convincing DH to move our EF from our regional bank making less than 1% interest to either a credit union money market or (my preferred choice) an online savings account like ally. He has always resisted because he doesn't like the idea of having to wait a day for a fund transfer. We have a credit card with $15k available limit and I even tried to suggest we keep $5k in the local bank savings and $10k with ally.

Now, he wants to up the EF from $15k to $20k and keep it all in the local bank equivalent of "under the mattress." Our current bare bones expenses are about $1700/month. Expecting to add $1100/month in daycare/baby expenses this summer, but that would not be a factor if one of us lost our job. So we'll have almost a year of expenses saved. Oh well.

But there are hundreds of worse financial relationship issues than having a spouse who wants to save more cash!

[Rosy]

This is also why I have a significantly larger cash 'stache than is recommended here -- BT, DT, don't ever want to do it again.  That cuts down one major worry.

Same here.  I always try to plan for the worst.  Even when times were good, I was thinking about how I would pay my bills in the event I lost my job.

Yup - while I believe in saving/investing alongside paying off debt, because it puts one in a better position than only focusing strictly on paying off debt stat:
I am at heart in the camp of living debt-free.
It is a difficult balance to find and it takes a while to be financially secure but with determination, it can be done.

We are debt-free, cars and home paid off and there is no question about paying our monthly bills - even if this virus trouble lasted 18 months or more.
We are currently in the happy position to have socked away enough cash to let the investments ride and do whatever.

There are tough times ahead of us.
I am retired but Mr. R. has a job in an essential industry so that helps of course. Timing and circumstance do matter in a crisis like this.
Had this happened five years ago I would be singing a different song.

So the answer to the OP is a definite NO - nothing will change how I feel about debt - debt makes you prey and limits your options.

[StarBright]

I would say that we are sort of in between the pay off early and don't pay off at all folks. I have a big need for safety and I am pretty happy with how we've got things organized right now.

We took a 30 year mortgage, but pay it like a 15. If SHTF then we can pay the 30 year payments and they are very manageable.

We don't quite max our retirement accounts - but come close. We have two young kids and some health issues so we are always a little more careful about cash flow.

We try to keep a slush fund/E-fund at 6 months barebones expenses. But also use it for things like car and home repairs. Extra money goes into this fund and if it gets higher than a certain amount then we make bulk transfers over to Roth IRAs.

If SreallyHTF - then we have a nice amount of money deposited to Roths since the early aughts and we could withdraw that in case of a true emergency.

It might not be perfectly optimized, but we are set up to have our house paid off before our kids go to college, we regularly save a chunk of our income towards retirement and we could probably go for at least a year with no jobs.

I think crises (crisises?) are good at letting you know what you can handle. We got hit pretty darn hard in 2008 and I knew I never wanted to feel like that again. No amount of mathematical persuasion (right though it may be) is going to top my emotional comfort. The way my gut is reacting to this pandemic crisis is telling me that we have been handling our finances in the way that makes us feel most comfortable. It is good to know yourself.

[dizzy]

Yeah. My boyfriend quit his job, last day of work 2/28.  Now all of this has happened and he is truly freaked out.  He lives relatively frugally but always did a 9-5 normie job.
I've always been a hustler and at least some, if not all (now) self-employed, so I've been keeping myself busy doin bank bonuses, bike delivery, rando apps, surveys, etc.  I'm pretty calm in stressful situations so ok despite being low income, it's the norm for me.

I decided I'll suck it up and live with him rent-free as he's offered once my lease is up in june.  Just 1 more rent payments for me.  I HATE the commute and location (house itself is ok, obviously the bf is amazing) but this whole situation has made me realize I want to be FIRE asap and also help him too.  Of course I will contribute to household expenses, but we discussed this and since house is in his name and he built the equity he feels he would be most comfortable paying it himself.

[Luz]

I've always been very cautious about debt because I saw as a kid how easily it can rob you of your freedom.

My husband and I are low-income and in the start on our path to FI. We have only part of an EF saved. We have a toddler and are expecting a newborn this summer. There's a good chance both of us will lose our jobs in a few weeks.

But aside from paying for the true necessities (keeping our 420 sq ft roof over our heads, making sure everyone is fed, buying soap and toothpaste) we have no obligations and I can't tell you how freeing that is. In preparation for what might happen this year, we're making do on $1,300 per month and could whittle it down to closer to $1,000 if need be, without feeling truly deprived. We're not touching our investments and I'm hoping to be in a position to focus heavily on them with any extra money available.

I don't care about the math and how to best leverage our money. The freedom and peace of mind with little overhead is too sweet for me. To live this close to the edge yet still sleep soundly at night in the face of a huge economic crisis has been amazing!

[thesis]

Personally, I prefer the no-debt way of doing things. But some people don't and that's fine, as long as they aren't snobs about it :-). Honestly, though, this event is a black swan, and the low-interest debt method is still very likely to be statistically sound. It could still be worth it for someone IF they have continued employment or cash reserves to pull them through, or just a huge stache. But we all take risks in life. Just because this one (keeping low-interest debt) will bite some people in the butt doesn't mean it's a bad thing to do, it's just nobody really saw something like this coming. You could have prepared your entire life for 'the virus' and then died last year and never saw it. That's how rare this sort of thing is, so I don't think this proves that methodology wrong by any means.

I don't agree with "this kind of thing" being rare. While the cause is different each time, everything tends to go to hell in a hand basket about every 10 years.

just things in my lifetime:

S&L crisis in the 80s
Black Monday
dot com boom
great recession
now covid-19

I was referring to a global pandemic that tears through the population and has the potential to kill millions of people. It happens every great now and then. But I get what you're saying :-)

[MrGreen]

There's just something innately freeing about knowing you are beholden to no one. I know that doesn't get you the best ROR but damn that's a good feeling.

[clarkfan1979]

The COVID-19 has reinforced the strategy of having cash reserves. The debt part doesn't bother me. However, I guess it depends on what kind of debt you are referencing.

I have 1.1 million in real estate debt, which does not bother me. However, the reason it doesn't bother me is because I have 52K of cash reserves. Because the government is printing money in dealing with the COVID-19, we are going to get inflation. After the pandemic, assets are going to climb again. This will unfortunately make it more difficult for first time home buyers. However, for people already in the real estate game, they are going to buy re-fi and buy more.

This will continue to build the divide between the rich and the poor.

[LightStache]

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.

It really depends on the long term strategy and the loan rate. For instance, if this car loan was 8%, then in all cases you would want to make incremental loan payments.

Or if someone is paying off large SLs to qualify for a mortgage in <5 years, then it also makes sense to max the SL payments to get the house sooner.

I have a moderate amount of debt and keep six months of reserves that make ~1%, so when a loan hits less than six months to maturity, I'll pay it off.

Every once in awhile I get tempted to pay off my SLs (1.79%) and car loan (2.25%), but when I run the analysis and see the reduction in my NW ten years down the line, I decide not to do it.

While I definitely don't enjoy having debt, I enjoy working a corp job even less. Since the former will help me with the latter, I'll keep the leverage.

[SotI]

I am not FI, yet, but my attitude to debt has not changed: The statement below summarizes my stance, as well.

Same here.  I always try to plan for the worst.  Even when times were good, I was thinking about how I would pay my bills in the event I lost my job.

For the time being, my job seems secure (at least for this year, it seens). Still, preparing for the worst is second nature for me.

Fortunately, no debt, paid off home, sufficient EF plus job security just leaves health to watch out for atm. Considering the impact of long-term stress on health, this is as good as it gets for now.

[frugaldrummer]

This question came up recently for my sister. Unexpectedly widowed, she had a choice - pay off her home mortgage of $100k or keep $100k invested. She chose to pay off her house, reasoning she could live on her secure day job earnings if she didn’t have a mortgage payment, even if she lost her second part time job.

Less than two months later, the market has tanked and the store where she worked her second job is shuttered. Her day job, secretary at a school district , is secure - and she is happy with her decision. She knows that even if she lost her day job (not likely) she could squeak by on unemployment. She has peace of mind and that’s priceless.

[SwordGuy]

All things in moderation.

It's not that you have debt that's bothering you, it's the AMOUNT of debt payments.   Would you be having this concern if you owed 1/2 as much each month?

An affordable bit of low interest debt, like a long term mortgage for something that you need anyway (shelter), is a great inflation hedge.   It provides many benefits.    But saying, oh, if that's true, then a multi-million dollar McMansion would be even economically better is false reasoning.   

A cheaper house or a cheaper car, or driving the old car into the ground while you save for a new car in cash, might have been one way to avoid this.   A house that had a rentable area separate from the rest of the house might have been another.

Anyway, it sounds like you've got a stash that will last you a goodly while so you should be able to ride thru this.

[NorCal]

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.

[wellactually]

Just throwing it out there on the "paying off half the debt aggressively is worse than investing and paying it on schedule" thread...

When we paid off my husband's federal student loans, we left it on a standard 10 year repayment and then just paid the most we could each month. Because of the structure of those loans, that basically just prepayed future months of the payment plan. So if at any point in our payoff we had faced financial struggles, we could have gone years without paying on those loans and never been in default. But paying them early did lower the monthly interest regardless. The ten year repayment amount was about $850/month, so not insignificant from a tax-flow perspective.

[thesis]

This question came up recently for my sister. Unexpectedly widowed, she had a choice - pay off her home mortgage of $100k or keep $100k invested. She chose to pay off her house, reasoning she could live on her secure day job earnings if she didn’t have a mortgage payment, even if she lost her second part time job.

Less than two months later, the market has tanked and the store where she worked her second job is shuttered. Her day job, secretary at a school district , is secure - and she is happy with her decision. She knows that even if she lost her day job (not likely) she could squeak by on unemployment. She has peace of mind and that’s priceless.

+1

There are times when it makes sense to keep the debt, but stories like this are a reminder of how unexpected life can be. For so many people, a paid off house is a huge victory against the craziness of life, and that's why I will always lean toward paying the house off.

[Laura33]

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?)

Why?  I don't follow.  Shouldn't I be comparing it to what I would otherwise do with the money?  Assuming my current allocation suits my risk tolerance, of course.  In my case, my money is in funds or cash, and most of my funds are largely total-market-based -- so assume for discussion that I'm 80% stock, 10% bonds, 10% cash.  So if I would use the $ to increase my cash 'stache, then paying off debt is a better deal; if I would throw it in VTSAX, then investing is a better deal; or if I do what advisors suggest and invest in a way that maintains my desired asset allocation, then I'd think the comparison would be the expected overall return from my portfolio, using the weighted average of each asset class.  (And considering what's happened to my funds over the past month, that might require throwing everything into VTSAX anyway to get back anywhere near my 80/10/10 split).

In reality, though, I have two mental buckets:  the "giant pile o' cash" bucket, and the "throw everything else into the market" bucket.  Once the first bucket is sufficiently filled to assuage my bag-lady anxiety, everything else goes into VTSAX.  So if I were to have an unexpected infusion of cash right now, it would go into VTSAX.  Which, I think, makes the comparison to stock returns appropriate.  YMMV of course.

[Cranky]

No matter what happens in the long run, I can’t tell you how great it feels to be debt free right now, except...  great. Very great. Worst case, my kids move back home and we all squash in here and get on each other’s nerves, but we’ve got a roof over our heads.

[LWYRUP]

It didn't change the way I feel about debt, but it has reminded me of it.

I have a mortgage at 3.5%.  It's fine.  I'd rather not have it. 

I've never had an interest in leveraging up to a bigger mortgage to buy more property.  Today's debt is the most principal residence debt I'll ever have.  Next month will be second most.  And so on, until I'm done and then it's cash from there on out. 

[MaaS]

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.

[John Galt incarnate!]

Nope, because I have always been more of a proponent of paying down debt as aggressively as one can while still investing as well.

And yeah, my mind is much more at rest during this turbulent time knowing that my mortgage is paid off, I have no car loans, and I own everything I have free and clear.

I don't like debt so Kris and I are in accord and consequently, in the same no-debt  position.

I've never understood the imperiousness of some  who occupy the  DPOYM camp.

Freedom to choose means choosing  options that maximize one's satisfaction.

I think America is on a one-way freight train hurtling toward  an economic depression so my no-debt position  results in deep and peaceful sleep.

[John Galt incarnate!]

This question came up recently for my sister. Unexpectedly widowed, she had a choice - pay off her home mortgage of $100k or keep $100k invested. She chose to pay off her house, reasoning she could live on her secure day job earnings if she didn’t have a mortgage payment, even if she lost her second part time job.

Less than two months later, the market has tanked and the store where she worked her second job is shuttered. Her day job, secretary at a school district , is secure - and she is happy with her decision. She knows that even if she lost her day job (not likely) she could squeak by on unemployment. She has peace of mind and that’s priceless.

Hear, hear!