Arkady
President
In another thread, there was a mention of the "No More Debt" movement. I've got a number of Facebook friends who post often about it. For those unfamiliar with it, it's a movement, with an almost religious tone, to help people get out of debt and then swear off it forever. Dave Ramsey is a prominent figure in the movement. It has some conservative/libertarian/evangelical affiliations, but it's not overtly political or religious in itself. In fact, although I never was involved in the No More Debt community, nor followed their guidance, I had similar goals of my own, and I can proudly say I'm now out of debt.
For me, it stemmed from being traumatized by debt at the start of my career, and deciding to get to a place where I'd never face that again. When I got out of law school, I had $120,000 worth of student loan debt, at a rate of around 9%. It was a bit like having bought a house, only without it giving you a place to live, and without the tax advantages of mortgage interest (student loan interest isn't deductible above a certain income level... bizarrely, a wealthy person can write off interest on a yacht, but not on his education), and with no possibility of getting away from that debt (even bankruptcy doesn't clear it). At first, I was able to pay without too much strain, but then I left my job because the company was relocating, and the minimum monthly payment started to consume my whole income, leaving nothing for food and housing. My parents were able to help me make ends meet for several months, before I hooked up with another job that paid well (letting me pay my parents back), but it was a humiliating and nerve-racking time, and it burned a hatred of personal debt into me.
So, several years ago, I finished paying off that student loan debt, a few years ahead of schedule. Then I paid off my cars, and have been buying with cash since then. Then, finally, I went to work on the mortgage. Since my rate was low, I didn't pay it off directly, but rather put the money into an investment account that was outperforming the mortgage interest rate. But at the end of March the value of the investment account exceeded the balance of the mortgage, so I liquidated those assets and paid off the house. Financially, I'd have been better off if I just kept riding the market up. Paying off the house probably cost me tens of thousands of lost investment returns, which is far more than it saved me in mortgage interest. But I still feel good about the decision. It's a nice feeling to know my wife and I could both lose our jobs and yet still we'd be fine for years, because we have no debt obligations and our housing is "free" (other than taxes, maintenance, utilities, and insurance).
The only bad thing is I wiped out much of my emergency funds, in the process, and now I have to restore those. It's not a huge risk, since I have credit cards I could tap in an emergency, plus home equity. But I think it's good practice to have enough cash to cover a few months of expenses, and we don't have that right now.
Of course, on a national level one of the problems we have is that too many people think like me. When the majority try to put their fiscal house in shape at the same time, by reducing spending, you get a recession. That's pretty much what a recession is. Although it's perfectly rational for each individual, collectively it's a problem. One person's spending is another person's income, so it's impossible for everyone to pay down debt at the same time -- as one person does so, someone else loses the corresponding income and falls farther into debt, and the economy as a whole shrinks from the reduced economic activity. That's where the government comes in. It can create inflation to encourage people to spend, and it can spend itself, countering the private sector austerity and preventing a self-reinforcing negative cycle, or bumping the economy out of a rut if it's already there.
For me, it stemmed from being traumatized by debt at the start of my career, and deciding to get to a place where I'd never face that again. When I got out of law school, I had $120,000 worth of student loan debt, at a rate of around 9%. It was a bit like having bought a house, only without it giving you a place to live, and without the tax advantages of mortgage interest (student loan interest isn't deductible above a certain income level... bizarrely, a wealthy person can write off interest on a yacht, but not on his education), and with no possibility of getting away from that debt (even bankruptcy doesn't clear it). At first, I was able to pay without too much strain, but then I left my job because the company was relocating, and the minimum monthly payment started to consume my whole income, leaving nothing for food and housing. My parents were able to help me make ends meet for several months, before I hooked up with another job that paid well (letting me pay my parents back), but it was a humiliating and nerve-racking time, and it burned a hatred of personal debt into me.
So, several years ago, I finished paying off that student loan debt, a few years ahead of schedule. Then I paid off my cars, and have been buying with cash since then. Then, finally, I went to work on the mortgage. Since my rate was low, I didn't pay it off directly, but rather put the money into an investment account that was outperforming the mortgage interest rate. But at the end of March the value of the investment account exceeded the balance of the mortgage, so I liquidated those assets and paid off the house. Financially, I'd have been better off if I just kept riding the market up. Paying off the house probably cost me tens of thousands of lost investment returns, which is far more than it saved me in mortgage interest. But I still feel good about the decision. It's a nice feeling to know my wife and I could both lose our jobs and yet still we'd be fine for years, because we have no debt obligations and our housing is "free" (other than taxes, maintenance, utilities, and insurance).
The only bad thing is I wiped out much of my emergency funds, in the process, and now I have to restore those. It's not a huge risk, since I have credit cards I could tap in an emergency, plus home equity. But I think it's good practice to have enough cash to cover a few months of expenses, and we don't have that right now.
Of course, on a national level one of the problems we have is that too many people think like me. When the majority try to put their fiscal house in shape at the same time, by reducing spending, you get a recession. That's pretty much what a recession is. Although it's perfectly rational for each individual, collectively it's a problem. One person's spending is another person's income, so it's impossible for everyone to pay down debt at the same time -- as one person does so, someone else loses the corresponding income and falls farther into debt, and the economy as a whole shrinks from the reduced economic activity. That's where the government comes in. It can create inflation to encourage people to spend, and it can spend itself, countering the private sector austerity and preventing a self-reinforcing negative cycle, or bumping the economy out of a rut if it's already there.
