Pay Debt or Stockpile Cash?

[CWMan]

I can't reason my way through this question... When I run the amortization schedule and see the amount of interest I will pay over the course of my loan, I'm compelled to pay as fast as I possibly can.

On the other hand, I'm not able to take advantage of opportunities that arise without cash on hand.

Where do you stand?

 

[rph9168]

No easy or really correct answer based on your circumstances. There are probably people that better understand the consequences of each scenario here on the forum but here is my take.

In recent business articles, conversations with mortgage brokers and money men it sounds very much that even before the recession winds down we will be faced with serious inflation if current government plans are fully implemented. On one hand you would be paying off loans with inflated dollars and on the other the money you hold on to will be worth less. The general consensus as I understand is to go with the loan and manage your capital to minimize the effect of inflation.

 

[dclark3344]

Great Question

I too am trying to figure out what to do. I sat across RPH at the forum dinner in Las Vegas and really enjoyed picking his brain.
What I am doing is paying off what I can and staying leveraged as much as possible on the assets I can not pay off. I do not want to have an asset 75% paid off and then the bank take it from me if times get as hard and I think they will. I agree with RPH in that we are going to have to have sever inflation to pay off this gigantic government borrowing. I like to have my money in real estate in the right location, this way no matter what happens I do have a commodity that has some physical value. My mentor put his in a very nice boat house, this gives him a great escape place that will float in a flood, a place to fish, ski, lounge, and play in the water.

 

[CWMan]

The benefit of paying debt with inflated dollars is only realized on the amount that inflation is greater than the iterest rate on the note... right?

And, holding cash will cause it to de-value only by the amount that inflation is greater than the earned interest rate on savings / CD's etc...?

Doesn't that mean that inflation has to get out of control (above 10%) for it to even be a factor? Is my thinking on this flawed?

 

[Bubbles Galore]

Watching.....

 

[soapy]

If you look at what Ford did in 2007 and early 2008 they mortgaged everything they had to stockplie cash. Chrysler and GM did not leverage their assets before the economy took a downturn. FOrd is still in control of its destiny while the others can't mortgage their assets and have to go to the government. In this economy I think I would keep hold of all the cash you can.

 

[Sequoia]

Cash

I'm going to disagree with staying in debt to hoard cash.

1. Getting out of debt, or getting into less debt, has quantified benefits. Easy to calculate. Holding cash for some future adventure is ... dubious.

2. You have a choice. Keep all the wash profits, or keep part and send some or much of it to a lender. Thanks-- I'll keep it all.

3. You can pocket all the wash profits and build a kitty for new adventures. If your kitty is short-- then take out a loan but *only* if the cost of money is worth the debt. So the opportunity has to exceed the risk.

4. Finally, do you want to sit on $100k, $200k, or whatever and watch the upcoming tide of inflation cut it in half or more? No thanks.

My .02 cents.

 

[rph9168]

I am not a fan of hoarding cash over extended debt as well. I also think there is certainly value in owning your wash and being able to increase gross profit by doing so. If you are not able to do that securing a loan during a recession and keeping as liquid possible is a decent strategy against inflation.

 

[Earl Weiss]

Have the best of both worlds. Convert the mortgage to a secured line of credit or get a secured line of credit and use it to pay off the mortgage. (Depends on how your lender works) Be diligent about paying and pay down conservatively. You still have access to funds with regard to the difference between what you owe and what the line is.

 

[IBFLYIN]

My accountant is a 75 year old Jewish man. He says, "Cash is king only after all debts are paid."

 

[robert roman]

Common experience has shown that companies that usually get into trouble are those that are over-leveraged. If a company is carrying too much debt, it will always have trouble responding to recession, increased competition, technological change, etc.

A good example is Checkers Hamburgers. In the beginning, Checkers developed new stores by leveraging debt on the expectation of future sales. The company grew like crazy until the hamburger price wars started. When cash flow dropped, the company had to closed stores left and right.

Several months ago, a local TV reporter interviewed the President of Raymond James Financial in Clearwater about the company's outlook with respect to the recession. The Pres quipped, RJF is going to be fine, we don't owe anyone any money.