Get Out of Debt!

One of the first pieces of advice a number of writers addressing the topics of peak oil and economic collapse offer is that individuals need to get out of debt (for instance, this is listed as the first recommendation on the front page of Seattle Peak Oil Awareness's website). This is the first step in disentangling yourself and your family from the financial economy, which is clearly heading for collapse according to practically anybody who has taken a serious look at our predicament and has been willing to follow the facts to their logical conclusion without flinching.

In this post, I offer some practical advice as one's financial situation can be improved to cope with the challenges of financial collapse. Please keep in mind that I am not a financial planner of any sort, and if one was to look at my own financial situation, I would not exactly be a stellar example of how to manage one's finances - though perhaps I have learned some of the lessons better by learning them through the school of hard knocks. Some of the advice I offer here may contradict the conventional wisdom of financial planners. I try to explain my reasons for why I make my recommendations.

In short, I will claim that this advice is worth no more than you paid for it.

First, most financial planners will emphasize "pay yourself first". That is, before one does anything else with a paycheck, put a certain amount each pay period into savings. Then forget that that savings exists, unless there is a bona fide financial emergency. No matter how bad one's debt situation is, everybody needs to have some kind of emergency savings, because nobody knows what will happen.

After paying yourself first, Saturday Night Live tells us how to avoid getting deeper in debt:


Got that? If not, please watch the video clip again. Repeat until it sinks in.

Next, the debts need to be paid off. Hopefully you can make more than the bare minimum payments on your debts. So after every debt gets the minimum payment, which debts should be paid down first?

This is one point where I diverge from conventional financial planning. Conventional financial planning dictates that the highest interest rate loans should be paid off first, as that will yield the quickest total payoff time. I however, look at the possibility that financial catastrophe (such as losing one's job, and not being able to find another one for a long time (i.e., longer than one's savings will last), a phenomenon which has become increasingly common) could strike at any time, and result in inability to pay any debts down and the possibility of delinquency and/or bankruptcy. With that possibility in mind, I emphasize the necessity to pay off the debts that will cause the most havoc if one becomes delinquent on them in a financial emergency first.

Student loan debt, by my standard, is the most toxic, simply because it cannot be discharged in bankruptcy, and if one is delinquent on student loan debt, wages and tax returns may be garnished and all other sorts of methods legally employed to make it a problem that will never go away. Pay student loan debt off as soon as possible.

Getting rid of the mortgage is the next priority. If you have significant equity, then pay it off as soon as possible; if not, sell your house and rent. (For more discussion on renting vs. buying, Seattle Bubble frequently discusses this and related topics.) Do not, under any circumstances, justify your being in debt to own a house as "an investment". Housing is an expense, not an investment, and house-owners have all sorts of financial headaches that renters need never deal with, and even with the current prices having dramatically fallen, renting is usually cheaper than paying a mortgage on an equivalent house. Also, it is much simpler to pick up and leave if you need to. I once listened to a debate between two individuals arguing about whether we are facing severe inflation or severe deflation in the near to medium term (a debate I am agnostic on), and I was struck by how both insisted that owning residential real estate is going to be a losing proposition for the foreseeable future. In short, if you can't own a house free and clear within a reasonable time frame, it is my considered opinion that you are probably better off renting.

Next up are secured loans that have as collateral anything (such as a vehicle) that would be catastrophic to have repossessed if you were unable to pay down your debts. In future posts I will discuss vehicles and how many people truly need.

The last priority to pay off are unsecured debts. Simply put, in the event of financial catastrophe (as described above), the inability to pay off unsecured debts won't matter. So even though these have higher interest rates, they may not be much of a priority.

As with all financial decisions, individuals and families should consider information and advice from more than one source, and make plans that are tailored for their individual situation. My word certainly should not be the last word.

In future posts, I will offer more ideas on ways to save money, definancialize your life, and possibly reap some benefits (expected or otherwise) from depending less on money to meet one's needs.