About 10 months ago I wrote a post about how some people who couldn’t sell their homes just stopped making payments. I also shared that my relatives who live in Phoenix were planning to do this. I wrote:

They plan to live in their current home for 3-6 months without making any mortgage payments. They will save up some money so they can move. When the bank finally approves them for a short sale — or gives them the boot — they’ll go get a rental somewhere else.

Here’s an update:

My relatives did indeed stop making payments on their mortgage in November 2008. They started getting nasty letters in the mail, phone calls, etc shortly after that. Fortunately, their realtor had prepared them, so they were expecting this and have seemed to handle it well.

Guess what?

It’s 11 months later… and they’re still living in the same house!!

In fact, we drove down to Phoenix this past April and visited them for a week. It was kind of strange at first because I wondered, “Could somebody show up at the front door and just decide to kick us out?”

Of course, that never happened. We had a great visit (with the exception of my youngest getting sick and vomiting).

It’s interesting to talk to my relative about their house. She’s very detached… and really doesn’t care about the house one way or the other. It’s almost like she’s adopted the mindset of a renter… but to a greater extreme.

She views the house as a place to live — but she definitely does NOT feel like it’s her home. And she and her husband are always waiting to find out when they’ll be forced to move.

Not an ideal way to live, but at least they’ve not had to make a mortgage payment or rent payment in 11 months.

You might wonder, as I did, why in the world a bank would let someone “squat” on its property for that long without making payments. Well, here is what I’ve discovered…

Many banks have bad mortgages on their books. But they don’t have to officially record those bad mortgages — they don’t officially get put on the books — until the bank forecloses on the property.

So here you have a lot of banks that are actually delaying or avoiding the foreclosure process so they can make their financial statements look better than they really are.

Crazy, huh?

The banks want to deceive the public, particularly their account holders and share holders, so they can continue to profit from deposits, transactions, and increase in share value.

And so banks are literally giving homeowners a break to maintain as long as possible the deception that everything is okay and the banks are doing well.

If the banks were dealing with only 10 or 20 foreclosures, this would never happen. But they’re dealing with thousands of foreclosures. The problem is so big they can’t deal with it — at least not all at once.

Anyway, that’s the update on my relatives. Still in the same house in Phoenix… still haven’t made a mortgage payment since November 2008. What crazy times we live in!

Example: In the past couple months, we’ve spent $1,000 on homeschooling curriculum, around $400 on new clothes for the kids (since they’ve apparently outgrown all of last winter’s clothes), and $1,200 for fillings of all things.

That last expense was completely unexpected. My daughter came home from the dentist this past summer with not one but six cavities. Don’t ask me how that happened (no soda in the house, few sweets, etc.). She then had to go in three separate times over the summer. They filled two cavities each time.

And then there’s other miscellaneous expenses that have been piling up: renewing our license plates (happens once a year), birthday gifts, surprise doctor visits, etc.

All is to say, it’s been a little bit frustrating lately to keep our spending under control. I guess on the bright side it makes me more sensitive to where our money’s going so I can cut back as best I can. And once we get past the next couple weeks, maybe I’ll be able to look forward to a month or two where we don’t spend as much. :-)

He said, “That’s great, man. If it’s zero percent, that’s the same as cash.”

In a way, it is.

Getting a zero percent loan and making payments against it is the same overall effect as saving that money up and spending the lump sum down the road.

Yes, you may lose out on interest from your savings… so you might argue that you’re losing money by taking the debt.

But on the other hand, inflation greatly outpaces the interest rates offered by banks. The more money the Fed prints, the faster prices rise. This process discourages saving and encourages borrowing.

With a zero percent loan I can borrow money today and pay back the amount borrowed with less valuable money. Yes, I’m paying back an equal amount of dollars, but each one is worth less (or has less purchasing power) than it did when I borrowed the money.

So in a very real sense, a zero percent loan is not the same as cash… it’s actually better than cash.

This is the kind of world most of us live in, particularly in America where the printing presses never stop running. It’s a topsy-turvy world where what should make sense (saving) doesn’t make sense; and where what shouldn’t make sense (borrowing) does make sense.

Thoughts? Leave a comment below.

In the last couple weeks, the prices of gold and silver have spiked significantly. We may see prices of precious metals continue to rise rapidly as the dollar deteriorates.

At what point will the U.S. be forced to default on its obligations to other countries? At what point does the currency become worthless and be replaced by something else?

Just some things to think about.

If the U.S. defaults on its debts, it will practically force the rest of the world into bankruptcy. It will be a worldwide Jubilee of sorts. Or, at least that’s what I’m hoping for.

When this happens, it’s not a good idea to be a creditor. Far better to be a debtor, strange as that sounds.

Not that this provides an excuse to intentionally rack up big balances on your credit cards. Because what I’ve described above may not happen. Time will tell…

Instead of $4 billion, consumer credit shrank $21.6 billion in just one month’s time, “the most on records dating to 1943,” according to this article.

Why such a drastic drop in credit?

With job losses mounting and an uncertain economy, many consumers are canceling cards and voluntarily cutting back. Plus, credit is hard to get these days. And banks and credit card companies are reducing available credit limits in an effort to reduce their exposure.

Of course, reduced credit isn’t good news for the economy because consumer spending accounts for “70% of  economic activity.” But what’s bad for the economy may actually be good for consumers.

Like a forced diet can help you lose weight, so can a forced “debt diet” force you to refrain from spending money you don’t have.

Ryan, just found your blog and am a bit confused. I believe that the scenario in some form as described in “Ushering in a New Era of Hyperinflation” will materialize. Whether it is nasty inflation or hyperinflation, we will see the value/purchasing power of our dollars decreased. It seems that you are focusing on debt reduction. A very noble and valuable exercise but probably not in this paradigm.

May I suggest an alternative approach? Keep your debt. What is the benefit of debt reduction right now? What is your current debt load preventing you from accomplishing? What opportunities are you missing because you a focused on singular goal — debt reduction. What about investing to expand your business? What about investing some portion of your debt reduction funds on acquisition of physical assests such as silver or gold… as a hedge? What about taking on debt backed property?

If inflation happens, savings become worth less and at worse worthless. If inflation is going to occur, then debt-backed properties and physical assets are the way to go. I am not suggesting one extreme or the other. Simply that debt reduction should be balanced with other strategies. The most important issues is to make sure all variable rates are FIXED. Best of luck. Keep the faith, brother.

I’ve been reading and learning about our money system for a few years now (I’m currently reading The Creature from Jekyll Island by G. Edward Griffin), and I’ve been struggling with what to do.

Because, in a way, what might seem logical in an economy with real money is illogical in an economy with fiat money.

The money I have today has more purchasing power than the money I earn tomorrow. Which means there is a strong incentive to spend that money on physical goods now — and a strong disincentive to save.

I distinctly remember when the real estate bubble was expanding in the early 2000s because Steph and I wanted to buy a home for our growing family. But it was insane. Builders were raising their prices by as much as $15,000 every couple weeks.

If you waited two weeks to make a decision, you would have to pay an extra $15,000. But who could possibly save that much money in only two weeks? Because of price inflation, waiting to buy didn’t make a whole lot of sense. (By the way, I still refused to buy.)

We may be on the verge of a similar situation, not just with real estate, but with the prices of everything. If hyperinflation takes hold, we’ll all be wishing we’d spent our money before it became totally worthless.

Assuming hyperinflation is in our future, it makes no sense at all to pay off debt right now. It actually makes more sense to take on debt, then pay it back quickly with worthless dollars.

I’ve studied the history of hyperinflationary situations, and from what I can tell, most people are able to pay off their debts quickly because the money supply is expanding so rapidly.

I know this probably sounds all weird and strange and topsy-turvy — and it is! You can’t think the same way when you’re dealing with a currency that is being devalued as much and as fast as the U.S. dollar.

All is to say, this line of thinking is influencing my decision about whether to buy a new car or not. I have one in mind, and it would make my debt go up quite a bit. But the car manufacturer is offering 0% interest on a 63-month car loan through July 31st.

Question: Do I buy the car using a 0% interest loan? Or do I go with one car for now and continue paying off debt?

Under normal circumstances, the “logical” thing to do would be to pay off debt. But in today’s circumstances, what is normally logical is illogical. And what is normally illogical becomes more logical.

Which is to say I’m leaning toward buying the new car.

Am I crazy? Leave a comment and let me know.

There are a variety of reasons: we moved in May, business has kept me exceptionally busy, and after writing this blog weekly for a year and a half, I think I needed a break.

The break has been good, but because of my silence, I’ve got a lot to catch you up on.

We Bought Furniture

In a previous post, I asked for your input on what kind of furniture we should get. We ended up buying high-end furniture for our bedroom, and some mid-level furniture for the office.

The office furniture is 100% paid for. The bedroom furniture is partially paid for; we financed the balance on a 12-month no-interest loan.

I know… debt went up a little bit (as will be reflected in my August update)… but we had to get furniture. And I preferred to buy something that would last for years.

We Sold Our 2nd Car

After eight and a half years, we sold our Hyundai Elantra with the idea we would replace it with something nicer.

Of course, if we buy another car, that will increase our debt. So I’m a bit torn as to what to do.

Stay tuned.

We’ve Continued to Pay Down Debt

Here are our debt numbers from June and July.

So total debt is well under $30,000 — and credit card debt is well under $10,000.

As I mentioned, our debt has gone up with our funiture purchase, and that will be added in next month.

If my math is correct, that means I’ve paid off $45,192 — 60% of my total outstanding debt — in 18 months.

Depending on what happens the rest of this year, I suppose it’s possible we could be completely out of debt by the beginning of 2010.

At least, that’s the goal.

Here are my latest numbers showing my debt reduction progress during the last month.

Debt Reduction Progress May 2009

The biggest change from last month to this month is that I paid off our Prosper loan, which frees up $287 a month in cash flow.

That’s what I love about paying off debt… each balance you pay off reduces your monthly obligations… which just makes life easier.

Anyway, that’s all for now.

Here’s the story…

On May 2, I moved into a new house. We’re renting it, just like we rented the last one, although this one is a little nicer and more expensive.

In the last house, I used the landlord’s office furniture. I don’t have any of my own. Plus, before we moved, we sold our bedroom furniture (to save the hassle of moving it, and because after 10 years we would like something new/different).

Bottom line: We need bedroom and office furniture, and we’ve been exploring our options.

After researching Craig’s LIst and visiting a few furniture stores, it’s clear there are three different approaches we can take.

Approach #1

• Buy cheap used furniture even if we don’t like it. (Most of the stuff on Craig’s List is ugly, in my humble opinion. Good stuff is hard to find.)

Approach #2

• Buy cheap new furniture. (Poor quality furniture at an attractive price.)

Approach #3

• Buy expensive new furniture. (Built to last with a price to match.)

I suppose each approach has its merits. My natural inclination is to buy something that’s going to last for a long time and hold its value better… something I could give my kids if/when I’m gone.

The only trouble with this approach is the cost. Of course, if you amortize it over the lifetime of the furniture, it’s probably not worth worrying about. But if we go this route, we have to pay for the furniture now — or finance it.

And financing furniture doesn’t really fit in with the goal of becoming debt free.

If there is zero-percent financing (as there often is with furniture purchases), then I might consider partial financing just to spread the cost over 3-6 months.

Unfortunately, with my business, I need furniture now, not later. Same thing with the bedroom. My wife will only tolerate our clothes being piled on the floor for so many weeks.

Ideally, all large purchases would be paid for with cash. And if we didn’t have the cash, we would simply save until we did.

But given the urgency of needing furniture, it’s hard to make a case for waiting. Which then brings us back to the question: Do we go cheap/used, cheap/new, or expensive/new?

What are your thoughts? Leave a comment and let me know…

In fact, paid it off just a few days after my last debt update.

After reviewing my payment history, I discovered I had the loan for just one year and one month. I got the loan in March 2008 and paid it off in April 2009.

With this balance paid off, I’ll have only two outstanding loans left: the USAA credit card and our Honda minivan loan.

I’ll post another update in 10 days or so. Stay tuned!