Simplistic ? about inflation

[amy g.]

We have always been a save and pay cash type of family. We don't have debt other than our mortgage, and we have several streams of income that are stable and ample for our lifestyle.

 

There are some big projects that I've been saving for, such as a few more acres of land, and a whole house remodel.

 

Now, Dh thinks that since future inflation is likely, it might be better to borrow money for the things I'm planning. He said that we would be repaying with dollars worth less than the ones we borrowed.

 

Does it make sense to borrow rather than save during times of inflation?

[Carol in Cal.]

Sometimes, but usually high interest rates accompany inflation in which case it can make it into a really bad deal. Because there are multiple competing factors, it can be hard to predict which way it will go.

 

Another factor to consider is that many people think that land and housing are still going to drop further in price, inflation or not. If that happens, it might be better to wait.

 

My inclination, if I were doing what you want to do, would be to borrow the money now if I could get a very low fixed rate with payments I could easily handle, and start looking aggressively for the land, etc. that I wanted to purchase, so that I would be positioned to pay cash for it. Then I would bargain pretty hard, because a buyer with cash in hand has significant value.

[Mama Geek]

There is also speculation that deflation will come after inflation. Going into debt now is more risk than I am willing to take.

[amy g.]

My inclination is that it is never a bad idea to save and just pay cash. It's hard to imagine how we can go wrong doing that.

 

I was wondering if there was something I was missing.

 

The land I want is next door and undeveloped. It's not for sale, but I intend to make the owner a cash offer and see what she says.

 

We plan to stay in this house forever. Some improvements like spray insulation and new windows will start saving us money right away. Others are purely for my own enjoyment. I'm not looking at a new kitchen as an investment, but more like others might look at money spent on a vacation.

[TechWife]

My opinion is that it's better to pay cash than to go into debt. Especially when this debt would be totally unnecessary. You would end up paying the loan with the money you have saved, but it would cost you more because you would be charged interest.

 

We updated our house this year & paid cash for it. It was money well spent and we will get years out of our investment.

[StephanieZ]

NO!

 

Keep doing what you're doing. Absolutely! Paying in cash is so much smarter on so many levels.

[Mama Geek]

The one time that it pays to be in debt is when there is inflation AND when wages are likely to go up as well. I have family that did this in the 70's. They bought land on credit and it wasn't very many years that wages and inflation gained enough that the debt became minor and they were able to pay it off.

 

I don't think that wages are going to go up in this period of inflation.

[amy g.]

I understand what you are saying about wages, but we also have income from natural gas royalties.

 

Natural gas prices are down now, I don't really know if they will be going up any time soon.

[jld]

Not everyone is convinced we are headed for inflation. Paul Krugman seems more concerned about deflation. You may want to check out his columns in the New York Times, or even his blog. I think he had something on inflation on his blog just in the last few days.

[amy g.]

Thanks.

 

I'll do that.

[jld]

You're welcome. :)

[KingM]

Have you ever heard someone say, "My one regret is that I didn't buy more stuff with borrowed money?"

 

No, and there's a reason.

[Gooblink]

:) I've been thinking the same thing. For real estate, it might make sense, especially with a fixed interest rate.

 

Not for unsecured debt.

 

Must my 2 cents.

[Sahamamama]

He said that we would be repaying with dollars worth less than the ones we borrowed.

 

Ask your husband, "How much less would the dollars need to be worth to (1) off-set the risk and (2) off-set the interest?" ;) HTH.

[plimsoll]

Have you ever heard someone say, "My one regret is that I didn't buy more stuff with borrowed money?"

 

No, and there's a reason.

 

Only people in government. (Sorry - I couldn't resist.)

[KidsHappen]

Well, there are a few problem with this idea. First of all, if you are going to use credit, interest rates are also going up so the increase in interest will negate the lower cost of future dollars. Second potential problem is that if you use cash now and then there is a real collaspe later, you may not have what you need in reserves. The only way that this would be a good idea is if you are going to use cash and your have plenty of it.

[jld]

Paul Krugman mentions the concern about inflation in his column today (Monday, 8 Nov.). Just fyi.

[plimsoll]

If you can afford to pay cash, I would recommend it.

In my mind, debt is only justified if (a) you cannot afford the full cost and have a reasonable expectation of being able to pay back the loan, or (b) the loan would allow you to purchase some asset that produces enough cash flow to cover more than the cost of the loan.

[Guest alexmor]

There's been a ton of discussion about how Americans do not save enough cash. While it is certainly true that careless spending is negative, what a lot of people don't comprehend that they actually lose cash if they save it. The reason has to do with inflation, which makes most savings accounts almost unnecessary to have.

[Mama Geek]

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