Tuesday, March 22, 2011

Why pay off a mortgage with todays more expensive dollars?

I believe the US is going to go into a period of extreme inflation over the next few years.

The other day I was asked why would I be paying off my house sooner than needed if I thought inflation is coming, why pay with today's more valuable dollars what you can pay later with less valuable dollars? It is a fair question and deserves a fair answer. The reason basically boils down to I am trying to get my financial house in order before the shit hits the fan.

Although it may be true that in the future I could pay back my mortgage with reduced dollars, if gas is $10 a gallon and food is 3-4x as expensive as it currently is, if everything we buy has risen in price, sure my fixed rate mortgage might not seem like such an expense in comparison, but it may be that so many other things have risen in cost to the point where I can no longer afford my mortgage, no matter how relatively inexpensive to my other bills it has become. My mortgage is one of the few expenses I can pay off now, and this opens that money up for future expenses. Lets say that right now I make $2000 a month, and spend $1000 on mortgage, $500 on home related bills, and $500 on food and luxuries. I am living like most people and it is pretty much paycheck to paycheck. If everything remains constant then I am doing just fine, but what if the price of food and energy goes up and suddenly I need $750 for home related bills like electricity and $750 for food and stuff. I may be able to cut back to some extent, but how much? Could I cut back enough to keep those expenses at my current costs? Maybe I could make more money, but then again maybe not, I am getting older and some of my more valuable skills have lost some luster as technology has made them obsolete. In this scenario I have very little flexibility. Now imagine if I pay off the mortgage expense, I then have an extra $1000 a month in cushion and can absorb even a 100% increase in the cost of everything else. If I am wrong and the inflation does not hit, then I am even better off because I have an extra $1000 a month to invest or do whatever with and my other expenses have not risen. If I am right, I can handle the change mush easier than my peers, who will be scrambling to live a lifestyle even remotely close to what they currently live. I do not see a down side.

I cannot truly predict the future, but I can predict with great certainty that in the future I will need a place to live, I can also predict that the lower my living expenses are the better off I will be. I don't need a magic ball to see this.

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