The question should be: what should I do with those $5000? You could use it to pay off some of your student loan, or you could invest it in something. Now, my assumption is that you don’t know what to invest it in, which is why you are asking us for help. So, I would take Jim Rogers’ advice when it comes to investing money: don’t listen to anyone else and do your own homework. Now, we could tell you to buy gold, silver, oil, or other commodities and they might go up in value, but now the question becomes, “when do you sell?” You won’t know the answer to this. Which is reason more why you should just pay off your student loan. My suggestions in addition to this are: move to Asia, marry someone wealthy, get a job and be as frugal as possible even if it means moving in back with your family.
Hi Sketch. I posted this exact same question not too long ago. I have about 15k in student loan debt, with all interest rates at 6.8%. My gold and silver assets are currently worth around $15,400. I bought the bullion over a period of about 2 years, and all told, they’ve nominally netted me about $1400. I also have $4000 in cash at the moment. I’ve been thinking about what to do for several months now and time is running out since the grace period on some of my loans is up and I will have to start making payments next month. The rest of the loans will require payments in the middle of December.
So far, I’m leaning towards sitting on the metal and waiting for severe devaluations of the dollar. I’m living at home still and saving as much as I can. I’m also considering selling my 1997 Jeep Grand Cherokee to get something more fuel efficient because gas will become very expensive when the Chinese begin consuming what they deserve.
It’s very difficult to predict what may happen in the near future. Jim Rogers is bullish on silver and Peter Schiff is bullish on Gold and they know what they’re talking about. Recent rise in oil prices has been very worrisome.
As LibertyStudent has mentioned, paying down your debt to zero and saving makes for good sleep. If I stick with my strategy and I’m wrong, I will waste lots of money making minimum payments for 2 or 3 years. It’s a very risky game indeed. I may wait one or two months before making a stronger decision. Your situation is a little different though. If you think you can make up the difference relatively quick, say in under 6 months, then it might be worth paying down the debt.
It appears to me that many lay followers of the Austrian school, as well as many scholars, have been ignoring risk and uncertainty. There is absolutely no way to tell what will happen to the economy within the next few months or years, when it comes to inflation/deflation. It is quite possible that price inflation will be in the double digits, but it is equally possible that we will experience deflation. The fact of the matter is that massive government intervention has caused massive distortions in the market economy. When these distortions are revealed, I believe that we will experience a redux of the late 2008 deflation. Velocity of money will collapse (or in Rothbardian terms, the demand for money will skyrocket) as the supply of money (M3, M2, MZM) will begin to contract. Any government money printing will be simply “pushing on a string” and accomplish nothing besides slowing deflation.
My advice to anyone is to pay down their debt first, while keeping some liquid cash savings in case of unemployment. That means that you should probably cash out of your gold and silver investments.
My opinion is that the private economy has deflated as far it can. The only thing that could deflate at this point is the state, and we all know what the chances of that are.
Or the Fed will print too much and people will lose confidence in the dollar, thus, outweighing the monetary deflation, therefore, causing hyperinflation in prices.
It is so depressing that this kind of thread could be started, where we have to make recommendations based not on the free market principles of voluntary exchange and win-win outcomes, but instead simply trying to minimize our losses by tossing the ball into someone else’s court.
Believe me, I’ve never considered anything to be certain in the short term (few months to 3 years). Complete destruction of the dollar in the long term is guaranteed at this point unless there is some miracle awakening to libertarianism which won’t happen. This weekend I plan on crunching the numbers with my girlfriend to figure out more precisely what the risks involved are. I may very well decide to cash out and continue saving and planning for a much leaner future. I give strong consideration to advice given by forum members here.
The loan amount is fixed. The loan interest rate is fixed.
The assujmptions are:1. The Dollar value may go down and therefore the saved dollars value will go down. 3. The Income amount may go up or disapear. 4. The S may HIF, and if so, gold will go up in value.
If the SHIF it may be that loans will be impossible to collect. Put the savings in gold. Consider your work carefully as to it’s continuance if TSHIF. Buy a gun and learn a personally useful trade.
Sorry, Citibank is my loaner and they’re basically a fascist enterprise. I’m not exactly scrambling to make good on my loan.
Where will this demand for USD come from?
The derivatives market is several times larger than the world economy. If we see an economic collapse as some predict, there is no way that the Fed will possibly be able to outprint a $500+ trillion collapse. I doubt anyone at the Fed has the balls to expand the balance sheet over 500 times.
I would disagree. After a second deflationary collapse, the Fed might have enough time to pull money out of the economy. The BOJ expanded the money supply in a similar manner in Japan in the 90s to what the Fed has done in the US now. I think a redux is possible.
You sell stocks and/or bonds, you are in effect trading stocks/bonds for USD.
You are unemployed, you will go into debt (increasing interest rates) to try to pay for your family’s needs.
You near bankruptcy, you are trying to get your hands onto any greenback to pay off your debt.
You go bankrupt along with many other Americans, then financial institutions begin dumping their debt-based securities (more trading securities for USD).
As banks go bankrupt, more dumping of securities will occur.
You get the point. What I’m talking about is the potential collapse of the over $500 trillion derivatives market. If something similar to that happens, we can expect severe deflation, at least in the near term. I believe something like that could be in the cards.
To go back to answering the original question, the best course is to begin paying off the debt. By paying back the debt, you have a guaranteed nominal return. Nothing else can give you that. Buying gold won’t give you a guaranteed nominal return. Buy investing in anything, you don’t have a guaranteed nominal return, though buying T-bills at ridiculously low rates comes close.
How did you get 10% in your first example?
Lets keep your same example of $5,000 in savings @ 2% and inflation is 4%. then your net annual loss in purchasing power,or, the real rate of interest would be approximately -2%. The Real interest rate is equal to (1+nominal rate/1+inflaiton rate)-1*(100)
(1.02/1.04)-1 *(100) = -1.923076923% This would be your loss of purchasing power due to inflation at the rate examples you gave us.
Similarly (or conversely), the newly government owned loans you and I both owe now to the Fed is charging us 6%. then the bank (rather the government) would not be recieving a realized gain of 6%. They would be recieving (1.06/1.04)-1 *(100) = 1.923076923% real rate of return.
Listen. Some of you are way off base. Liberty student does not have his facts correct, nor do many others in here. There is what is called the “REAL RATE” and it is calculated in the following way.
((1+ Nominal Rate) / (1 + Inflation Rate)) - 1
multiply this answer by 100 for simplicity purposes. This rate is adjusted for inflation to reflect real earnings against inflation. If you have 12000 in student loans and the bank is earning 6% APR, while infltion is at 4% as some other gentleman suggested. plug and chug to get to get your answer.
Real Rate = ((1.06)/1.04)) - 1 = 1.923076923% ( This is what the bank is earning off of your interest after they adjust for inflation. You are not paying more because of inflation. The bank is earning less. Yes your dollars will be worth less in the case of inflation, but you should have more of them, and expect to pay the same steady amount back to your lender.
12,000 @ 6% interest. Lets say you plan on paying back in 10 years.
To pay off in ten years, you would pay $133.22 per month, or; $1,598 per year
This means you end up paying back a present value of ~ $15,633.20
If we discount $15,633 back for 4% inflation. (15,633.20/1.019230769^10) You end up paying a present value of $12,921.79
What this means, is that with 4% inflation, you’re actually paying ~1.92% interest. As far as purchasing power is concerned, you will make out quite well, and even end up paying a negative real rate of interest. Of course you will be hurt at the gas pump, and the grocery store. So you really end up losing in the end! Ha J
Balance your finances. Don’t pay off all of your debt. Manage it. And don’t put it all in bullion either.
What fact do I have incorrect?
No, with “asset” I meant gold, silver, stocks. Even with a general dollar inflation it’s possible that the specific asset you buy loses even more value. Then you are still in debt and you lost your means to pay it back.
The point is, while it is true that you can not just switch off economic laws, you can override them for a pretty long time if you are determined to do so and you have the necessary political means on your hand. e.g. central banks, legislature, you name it. There is no way anybody here can really predict what will happen over the next couple of years. What you can do though, is minimizing your risk by paying back your student loans.
The expected value may be higher if you would speculate, but the same is true for variance. Thats the basic reason you should not speculate with debt. If you win, you win big. But if you lose, you’re wiped out.
So, I’d say pay back the debt, work hard and start investing with the money you have and not with the money you don’t.