I was recently sitting in my local barber shop talking with my favorite barber, and we were discussing financial issues. My barber and his wife recently went through Financial Peace University and he is close to retirement age.A few years ago, they built a new house and now they are contemplating refinancing their mortgage given the latest drop in interest rates and paying the mortgage down as quickly as possible. As they discussed their options and plans with their loan officer, he made the following statement to them: "right now, cash is king given the state of the economy."
The loan officer explained his statement by saying that due to the continuing decline in home values, my barber and his wife would be better off saving any additional cash then putting it into a house in a declining market. As we continued talking, I really pondered that statement and I believe this particular loan officer made a correct assessment.
I will admit, this is not a Dave Ramsey/Financial Peace University type of financial strategy and I'm a huge fan of Dave. When Dave put FPU together over the last several years, the housing bubble was growing larger and larger and home values were soaring, so it made a lot of sense to pay off your mortgage as soon as you could. But now, with the economy entering a dramatic recession, home values falling, and unemployment levels rising, I believe there is a lot of truth to this loan officer's line of thinking.
During this time of economic upheaval, having a larger cash reserve/emergency fund is a better financial strategy to get families through these troubling times. Once our nation is able to navigate its way through this recession and home values begin to rise, again, you can always take your additional cash savings, and begin aggressively paying off the house.
But, isn't that what Dave teaches in FPU? 1) $1K emergency fund, 2) debt snowball on everything except the mortgage, 3) six month emergency fund, then... work on taking advantage of 401(k) matching, fully funding college, paying off the mortgage, et al.? All you are recommending is building on the six-month emergency fund. In the current economy, it's not a bad idea to have a bigger cushion, but it is still in-line with what Dave's premises.
ReplyDeleteAlan Schuetz
Baton Rouge, LA
Alan - thanks for the comment. My answer is yes and no. I should have qualified the post by stating that if you are at Baby Step 6, paying down your house as fast as possible, you might consider banking additional money until the housing market corrects itself and the recession has ended.
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