Debt Crisis coming soon?!?!?

Question

Anyone else concerned with the debt crisis?   How are you positioning your self defensively?  How much cash reserves keep on hand. 3 months, 6 months, 12 months?

Jason D. · Answer

@Gareth Fisher what do you mean by debt crisis?

I'm not concerned about a "correction" or mild "recession", I'm actually looking forward to it.

Account Closed · Answer

I've read where CLOs (collateralized loan obligations) are the new CDOs (collateralized debt obligations).  I've positioned myself defensively and offensively with diversified streams of investment incomes with hopefully enough margin of safety to weather the next crisis whatever the cause.  Cash in the bank is one component of that strategy.

Jay Hinrichs · Answer

I like having 10 years 100% of living expenses in cash. at my age you need that.

Bill F. · Answer

Here are delinquency rates for consumer loans (blue) and mortgages (red) with debt to disposable income thrown in for good measure.

Both delinquency rates are below or around historical averages...

Availability bias can distort reality.

Jaron Walling · Answer

I'm concerned with millennials buying new cars on 7 yr notes instead of paying there student loans. The total student loan debt was $1.2 trillion last I checked. My brother told me he knew people who vowed to never pay student loans after graduation. That's insane if you ask me.

Account Closed · Answer

In my case, I'm retired.  I stopped carrying a credit card balance many years ago and now use them as debit cards (I pay off each purchase as soon as I make it).  I've never owned income property as discussed on most BiggerPockets posts, but I sold my house a few years ago.  This former "dead equity" has been temporarily redeployed in a high-yield savings account paying a 2% rate of interest at the moment.  I'll likely buy a house again in the area where I'm retired.

I built my wealth mostly by taking advantage of the 401K, IRA, and HSA mechanisms of the tax code.  A good chunk of my CORE portfolio is invested using the asset allocation strategy (different types of index funds) managed by a robo advisor.  I manage the rest of my CORE portfolio myself, which is invested using the dividend growth strategy (mostly Dividend Aristocrats).  My EXPLORE portfolio includes crowdfunding, where I'm toe-dipping cautiously to learn this space of startups made possible by the JOBS Act of 2012.  Whether they win or lose, none of my crowdfund investments will move the needle on my net worth.

Income real estate is one way to generate an investment income stream.  Owning income real estate directly is one of the many ways of owning income real estate and the way most frequently discussed on BiggerPockets because it involves the most hands-on activity (and when done correctly, probably yields the highest return of all the different ways of doing real estate).  The checkout clerks at the supermarket, however, don't care if the money I use to pay for my groceries comes from salary income, stock dividends, savings account interest, bond interest, real estate rents, or capital gains.  They won't let me pay for my food with capital losses, however. 😜

The next debt crisis is just around the corner (always has been, always will be).  The way to prepare for it is to stress-test your income and expense streams.  When I was working, for example, I always asked myself what I would do if I lost my job for any reason and then made whatever preparations I could to be ready.  One of those long-term preparations was to replace my job income with investment income so I wouldn't need a job someday.  This wouldn't stop me from working if I wanted to, but working because I want to rather than because I have to does wonders for my peace of mind.

Account Closed · Answer

Are you referring to the U.S. Debt Clock?  Back in the 1970s, I remember seeing such a debt clock off Highway 101 in South San Francisco.  Retirees like myself are advised to have a couple years of living expenses set aside in cash savings so we don't freak out if the markets crash.  For others, the amounts vary depending on personal circumstances.

Bill F. · Answer

@Gareth Fisher what pieces of information or data could lead one to conclude we sit a top a "house of cards"?

Gareth Fisher · Answer

I concur the average person doesn't understand even basic financial planning.   Recent statistics came out stating something along the lines of 7 million people are now behind on there car payments.   A big part of the markets is based upon consumer spending from what I understand.  I wonder what percentage of consumer spending are folks spending money they should be saving.

I see the same with investors consistently maxing out ltv refis.  Making the basic assumption that the rents and home values will always go up.  Many bears are in the camp that the credit bubble has supplied much of the appreciation we have seen over the past 10 years, and the trend is soon to break down.  I don't hear many investors talking about though.

Jay Hinrichs · Answer

just depends if congress allows student debt to be wiped out in a chapter 7.. right now no.. just like those that get SBA loans you cant BK those either..

Debt Crisis coming soon?!?!?

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