Dear Debt,
Hi debt, you antithesis of freedom. You short-term savior and long-term captor. Oh debt, how you can be tweaked and twisted in so many ways to look so attractive. It's like that saying, "You can put lipstick on a pig..but it's still a pig." which I heard 5 times a day from fellow stockbrokers. No matter how much makeup people slap on you debt, at the end of the day, you're still soul-sucking debt.
I should probably stop here and offer up a disclaimer. This post will be a little more into the weeds than our usual personal finance posts but so many of you have pleaded with us to get into the weeds, so here we are. And this post may come with up to two scary graphs but I can assure you, they will be accompanied by a layman's guide to being understood.
I should start by describing how Kelsey and I treat debt because let's face it, not all debt is bad - just 99% of it. We look at debt rationally and understand that if an asset, meaning a car, house, etc. comes with a loan - it is not an asset, it's simply a liability. Now if the asset comes with a loan or mortgage but it provides monthly income, it is then an asset because you are simply using debt as leverage to increase your monthly income. An example of this would be using a 15yr or 30yr fixed mortgage to buy a rental property. That's good debt, pretty much everything else is lipstick on pigs.
Now debt has some surprisingly strong supporters nowadays considering how 4 out of every 5 Americans carry over $50,000 in debt. A lot of people we talk to about debt like to say they can 'beat' their interest rate on their loans. The reality is these people virtually never invest their discretionary income to 'beat' their interest rates and continue to only own stocks via their 401k or IRA (retirement accounts). They then continue spending as they typically would. In order to beat anything, you have to at least play, right?
Now prepare for the scary graph and me throwing out clickbait headlines like "there's a recession coming" because let's face it, there is.
This chart is showing how little people save nowadays (green line) compared to how much debt compared to their income (pink line) they carry.
It's been nearly a decade since our last recession and the U.S. business cycle likes to mean revert (meaning go back to equilibrium) every 8-10 years on average. Now before you say this time is different understand that no time is different, ever. Yes, everything is unicorns and rainbows right now so no one wants to talk about scary what-ifs but seriously, we're overdue for the market to balance out again. Now I'm not calling for another great recession like we experienced in '08 & '09. All I'm saying is things currently look expensive and if we're patient enough we'll be able to buy things at cheaper prices. (Aka 3 months later when the market dropped 25% in December of 2018)
So what does this mean for our plans? Well as all of you know, we have no debt. We sold the old boat for 60k and bought the new one for a lot less so we have some cash to put to work. A big factor for us selling the old boat to buy a smaller one was setting ourselves up to make our lifestyle of consuming less & adventuring more, permanent. Meaning we did not want to continue to remain 100% reliant on AC for our income because what happens to Patreon when a recession does hit? Being in this weird space of people voluntarily paying for a service typically means we're pretty high up on the discretionary income totem pole. Sure, going through another refit and a big change (like a new boat) doesn't bode well for our YouTube series but in the long-term, us owning a cheaper to maintain boat while having more cash in the bank equates to AC not being another flash in the pan like other short-lived YT series.
Now back to what we're doing with our extra cash. Since we've been Airbnb hosts off and on since 2015 and it's something we thoroughly enjoy, we may buy an investment property for short-term rental. Or maybe we'll just sit on the cash for a little while waiting for more opportunities to pop up. Because as we all know, it's much better to buy things when they're on sale and last time we checked it's been awhile since our last sale - close to 10 years. So we're happy to let the good times roll but it doesn't mean we're not preparing for when the music stops. All we can do is position ourselves to make the most of when the cycle does complete and treat it as the buying opportunity it truly is.
Consumers aren't the only ones that have a newly found love affair with debt, corporations do as well. This shows corporate debt at all-time highs.
Companies call debt leverage, and so should we. Some of the best personal finance advice we've received is to treat your bank account like a business. Given we're approaching the end of the business cycle, we're looking to deleverage and put our eggs in other baskets. Now don't take this blog post and go move your 401k into all cash. If you're investing for a traditional retirement, business cycles shouldn't mean anything to you. But for us, we don't want a traditional retirement. We want to be happy, and doing meaningful work where the amount of money we earn from our work isn't a factor, for the duration of our time on this blue marble.
We plan on doing AC for the long haul and if we want to continue to be self-reliant that means we need to diversify our income. As we've learned from sailing, patience keeps us out of trouble and preparation is all we can do - everything else is out of our control.