Getting Real

Well, guess we're gonna have to take control
If it's up to us, we'll have to take it home
--Bobby Brown

From where I sit, there's considerable chance that a prolonged deflationary period is commencing. What financial strategies work best during deflation? Paying down debt, reducing risky assets, and raising cash (saving) help protect wealth during deflationary deleveraging and position individuals favorably for the cycle's end.

Over the past two years I've been acting accordingly. I've paid down nearly $100K in debt, including a $30K home equity loan, all credit card debt (another $30K+), and my car loan. I've sold many risky assets; my liquid asset allocation currently stands at nearly 45% cash and short term fixed income (CDs) across all accounts (including brokerage and retirement accounts). I've been raising cash (primarily via saving more of my paycheck) such that readily accessible cash account balances (checking, Vanguard money market account) currently stand at more than one year's worth of living expenses.

The big enchilada still out there is my home mortgage. About $124.7K in principal remains on my 15 year fixed mortgage originated in 2004 @ 5 1/8%. Using various payoff and amortization calculators, I modeled various scenarios. My conclusion: I can pay this off in 36 months.

Beginning this month of November, my plan is to add extra principal to my monthly payments at a rate that will pay off the home in 4 years. That will allow me to still build cash at a significant rate. Then, in October of 2011, if all goes well, I'll snuff out the 4th year principal in one lump sum payment.

It appears, then, that my big investment over the next couple years will be in real estate--to OWN my place of residence. Based on the interest savings, I estimate the annualized return on this project at about 5.4% pretax. The return improves if I'm fortunate enough to pay it off sooner.

In a low yielding deflationary environment, it may be difficult to achieve such a return on other projects.

God willing, total debt freedom is thirty six months away.