Weak Dollar = Debt Payoff?


Recently I have seen quite a few searches related to the weak dollar and debt payoff. I hope to give my perspective on this, and maybe a few more searchers will have what they are really looking for.

For those new to economics, a weak dollar is what it sounds like – weak. As a quick example, buying a Euro half a decade ago was cheaper than it is now. Almost half cheaper, in fact. This is partly due to inflation, and partly due to trade and budget deficits. Most people agree that a weak dollar is a bad thing if you are a consumer, and a good thing if you are producer. As an example, my business is getting a lot of attention from international clients, because our products are cheaper here than they are in their home country. On the flip side, if you travel to Europe, expect to pay twice as much for everything.

So, basically, if you had a total debt of $20,000 five years ago, that amount does not change with the dollar (unless it is in overseas currency). Meaning that you would technically be paying less for it now, even though the amount is the same.

However, this is not true, for the most part. If you had traded your money for Euros five years ago, yes, they would now be worth twice as much. But since you kept your money in US dollars, then you have the same amount as you did then. Your debt and savings both weakened at the same time and to the same degree. It is no better to pay off debt now than it was at the time you built it up. In fact, since your debt likely carries an interest penalty, your debt actually weakened LESS than your savings, meaning you now owe more than you did back then, unless you’ve been trying to pay it off.

Since your debt is worth the same it was back then, relative to your savings, then it will be the same thing when it bounces back. $20k ten years ago = $20k right now = $20k ten years from now, when you only consider a strong or weak dollar. It only becomes worth more or less when you invest in international currency. When the dollar is particularly strong, you may consider trading it for a currency that is particularly weak. And then, when the situation reverses, you will have extra money. However, when you factor in a typical inflation rate, this is not a sound investment strategy; you almost always lose in the long run, and it requires a long run to see a gain. Of course, there are always higher risk currencies (if a country is about to crash and you believe they will bounce back), but most of the time you will lose on long term gains.

So, then, what is the right time to pay off debt? Put simply, the right time is NOW. With interest rates rising, that $20k right now will become $30k before you know it. If you’re waiting for the “right time”, then your money is sitting there gaining interest by the minute. In general, paying off debt is almost always smarter to do immediately, rather than waiting for some magic moment. The monetary benefit is eclipsed by the psychological benefit – imagine being free of the weight of that debt! Imagine if you owed nobody but yourself, what you could do with that paycheck every month.

So, start now! Create a strategy, maybe review this blog and some other ones for support, and get started today. List your debts, create a budget, and put as much money as possible towards it to get it paid off soon! In a bad economy, the one thing that makes it worse is debt. Losing your job is terrible no matter what, but imagine losing it and not having to really pay any bills but the necessities… it would be great, right? So, the best way to prepare for the worst is to get out of the red. It’s a difficult road, for sure, but it’s rewarding in so many ways.

An update


It has been awhile since I’ve posted, primarily because I have sorted out my financial issues. I have a few final months of payments to eradicate my remaining debt. Work has gotten better, and I’m up to about 80% salary, where I’ll be until I change jobs. I am now married and have moved to another state. In fact, I plan to come back to David On Finance now that I am married, to write a small series about how money matters work inside a marriage and some good steps we’re taking as we learn how to manage our finances. I hope to have the first one up tomorrow, and perhaps I can stick around this time!