# How does inflation rate affect debt payoff strategy?

When reading a comment by user Philipp on this answer, he states:

[W]hen the debt is in a currency which has an average inflation rate larger than the interest [in this case 0%], you essentially sa[v]e money by paying the debt as late as possible.

Can someone explain why this is the case?

I understand that as long as you have your money in the bank/investment making positive returns, you should wait as long as possible to pay off a 0 APR loan. But what does inflation have to do with this?

I know this can be confusing because you tend to think of money being worth the face value. So let's eliminate that for the sake of an example that will be easier to understand.

Let's say your friend loaned you rock worth \$10 today. He expects you to pay him back an identical rock whenever you can.

Now let's also assume that historically the price of rocks tends to go down every year. At some point you will need to buy a rock to pay your friend back. Because they keep getting cheaper, it costs less to buy the payback rock the longer you wait.

Replace a dollar with a rock in the example and you have your answer. This is known as the time value of money.

In reality, this is priced into the loan (via the interest rate) because the lender very much understands the math going on here. Also, it is more complicated because the longer you delay payment the more interest you pay (pebbles if you will) so it doesn't usually work to your advantage unless they underpriced the loan's interest rate.

Lets pretend that your parents were given the opportunity to pay X for a year of college tuition in the year that you were born. That would have been a significant portion of their yearly income.

But what if they were given the opportunity to pay for that year of college when you are 18, but at the price it was when you were born. That tuition bill would be much easier to pay. That would be a very small amount of their yearly income.

Why? the cost of tuition grew at a high inflation rate, but the second option allowed them to skip inflation on the bill side, but keep inflation regarding wages. You asked about paying for stuff you want today with future money; where my example was to pay new money for old expenses.

If you believe that inflation will be high,and your income will keep up with it; it is advantageous to pay with future \$'s

• I +1'd your answer, but accepted JohnFX's, because this really only addresses he fact that I will be making more, not that the value of money decreased. If your income does not increase with the rate of inflation, is it still beneficial to wait? Your answer did not address this. Thanks though! It definitely helped! Commented Sep 24, 2015 at 15:58
• @dberm22 if your salary is not increasing with inflation, then you are losing spending power and interest payments. In that case, pay the debt quickly. Commented Oct 13, 2019 at 18:52