There’s an interesting story in the NYTimes today (click here) about a family living in a subdivision in Southern California that the newspaper has been following for the last year as the recession as progressed.
This particular story is interesting because of statements made by the parents — the husband of the family is reduced to selling car parts on eBay and becoming a homemaker, while the wife is now the breadwinner, working in a dental office.
At one point the husband says ““We have to start practicing acting poor.” The wife, on the other hand, keeps talking about how things could be worse but, more important, already seems to be “practicing acting poor.” And not practicing — she sounds like someone who has always acted poor and she’s miffed her neighbors didn’t, as in this outtake:
“I was kind of angry when she moved,” Ms. Sanchez said. “You can’t make stupid choices,” she added, referring to the large amounts of cash her former neighbor’s husband drew on their home’s equity.
That’s important — while the husband is finally getting a clue, the wife is obviously way ahead of the game. One can only wonder why she couldn’t get the big lunk to be more careful earlier on.
The article describes how they were, at one point, planning to use the alleged equity in their home — a mirage built up by the housing bubble — to buy a bigger home. They’re very lucky now that the idea didn’t go through or they’d have been up the proverbial excrement creek without a paddle. The wife is impatient with her neighbors who did take all the equity out, and well she should be because their decisions have ruined the whole neighborhood.
The husband’s discovery that he needs to “practice” being poor is something I have little patience with. Obviously, in his world, he was living on future income, not present income. He bought into the myth that it was OK to be in debt, or at least live on the edge of debt, rather than live below one’s means and save the difference.
I am firmly convinced that it is only the people who already lived as if they were poor, even when they weren’t, who are keeping the economy alive now, more so than federal stimulus efforts. A lot of people in this country live in paid-off homes and have no debt. When the debt crisis hit, those folks were the ones who didn’t have to cut back on their spending. If they lost their jobs, they had savings to fall back on. Like this family, they managed to hold on.
I’ve never seen the logic of borrowing against your home’s equity. That’s not money sitting there unusued, it’s paper profit that doesn’t exist. If you borrow it, you effective increase the price you are paying for your home — you’re going deeper into debt, and you’re spending that money on stuff that is going to lose value very rapidly.
Yeah, sure, the interest on that debt is tax deductible, but that deduction is a rationalization, not real savings – saving 30 cents in taxes on a dollar of interest still means you paid 70 cents. I’d rather save up to buy what I want and not pay the interest. That’s the same as putting a dollar of interest, tax free, into my own pocket.
Bottom line lesson: Quit spending money you don’t have. Always live as if you are poor. Then you don’t have to “practice” when the time comes. I find a lot of good stuff in thrift stores, always buy used books or books on deep sale, wear my clothes until my wife has to hide them, drive my cars at least 10 years, usually more, and eat cheap at home.
If everyone lived that way we wouldn’t have had the boom we had during the Bush years (and, notice, that boom did not lead to higher wages, which in Utah only went up 23 percent since 2000) but we also wouldn’t have had such a bust either.