Finally, a financial success story

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.

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7 Responses to Finally, a financial success story

  1. Flatlander100 says:

    I take your point — avoid unnecessary debt like the plague — and it’s a good one. But I’m not sure “live like you’re poor” is a standard most people will be willing to embrace. After all, a lot of people lived [and live] a comfortable middle class life [not "living like they were poor"] while living well within their means. That seems to me to be the better, or at least more likely to be widely adopted, standard: live well within your means. What kind of life style that will enable will vary family by family, income by income. [Living well within your means includes saving for the unexpected and avoiding unnecessary debt.]

    I don’t want to live like I’m poor, Charlie. But we — I and Mah Woman — are careful to live within — well within — our means. [Growing up in a home in which both parents went through the Great Depression probably had a lot to do with that. I recall when I was a child and we finally moved out of Brooklyn to a suburban home on Long Island the determination of my parents not to be "house poor" --- meaning not to buy at the limit of what the bank said they could afford, and then have every spare dime go to mortgage service.]

    Living frugally, staying well within your means, does not have to mean for middle class families “living like you’re poor.” We agree, I’m pretty sure, on the point you were making, but I’m afraid phrasing it as you do means fewer people will give it a go. Who wants to “live like they’re poor” when they’re not?

  2. Charles Trentelman says:

    i guess it depends on what you mean by “living poor.” In my case, it’s not being afraid to shop at thrift stores and not being worried what people will think if my car isn’t new. If you live within your means, and if you can survive if one of your family’s two incomes goes away, you meet the definition no matter what your style of living is.

    Anyone who lives paycheck to paycheck, especially in a two-income family, is not being frugal in my estimation.

    the NYTimes has also had, as has the wapost, several stories on how the rich are suffering too because it’s hard to shift from a $3 million lifestyle to a $1 million. Needless to say, these sorts of stories get nothing but well-deserved derision from myself and many others.

    The REAL point is, responsible handling of your money means that you plan for hard times — that includes having some resources for when they hit, but it also means practicing now, when you don’t have to, so that when the hard times come you know how to survive. If that means being thrifty when you don’t need to, saving on food when you don’t need to, avoiding wasting money on gadgets you don’t need when you don’t have to, well there you are.

    Living like that now — and there are a lot of people who think avoiding daily fast food lunches, or letting the gardener go, constitutes poverty — means when the crash does come you not only are better able to handle it, but it will be less severe. There are millions who avoided it entirely, I would bet. When my wife quit her job to go back to school for eight years, and we had to live on a journalist’s salary alone (equal to a utah school teacher, no kidding) we did just fine, and even continued to save money.

  3. Mark Shenefelt says:

    Leftovers for lunch today. Mmm. I embrace minimalism … in spurts.

  4. laytonian says:

    Agree, Charlie

    There’s another lesson we learned early on: if you treat your home as a home, and not an “investment”, you’ll be OK. We bought our first home almost 34 years ago, during a recession. (We got a tax credit for buying it!)

    Property values fell, and we were considered “upside down”.
    But….so? Why would we care?

    We weren’t planning on selling it. We wanted to live in it — and we did. We outlasted the recession, we “took money out” a few times early on….but got wiser.

    We still live in it. We feel like geniuses… our little neighborhood full of great people who’ve watched each other’s kids grow up…. and always thought like us.

    There are two McMansions in our neighborhood. One’s finished, one’s not. We understand the builder went bankrupt trying to “get rich quick”.

    Sign us:
    We’re not out to impress anyone

  5. Charles Trentelman says:

    well, considering that you did a better job of reading the economy than Alan Greenspan did, I’d say you ARE a genius, Laytonian. That idiot looked at liars loans and said “Hm, no problem with those!”

  6. laytonian says:

    Charlie, lots of us are geniuses. We’ve watched a few (early) neighbors live in the neighborhood when the homes were new, then move every two years until they’re in something more impressive.

    Now we’re watching them all downsize, or try to keep up with a house that’s a waste for two people to live in.

    My husband calls me his “[deleted] financial advisor”….because after watching ONE of those HGTV “Flip This House” scam shows, I told him the market was going to crash because none of this made sense. We argued back and forth for about three months, watched more of those shows, watched people build spec homes on “unbuildable” lots…..and finally, he believed me. He took his entire 401K out of the stock market four months before the crash.

    He’s a genius. ;)

  7. Bob says:

    Why would you criticize someone for having to live on a 1/3 of their income just because it’s at a higher level than yours? Sounds like class warfare to me. Let’s assume that the millionaire has paid for their lifestyle (owns a large boat, large house, couple of nice BMW’s, etc). How is that any different than a middle class guy who owns a small boat, medium house, and a couple of Honda’s? The millionaire might have to lay-off his gardner, maid, and butler while the middle class guy has to quit eating out, going to the movies, or wash his own car. Both are doing without, both have an impact on the economy, both have to live “below” their standard of living. When the economy is health both buy items that companies produce, which in turn provides jobs, taxes, etc. And living “poor” is my mind is stupid if it’s not necessary. What good is your money stashed in your mattress? By “spreading the wealth”, you actually create wealth. Of course, if you don’t have it to spend (need to borrow), then your really not spending your own money but borrowing someone else’s. Flatlander has it right…as long as you live within your means, then it doesn’t matter whether your a millionaire or journalist.

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