Bob enjoying his Man of the Year trophy (reenactment)
Lately, we’ve been guilty of accentuating the negative, poking fun at people who refuse to foster their money while not giving enough positive examples of what to do and who’s done it. This week, that changes. Sports Illustrated announces its Sportsman of the Year about a month in advance. Time names its Person of the Year around the same time, and as often as not awards it to multiple people, a symbolic person, or whomever happened to see the magazine on a newsstand.
At Control Your Cash, we actually wait until the earth completes its lap around the sun before handing out honors. And so, our inaugural Man of the Year: a person who exemplifies adopting the habits we’ve been trying to avail you of for the last few months. Anonymity precludes us giving our honoree’s full name, but here he is: Bob G., a 44-year old radio personality who lives in Las Vegas. For a decade, Bob worked for a particular station where he and a series of co-hosts did a morning show that was consistently both lucrative and popular. But because Bob works in the least rational industry in all of commerce, 2 years ago he was fired and replaced by a tardy borderline illiterate who commands half Bob’s salary. Even worse, Bob’s contract included a 6-month noncompete clause – the rationale presumably being that Bob is no longer talented enough to work for that employer, yet still so talented that he’d indirectly cost that employer money were he to work for a rival. You figure it out.
Even with a college degree (Wisconsin, communications, 1988), Bob was now rendered legally unemployable in his chosen field in the city he’d called home for most of his professional life. For most people placed in such a situation, the strategy would be simple:
- Eat potato shavings while tallying the days until the noncompete expires;
- Ask the wife to pull a double shift at the medical clinic;
- Set fire to the credit rating;
- Hop around the nation from medium-sized city to medium-sized city, a/k/a the transient career path of the doleful would-be radio star.
Instead, Bob descended to the figurative basement shelter and hooked up with a competing station shortly thereafter. Although he of course missed the $2,000 biweekly direct deposits, practically speaking, Bob and his household barely felt a breeze. Bob spent the previous decade contributing to his 401(k), automatically sending monthly payments without even thinking about it. He transferred it over to an IRA that’s now worth $165,000, and after getting fired set up a Roth IRA.* He also cut a regular monthly check to Vanguard, his mutual fund company. Today, that mutual fund is approaching $170,000. When the market dove, losing almost 40% of its value, Bob didn’t flinch. Instead, he took the drop in stocks as the buying opportunity it is, knowing they were bound to rebound. He started writing bigger checks, and watched his fund rise 30% over the year. And, while temporarily barred from earning income (yes, he signed a contract with draconian restrictions, but that’s another topic), Bob could at least reduce his expenses.
Except Bob barely had expenses to reduce. Credit card debt? Please. Bob carries a single MasterCard, using it for household expenses as a matter of course. He pays the balance in full every month, subscribing to the quaint notion that the price on the tag is what the buyer should pay. Bob would rather eat his groceries than spend years financing them.
Those household expenses aren’t particularly exorbitant, either. Dog food. Cable. An occasional night out with the fellas and a beer or two. A quarterly lovers’ junket to San Diego. Bob has yet to pay $300 for bottle service at a nightclub, and his next clothes-buying spree will be his first.
Bob, his gal pal “Susie” and their Rottweiler “Pinto” live in a house Bob bought new 7 years ago for $185,000. Even though Pinto’s had a health problem or two, his care runs about $800 a year, which is several times cheaper than a child would be. Bob caught the housing market before it exploded – which it did in Las Vegas in a more pronounced fashion than it did in most places. So was his home purchase a strategic decision, bought when it was bought because Bob predicted what market forces would soon do to the value of his property?
No, he bought because he needed a permanent place to live. He was tired of living in an apartment, wanted to build equity, and finally had a worthwhile partner to share his life (and expenses) with. Bob’s house shot up in value in the ensuing years, through no intrinsic reason. Buyers were just bidding prices up faster than builders could build, and Chez Bob went along for the ride. In theory, Bob’s functional house was worth $300,000 in early 2007. That fell as quickly as it rose. An identical house across the street sold 2 months ago for $172,000. Retroactively, it’d seem that early 2007 would have been the ideal time for Bob to have sold and enjoyed the $115,000 gain he’d spent 4 years building.
So did Bob cost himself $13,000 by buying when he did, instead of this past November? If he were a real estate investor with thousands of other options, maybe. But as a human who needs shelter, Bob made out just fine. Yes, his home depreciated. However:
- He and his home still have plenty of years left. In Bob’s case, to live. In his house’s case, to regain value. There’s no such thing as a permanent price level of any kind.
- What was he supposed to do instead, keep renting an apartment? He still had to have lived somewhere. Say he found one for $850/month. Instead of being down $13,000, he’d have been down $71,400.
Bob’s built equity in the house. He deducts the mortgage interest payments from his annual tax bill. Oh, and that mortgage? Its rate is fixed at 6¼%. Always has been. No nasty surprises that way: the nasty surprise of paying for his professional success by getting fired was plenty, thank you very much. If Bob were reckless, when the home reached its maximum value he’d have opened a home equity line of credit – also known as a second mortgage, it’s a loan from the mortgage company that’s tied to the new, enhanced value of the home. At the height of the market, some people did this, which is risky if you want to use the lent money to buy assets with. It’s ultrasonically risky if you want to buy jetskis and vacations with it, yet people did. And then cried about the heartless bastards at the mortgage companies when the bills came due. Not Bob. He just continued cutting the mortgage company checks without thinking about it.
He drives a 2000 Maxima with 120,000 miles on it. Bob signed a 5-year deal, always overpaid what was due and paid it off 2 years early. He gets the oil changed every 3000 miles and has yet to add aftermarket bumper canards or tinted windows. Every Thanksgiving and every summer, Bob and Susie visit his family in the upper Midwest. They buy the tickets months in advance, saving them a few dollars more for no incremental effort.
Bob’s not wealthy, not does he have any particular desire to be. However, he has a fanatical desire to avoid being poor. While putting that into practice, he’s managed to remain in the 90-somethingth percentile of net worth in this country despite getting fired. He didn’t, and doesn’t, even have to work more than 30 hours a week to get where he and Susie are today.
When informed of his honor, Bob celebrated the news by announcing that he was on his way to a movie. With Susie. And complimentary tickets. Controlling His Cash yet again.
*Real quick: whatever you contribute to a traditional IRA is deducted from your income for tax purposes, with the interest and appreciation taxed years later when you start collecting payments. With a Roth IRA, you pay taxes on the income when you earn it, but those payments, interest and appreciation in the future will be tax-free. You can only get a Roth if you make under $95,000. Bob’s salary of 0 thus qualified him.
