Debt – Page 2

Why is he smiling? No debt. You should be so diligent.

We’re going to go an entire week without writing about what a waste a college education (almost always) is. Don’t worry, we’ll beat that drum again soon enough, probably next Wednesday.

It’s time for us to embrace that old standby of the uninspired blogger – the list post! 5 Ways to Save At The Grocery Store. 8 Financial Mistakes First-Time Parents Make. 17 Cheap Graduation Gifts. 432 Tired Ways To Write A Blog Post.

We’ll call this one Control Your Cash’s 6 Axioms For Building Wealth And Thus Saving You The Trouble Of Buying Our Book.

1. Don’t Have A Budget, Have A Ledger.

Creating a household budget is a waste of time. If you earmark $423 for groceries in a given month, and you’re at $454 with 2 days to go, are you going to starve yourself just to prove a point?

Or, if you happen to be under budget as the month is ending, then what? Do you replace the tilapia in your cart with Chinook salmon just because your numbers allow you to? Even if you’d rather eat tilapia?

We hear this constantly: “I can’t believe how big my VISA bill is. What happened? There must be some sort of mistake.” But VISA didn’t make a mistake. You did. You bought too much and you didn’t think about how you were going to pay for it.

Have a ledger means be conscious of every dollar you’re spending. Track them. There are smartphone apps for this, Mint has a good one. Don’t have a smartphone? Buy a pocketbook, they’re like 49¢ or something. Doing this eliminates the possibility of seemingly insurmountable expenses “creeping up on you”. They can’t, not if you know that they’re coming. Even if you’re not so meticulous that you enter every expense in said app, that monthly credit card statement should never, ever make your jaw drop.

2. Stop rationalizing.

You really wanted that Croatian vacation and/or theme wedding? You feel like you’re entitled because you hate your job and your mom’s being a bitch? Wow. It’s like you and we are different species.

Your finances should be the least emotional facet of your existence. Save the emotion for the non-financial parts of your life.

It’s fine to want (and even to buy) extravagant stuff. An otherwise prudent friend of ours dropped $2,462.35 for a couple of nosebleed seats to Game 4 of the Stanley Cup Final. A lifelong L.A. Kings fan (a legitimate one, not a bandwagoner), it was perhaps his only-ever chance to see his team clinch the Stanley Cup at home.

They lost. No big deal, they ended up winning the Cup anyway, but our friend didn’t get to watch the clinching moment live. (Had he wanted to, he could have spent a similar amount, probably a little more, for tickets to Game 6. And flown across the country for Game 5, just to cover every base.)

Was that a waste of $2,462.35? Maybe to us, but not to him. This story isn’t an argument for spending extravagant amounts on ephemeral things. Our friend is a smart guy with a big cushion who could withstand the loss. He weighed the risk of the New Jersey Devils winning, paid cash, and still enjoyed 3 hours’ worth of Stanley Cup Final action. He’s not going to be spending the next 7 years financing his tickets at 19.9% interest, which would be unequivocally dumb.

3. Unless you’re going to major in the hardest of hard sciences, pure or applied, or possibly in corporate finance, don’t go to college.

Sorry, we had to mention it. We’ve broken it down in greater detail before, but not only is college a colossal financial expenditure, it’s an enormous time commitment. 4 years of your life and tens of thousands of your (or your parents’, or the taxpayers’) dollars? So you can spend decades paying off the loans? Which brings us to our next point:

4. Only incur debt if you have a plan behind it. A plan that pencils out.

Borrowing $200,000 might sound like a bad idea in and of itself, but what are you borrowing it for? To have a stable place to live for a fixed period (and simultaneously avoid paying rent)? Going into debt to buy a house makes sense, most of the time. Look at the alternatives. Borrowing money might set off a frugality switch in your head, but would you rather spend 30 years renting and knowing that you won’t recoup a penny of your housing costs? While enriching the person who does own the place where you live?

And that’s shelter: as high as #2 on the hit parade of necessities behind food, maybe #3 behind clothing unless you live in the tropics.

Incurring debt for other reasons is – we’re running out of synonyms for “idiotic”. All your life, you dreamed of having a storybook wedding. Great. Do you want to spend the next 10 years paying off one memorable afternoon?

Some people are going to take that literally. Of course no one wants to spend an extended period paying for something fleeting (and that has a 50% chance of ending in failure), but if you incur the expense, you have to pay it. We come out of the womb understanding this inherently, but the sophisticated and rationalizing brain knows better.

5. Look at each transaction from the other party’s perspective.

Your humble blogger had a (dumb) high school finance teacher who believed that for someone to make money, someone else had to lose money. Were that true, it would mean that all of human civilization has been one big zero-sum game. And that the accumulation of wealth in the world today – all the ocean freighters, skyscrapers, communications satellites, power plants etc. – is no greater than it was when the only items of value in existence were Smilodon pelts.

Not to turn this into an Economics 101 lecture, but exchanges benefit everyone. However, they don’t necessarily benefit everyone uniformly. Sometimes you run into a seller who’s desperate to do a deal, or a buyer with the same problem. In that case, enjoy your bargain. Other times, the one who needs to make a deal and has time or other circumstances working against him is…you. Don’t be that person.

6, the big one. Buy assets, sell liabilities.

Do this consistently and you’ll build wealth no matter how stupid or lazy you are.

401(k) contributions are assets, defining them as we do as something that will help your wealth grow. Extravagant dinners are liabilities.

We should elaborate. You can’t sell extravagant dinners unless you own the restaurant, but from a consumer’s perspective you can avoid buying them.

That doesn’t mean you shouldn’t cut loose and enjoy what life has to offer, every once in a while. It just means that if you do so, you’ll be forgoing future wealth and investment potential. You need to weigh this stuff, assess it intelligently. Don’t buy what you can’t afford, which is so fundamental it barely counts as advice. Mark Zuckerberg gets to spend more than you do. No offense, but at least at this point he’s entitled to more Caribbean cruises and country club memberships than you are.

But don’t fret. In turn, you get to spend more than that hobo who stands on the street corner every morning.

Unless you’re in debt. Then the hobo (assuming his net worth is 0) gets to spend more than you.

STOP.

If you read that last couple of paragraphs and your internal monologue is:

“Who are they to tell me what to do? I deserve it. Life’s too short”,

send us a request and we’ll fix it so that your IP can’t access our site anymore.

There are a million analogies we could make here, but people hate to face reality. If you want to spend profligately, and then complain about your financial situation, you’re no different than a chain-smoker who considers it a random tear in the cosmos that he’s the unlucky stiff who ended up with lung cancer.

One more time: build assets. Sell liabilities. Get in the other person’s head. Attack debt like the household pest it is. Don’t take on expenses with only an unformed (and uninformed) idea of how you’ll profit from them. And buy our book.

You're just a statistic.

You need to understand math to understand money. Not differential equations or sympleptic and contact topology, but a little rudimentary addition and division wouldn’t kill you. Division alone should get you through this week’s post.

If you want to grasp what the macroeconomic world means to you, both now and in the future, personalize it. Understand that “the government” doesn’t bail out Fannie Mae, or Freddie Mac, or General Motors, or Chrysler, or Goldman Sachs, or Bank of America, or AIG, or Citigroup, or Wells Fargo, or Morgan Stanley, or Capital One. You do. More specifically and accurately, you bail out those companies’ executives and managers, and indirectly, their employees and customers. All economic transactions, if you strip away enough layers, are between individuals and/or groups of individuals.

It’s an obvious point, but one many people ignore. The next wealth created by government, any government, will be the first. Government redistributes. Or to be more fair, government bureaucrats and legislators redistribute. They act as intermediaries, taking assets (and liabilities) from some and giving to others. Sometimes government actors do like Robin Hood, taking from the rich and giving to the poor. Other times they’re like Ayn Rand’s Francisco D’Antonio, taking from the poor and giving to the rich (or as he calls them, the unproductive and the productive respectively.) Most often, government actors confiscate from the middle-class and redistribute to the similarly situated. While taking their cut, of course –which they distribute among each other. Money is never money unless someone’s possessing it. A non-human entity, whether a King Charles spaniel or a building, literally has no use for money.

Not to get too philosophical, but there’s no such thing as “collective” economic action as distinguished from the accumulation of our individual actions. National economic pain or prosperity – consumer confidence, or whatever else you feel comfortable calling it – equals yours plus mine plus your neighbor’s plus her neighbor’s.

With a federal budget dealing in numbers far beyond anyone’s daily grasp, it’s easy to liken economic data to astronomical data. For instance, Neptune is 2.7 billion miles away. But even if you understand every word in that sentence, and know the sentence makes sense, can you visualize exactly what it means? Neptune is farther than Tuva, farther than Antarctica, farther than the Moon. Yet is there a way to understand that in physical, personal terms?

If you drive 20,000 miles a year, and drive from the age of 16 to the age of 86, that cumulative distance is to the distance to Neptune as a mile is to the distance across the United States. That’s still complicated, but it’s about the best we can do. With national dollar figures, we can see how our government leaders’ failure to restrain themselves fiscally impacts us directly. Two little words: per capita.

“Trillion” and “million” are almost homonyms, which is where their similarities end. A trillion is to a million as the population of the United States is to the population of a subway train. Or as LeBron James’ salary is to your average 5-year old’s allowance. That doesn’t stop politicians from insulting your intelligence by proposing budgets in trillions while promising cuts in millions.

In the remainder of this week’s post, we’re going to divide every number by 300 million, and give you an idea of how government spending affects you personally.

The preceding anecdote refers to a speech the president gave last April, 2 months after signing the ($2,623) American Recovery and Reinvestment Act, a/k/a the (first) stimulus bill, and encouraged austerity among his inner cadre:

“I’m asking for all of (the cabinet secretaries) to identify at least (33¢) in additional cuts to their administrative budgets.”

Presumably, he means annually. Let’s examine each department’s budget:

Health & Human Services $2,818
Defense $2,170
Agriculture $317
Veterans’ Affairs $292
Transportation $244
Education $209 (excluding $323 in stimulus funding)
Homeland Security $173
Justice $154
Housing/Urban Development $146
Energy $ 80
Interior $67
Treasury $ 65
State $55
Commerce $47
Labor $47

You can see what a gigantic, gaping hole a 33¢ reduction would leave in the coffers of the tattered vestiges of a once-robust Department of Health & Human Services. Last fiscal year, the United States’ federal deficit increased by $6333. (Not to $6333, by $6333. To would be $48,167. Are we getting close to your net income yet?) That last number is somewhat misleading, because many of us are either too young or too old or too disabled or too incarcerated to work. Per taxpayer, the number is closer to $60,000. The interest you incur on that debt is $1,513, or 18% of the total. You’ve also borrowed $12,502 in Treasury securities, at least a third of which has gone to Chinese government leaders investing on behalf of their citizens. You paid $50 to bail out Fannie Mae and Freddie Mac. The preceding president appropriated $45 of your money to bail out General Motors and Chrysler – the latter of which was owned by a private capital management firm whose members were all billionaires or close to it.

Stop complaining, Citizen. This is all for the Greater Good. Repeat after us: The Greater Good.

This is ostensibly a personal finance blog, so if you’re wondering how this talk affects you, understand that electing fiscally ascetic politicians can mean thousands of dollars to your bottom line. Taking the effort to find them, vote for them and maybe even volunteer for them will help Control Your Cash more than clipping any coupon will.

Control Your Cash’s 6 Axioms For Building Wealth And Thus Saving You The Trouble Of Buying Our Book.

Per capita

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