Thursday, August 11, 2005

Money, money

Americans save $.40 of every $100 of disposable income, according to
this (for the mathematically illiterate among you, that’s forty CENTS—please note the decimal). According to the economics professor I listened to on public radio this week, the savings rate of Americans is zero. Others place it in negative territory.

We’re told that Americans are treating their
houses like giant ATMs, taking out cash via home equity loans to meet fleeting desires. Trading a hard asset (the house) for depreciable and/or fleeting ones (cars, vacations, restaurant meals). Homeowners refinance, take cash out to pay down credit card balances, then run them up again, leaving themselves with 1) just as much credit card debt; and 2) less housing equity.

Homeowners act as if housing prices will continue to rapidly rise forever (I agree that the Midwest is not as susceptible to a housing bubble as coastal cities—Boston, Southern California [ok, it’s not so much a “city” as a state of mind], D.C.). They figure on finding some new buyer to finance their retirement.

Where are the flaws in this? The upcoming buyers will need to be compelled to buy your overpriced house—why will they pay your price, among a glut of want-to-be-retirees’ houses? And, in retirement, you’ll still need a place to live, right? Trust me, you won’t be able to live with your kids. Finally, as energy costs continue to rise, heating those 3000+ square foot energy sinks is going to make them less, rather than more, desirable.

You can find multiple financial “advisors” who say DON’T pay down your mortgage early. Your home is not a liquid asset, there are better places to invest your money, you’ll lose a great tax deduction; I’ve heard the arguments and I don’t buy them.

Who benefits if I have no mortgage? Only I do. Having a paid-off residence gives me a great deal of freedom in determining what I will work at—and maybe the freedom not to work at all. (Ok—you do lose the flexibility of deciding WHERE you’ll work.) Businesses (and by implication, the “U.S. economy”) lose if I’m not driven to work/spend/borrow/work for whatever pittance/horrible boss I happen to get.

Last year we traded our variable rate mortgage for one with a fixed rate, and the assurance of knowing our payments will never go up. We could have done the refi for another 30 years, but we didn’t want to essentially erase the seven years we’d already been paying. Our goal now is to pay the rest off as rapidly as possible.

As an individual, I can have zero effect on the national debt. All I can do is choose to have as little personal debt as possible, and make it easier for my family to weather any oncoming financial storms.

My advice for everyone: don’t buy a house that takes two salaries to afford. Keeping your house payments low gives you incredible flexibility, and lowers your stress immensely, when you know you don’t have to keep working at any particular job. (Exception allowed for singles, obviously [I bought my first house when single]—just don’t spend nearly as much as the realtor or bank tells you you’re “qualified” to.) Eschew the interest-only loans and 100% financing; people pushing non-traditional financing options do not have your best interests in mind.

D has a vision—eventually it will be considered a “crime against the economy” to quit your job if you have any debt. We’re not going to bring back debtors’ prisons, but we’re going to re-institute slavery—you will be made to work, for the elusive benefit of the U.S. economy.

Remember right after 9/11, when we were supposed to show how patriotic we were by buying things? What brings more national security—having everyone tanked up with credit card debt and enslaved to banks and their employers (economic serfdom), or having a populace that is financially free to act in their own best interests?


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