Secret One
Shun the Crowd
This annual royalty paid the world - which would not disappear unless the U.S. massively underconsumed and began to run consistent and large trade surpluses - would undoubtedly produce significant political unrest in the U.S. Americans would still be living very well, indeed better than now because of the growth in our economy. But they would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an "Ownership Society" will not find happiness in - and I'll use hyperbole here for emphasis - a "Sharecropper's Society."
Warren Buffet, March 5, 2005
Boy, are we in trouble.
Or are we?
Two-thirds of credit card holders aren’t paying off the balance on their credit cards each month. But one-third are.
Seventy percent of homes have mortgages. But thirty percent are owned outright.
A majority of workers are not saving enough to retire by age sixty-five. But some are.
There’s an interesting dichotomy going on in the U.S. today. Look at Americans by the averages, and the news is really grim. Yet there are those eccentrics riding along the edges of the bell curve for whom the generalizations don’t speak. They aren’t “a paycheck away from homelessness,” as television news claims most of us are. They aren’t drowning in debt. In fact, they’ve even got something stashed for a rainy day. Some of them started from nothing, but have managed to achieve independent wealth.
They should be our teachers. And we should learn the lessons before it’s too late for our economy.
The Joneses we’re supposed to be emulating sure have been busy. In 2005, Americans’ personal savings rate dropped to a negative half a percent, a level not seen since the Great Depression. By the end of 2009, it soared to a whopping 3.3 percent as consumers finally snapped their wallets shut and hunkered down for this recession.
Seeing higher savings rates anytime soon is going to be hard, as many of us are awash in consumer debt. Debt, not including home mortgages, averages $8,500 per household. No wonder people are spending on average about fourteen percent of their after-tax income on payments! By the way, the more educated we are, and in the managerial and professional occupations, the more likely we’ll have debt, so this is definitely the traditional Middle Class we’re talking about.
The group that personally remembers the Great Depression knows how to shed debt, but not the retirement planners after them. As the February 2009 Federal Reserve Bulletin reports on the statistics it compiled in 2007:
By age group, debt ownership rose 5.5 percentage points for households in the 55-64 age group and 6.7 percentage points for those in the 65-to-74 age group, but it fell 8.9 percentage points for families in the oldest age category.
This same report tried to put a positive spin on our increasing debt, but it’s still going up just the same:
The overall median and mean values of outstanding debt for families that had any such debt rose about 11 percent from 2004 to 2007, a slower rate of increase than in the previous three-year period, when the median and mean both rose nearly 34 percent.
Most credit card debt falls squarely on the shoulders of the Middle Class, too: “As with installment borrowing, the carrying of credit card balances is widespread but considerably less common among the highest and lowest income groups…”
Those “few bad apples” who drive up the percentages for the rest of us aren’t so few anymore:
A limitation of the median ratio is that it may not be indicative of distress because it reflects the situation of only a typical family. Unless errors of judgment by both families and lenders are pervasive, one would not expect to see signs of financial distress at the median. Thus, a more compelling indicator of distress is the proportion of families with unusually large total payments relative to their incomes. From 2004 to 2007, the proportion of debtors with payments exceeding 40 percent of their incomes rose 2.5 percentage points, to 14.7 percent; in the preceding three years, the proportion had increased 0.4 percentage point. The increase was shared by all demographic groups except families in the bottom net worth group.
The quote at the beginning of this chapter by Warren Buffet was about larger national realities, but it alluded to what is needed for even individuals to thrive fiscally, which is underconsumption. So, what are the advants of living below your means and having a surplus?
- Funds to cover that blown tire, burst pipe, orthodontia, temporary job loss, or any of a myriad other “surprises” that life hands us.
- Through interest, rent or savings, that surplus can go towards something that produces an income for you.
- Compound interest over time, if it stays ahead of inflation, is magical, and the earlier you get started, the better.
- Funds to achieve goals, like retirement.
- Funds to pursue interests.
- Even funds to live your values. Are you disgusted with what public schools are teaching your children, and you want to home school instead? Do you want your home to be more “green?” Would you like to weather this economic downturn without resorting to stealing? The reality is that while virtue is its own reward, it does often cost money.
Intellectually, no one disputes the need to consume less and save more. It doesn’t take a lot of reasoning to see the danger and just plain inherent inefficiency of toiling away in order to consume, never getting ahead and never creating savings that can work for you. And yet, statistically-speaking, that’s still the model the majority of Americans are following.
The “outliers” have found a way to buck the practices of the majority, breaking the shackles of debt and buying their freedom with savings. Does anyone ever ask them how they do it? Is there something we could learn from them?
Imagine “Robin Reach” marveling at the Lifestyles of the Miserly and Mysterious. In his cultured drawl he announces, “We’re here at the home of Ben and Betty Harper in Watchacollit, Wisconsin. The Harpers have fully paid off their three-bedroom, two-bath home on a quarter acre and they put four children through college. Betty has been a homemaker since the children were born and Ben is planning to retire next year at the age of fifty-five. They have a net worth of some three million dollars. Tell me, Ben, what’s that sticker on the back of your car?”
Ben chuckles, “Oh, it says, ‘Don’t laugh, it’s paid for.’ One of the guys at work stuck it on there. I’d take it off, but now it’s helping to hold the bumper on the car…”
“Ah, I see. And this house is awfully small for having raised four children in it.”
Betty chimes in. “Oh, it’s plenty big enough when you have to clean it.” “But couldn’t you hire someone to help with that?”
“You bet I did. Trish specialized in bathrooms, J.J. was a genius with a vacuum cleaner. Gracie could wash windows so that you couldn’t tell there was glass there anymore, and Paul was usually on K.P.”
“Er, okay. Well, now that the kids are all grown and gone, surely you’ll be eating out more.”
The Harpers look blank for a few seconds. Ben recovers first. “Well, the corn, cucumbers and potatoes are ripe now. Can’t let ‘em go to waste. ‘Sides, you know money doesn’t grow on trees.”
Betty brightens. “Well, Honey, that’s not entirely true. Our peaches sold out at the school fundraiser that one year, remember?”
“How could I forget? And the pies you made...”
“Oh, just a little of this and a little of that.” She smiles at him. “You need a haircut. I’ll set up the chair after dinner.”
“Only if you’ll make more pie.” He smiles back.
“Which reminds me,” she seems almost startled that Robin Reach and the cameraman are still standing there. “Would you care to come into the house for some iced tea? Just made a pot. You’ve got to see the new kitchen floor we put in.”
Before Robin can respond, Ben reminisces, “It sure was nice of the high school to give us all the leftover tile from one of their projects. You two go on in. I’ll be along after I mow the lawn. Mr. Reach, would you mind bringing that wheelbarrow over this way?”
Mr. Harper tries not to smile as Robin delicately grasps the handles with his soft hands, but obviously doesn’t realize he has to lift his end to make the wheelbarrow go.
When he finally manages to drag it over to Mr. Harper, he mutters, “You’re millionaires; you don’t have to live like this!”
Ben grins. “How do you think we got to be millionaires?”
Moral: Don’t follow the herd into debt.
