Wednesday, June 11, 2008

Mixed Messages

It should be a mere funny coincidence, but it’s not. An article in the Business section of the Washington Post talks about how the new iPhones will cost half what the old ones did and are expected to bring in a new tier of customers. Meanwhile, an op-ed piece in the New York Times excoriates the American people for not saving. We spend too much, it says, unlike our thrifty forebears. I found it ironic that the op-ed piece quotes Ben Franklin more than once as an avatar of thriftiness. Ben was a shrewd businessman, but his thrift came in having a hardworking wife who managed his business affairs. He himself spent decades living it up in the salons of London and Paris on OPM (other people’s money). He liked to tell other people how to live, but did he himself live that way? Not really. True, Ben Franklin was a self-made man and he lived on sparing rations in his early years. But that’s my point. He was willing to sacrifice to make a fortune. But he was not the type of person who made his fortune by saving up money one day at a time for years. He made it by creating businesses that were successful. And then his wife kept the money flowing.

It’s the middle of June now, and half of the people entitled to Stimulus Rebates have received theirs. Did you? Is it spent yet? What did you do with the money? I have spent $400 of mine. I spent $300 on a piece of electronics that I had been planning on buying for about five years. The other $100 was on a friend’s new hardcover book and some DVDs, one of which is a present for someone. Modest enough, you say. Maybe I’ll save the remaining $200.

Meanwhile, I just spent $10,000 that I do not have to get my driveway paved. Cash advance, 3% transaction fee, no interest for over one year. I figure that I saved a minimum of $525 on gravel per year. I’ll probably break even on the driveway, assuming the cost of gravel goes up, after maybe 15 years. Will I actually live in this house for another 15 years? Not according to national statistics. I’ll be long gone before this driveway earns out.

Or will I? A house with a paved driveway is a cut above one with a mere gravel driveway. Whereas asphalt is the basic in a suburb, in the boondocks where I live, it’s a luxury. So let’s say that I get an additional $5,000 on the sale price of my home because I had the driveway paved. That means my investment amortizes after something like 10 years. Or maybe less, depending on the rising price of replacement gravel. Will I still be living here in 10 years? Better odds, but still not good.

In this economy, with so many people strapped for cash (including me) and credit (not including me), I got a very good deal on the paving price. Businesses are hungry for customers. But still, I financed the paving with borrowed money. I leveraged my good credit to get an immediate, no-questions-asked loan on very favorable terms. I have reason to believe that I can pay it all back in the time required. (We waited until a car payment dropped off our monthly nut, plus somebody got a raise.) And for another 3%, I can probably transfer the remaining balance a year from now to another credit card and ride for another year if I need to. And then I can do it again.

So, was my action part and parcel of the folly of Americans who live on credit and who aren’t thrifty? Or was it thrifty because I spent as little money possible now to get what I needed now? At today’s prices?

And here’s another angle to ponder. I had $10,000 in a CD at the bank, and it would have matured and have been available in two weeks with no penalty. So I could have taken savings out of the bank to pay for the driveway. But I didn’t. I feel more comfortable keeping the $10,000 in savings, while taking on $10,000 as debt owed to a credit card. Why? Because it’s hard to save up $10,000 and stick it in a bank. It’s a lot easier to spend $10,000 and then slowly pay it off. And if I suddenly had no income, I could stop paying on the $10,000 debt, and live on the $10,000 savings. And meanwhile, I have a paved driveway and the paving company has been fully paid, which meant that eight men could feed their families or pay their rent this week.. Sounds like a win/win to me.

Finally, lest you think I was extravagant to have my driveway paved at all, consider this: Delivery trucks and rainstorms kept creating enormous potholes in the gravel. Huge ones that cost a lot to repair, in time and effort and in the purchase of new gravel. Meanwhile, the potholes were a lawsuit liability. What if someone broke an axle on their car on my driveway and sued me? Or fell and broke a leg? I’d be out much more than $10,000 when all was said and done. So have I been thrifty after all, by improving my property now and averting the likelihood of future catastrophes?

One thing I know for sure. I’m not living it up in London and Paris on government money.

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