Sunday, October 18, 2009

Why You Never Bought My Personal Finance Book

Five years ago, I wrote a book on personal finance. You haven’t seen it at the stores? You didn’t buy a copy to support me? No prob. I never bothered to send it to an agent, let alone a publisher.

Do you know why? Because, silly me, I thought that my adventures in credit card debt would not be of interest to most people, because I did not resolve them in the conventional manner (getting a second job, contracting with a credit card counseling company, etc.). What loosened the grip of the credit card companies was a deus ex machina: a big fat wad of unexpected cash that arrived through a piece of extreme good luck (which was the result of hard work and sheer talent, but that’s another tale).

I came to some striking conclusions while writing my book. Chief among them was that we should never have bought our first house. Daringly, I concluded that most people’s money problems (if not related to the obscene costs of health care) could be solved by downsizing their lifestyles. And the most effective way to do that would be to sell the house and move into a cheaper one.

Really. I wrote this five years ago, as the real estate bubble was near its zenith. Sell the big house, get a smaller house, and everything else gets cheaper, and you can breathe. Am I prescient or what? Yes, I am prescient.

Last night I was reading a money book written in the middle 1990s. Ordinarily I would not bother. There’s hardly any point in reading a book about personal finance that does not take note of the amazing crash of our economic system last year. But this book was by Andrew Tobias, a writer I’ve always liked, so I was willing to read it. How dated it already seems, like a trip back in time. What was true then is not true now. Both for him and for me. Except for his basic message about making safe investments versus taking stupid risks.

So I am a little more at peace with the thought that I missed the boat with my personal finance book manuscript. In 2004, no one would have listened; they were firmly in the grip of maxing out all possible legal and shady sources of credit. And by now, 2009, everybody knows better. They don’t need me to tell them what to do. Or do they?

I still hear of people trying to game the system and buy housing with nothing down, or maybe only a 3% down payment. If that’s all the cash you can lay hands on, you should not be buying a home. You should be renting somewhere cheap and saving up your cash. And you know it. But you aren’t listening, are you? Please, listen. Being broke for a decade in order to eventually make a handsome capital gain is a lousy way to live. You can have a much nicer life if you live within your means. Take it from one who has lived it both ways: not being in nasty debt is better. Having a few dollars to play with is a lot more pleasant than always worrying where the money for the next payment is coming from.

Right now, a lot of us are experiencing the double catastrophe of reduced income because of unemployment and the inability to downsize our lives by selling our homes. My best answers to deal with this kind of crisis are:

1. Get more income; everyone in the family who can work should. In the Depression, kids got jobs to help put food on the table. They can do so now, too. Pool all family income to buy necessities; don’t treat the income of a dependent child (even a returned college graduate) as merely their personal money. It’s okay for each member to get an allowance according to their contributions, though.

2. Consider doubling up with other family members or friends in one house, to cut overhead. We’re not used to this anymore, but it was common years ago, and it works. Yes, there can be problems, but you can draw up leases and make sure that responsibilities are shared and rent is paid.

3. Sell as many possessions as possible to generate cash. Do not fret that you bought these things for X dollars and can only sell them for Y dollars. That is a constant in life.

4. Do not buy more possessions. Most of us have far more than we need. If you have a working washing machine, you don’t need two weeks’ worth of clothes. (The only exception is if you work in an office and have to front.) Similarly with electronics. You’re going to be working for money or to keep your home going; how much time will you have for toys anyway?

5. Follow anybody’s and everybody’s economizing tips that you can bear to. Examine your feelings about the ones that stick in your craw. Can you change your mind about them? Try it and find out.

And that’s it. I wonder if five or ten years from now these suggestions will feel completely outdated? I hope not. Some ways of approaching life should never go out of style: Spend less than you earn. Don’t waste. Everybody works for the common family goal. If you are single, that family goal means your personal goal to be financially secure.

Maybe I’ll write a book about this someday.

Wednesday, October 14, 2009

Sunk Cost vs. Pricing Tough Love

“Sunk cost” relates to “throwing good money after bad.” We’ve invested in a course of action and it has not paid off, but do we stop? No. We keep doing it. “In for a penny, in for a pound” is another adage that demonstrates how people feel and act. When we commit to something, we do it wholeheartedly. That’s a good trait. But when we are doggedly loyal to our mistakes, such commitment is not to our advantage.

A lot of people still have not fully accepted the reality that their houses are not worth what they paid for them only a few years ago. Many people are trying to sell, either because they are overextended financially, or they have lost their jobs, or they have changed their plan to live in that house and want to move elsewhere. Having good reasons to sell is fine, but it does not make the market any better. It does not mean you will break even on the investment, let alone make a profit.

How do we change our stubborn feelings that this item was worth X yesterday and still should be worth X today, even when everything around us says it is not? One way is to gather lots of information. If you’re planning to sell your house, look at the MLS, the multiple listings of homes for sale, and see what the sale prices are for homes in your neighborhood with and without your amenities. And then forget the fact that you like your home better. A buyer might not care about your wallpaper or your granite, and instead will consider your distance from a busy street, or whether you have a fenced yard as more significant. That’s why the next step is a talk with a real estate agent who knows your area and can tell you what the final sales prices were nearby. Real estate agents know what the average sales prices are, regardless of personal style, and you’d be wise to heed their estimates.

(By the way, some people think that they can break even by selling their homes without paying an agent. This is usually a mistake, because your house does not get on the MLS, and many buyers will not deal directly with a seller. You always want the biggest pool of potential buyers, not just the ones who happen to drive down your street and see your homemade sign.)

If you want to sell personal possessions on eBay, Craigslist, through a classified ad, or at a yard sale, check out the prices other people assign to similar items. And what they sold for, if they sold at all. Then, think about what it is worth to you to be rid of your clutter or that clunky old car. Does it really matter what you paid for it, if keeping it means that you must keep paying for it? It shouldn’t. And yes, you bought that lamp for $50, but nobody is going to buy your used lamp for $50; you need to remember that possessions depreciate. Too many of us are paying for storage of possessions that aren’t worth the monthly rent. Purge them.

I recognize that it is hard to think realistically about our possessions. That’s why so many people lose out in the stock market. They buy too high, see the stock tumbling, and keep holding on in hopes of recouping their original investment. It does not work that way. Take the loss and go on to better prospects.

Thinking strategically is another way to deal with hard-to-swallow realities. If you and your family invested $100,000 in your college education, in a down economy you might be forced to take a job that only pays $10 an hour. A job that you could have had without all the years at school and all that tuition money. But if taking that job means the difference between being able to make ends meet and not, obviously, you take the job while looking for a better one. But don't just sign on for any old job. Try to pick the employment that also offers some advantage related to your preferred career. Pay attention to the business model of the company. Actively seek to learn on the job. Think of it as an internship, and you might produce less stomach bile during the months you have to hold on while still searching for something with more promise that relates to your career interests. And remember, many people have ended up with successful careers doing things they never trained for in school.

Effective sales people know that selling is compromise. Each side has to give up something and must get something. In a depressed market, what you might give up is a high dollar sales price for your house or other possessions, or a high dollar income that is consonant with your training and experience. But what you’d get is some peace of mind, and often that is well worth the compromise. And your feelings about sunk cost won't sink you.