Saturday, March 25, 2017

Sturdy Wisdoms: The Worst Habit

     [Just yesterday, after a jaunt on which I spent far too much money on cheese – it’s one of my more difficult-to-resist vices – I received an email from Dystopic of The Declination. He drew my attention to his most recent essay, and mentioned that he’d come to an opinion about mortgage debt that differed greatly from his original one. He wrote that the change was because of the essay below, which first appeared at Eternity Road on December 13, 2006. In appreciation of his missive and the implied compliment...and yes, in recognition of the folly of spending so much on exotic cheeses that I was moved to inquire of the cheese shop proprietor whether financing might be available...I repost it here. -- FWP]

     Your Curmudgeon is rather older than most wanderers of the World Wide Web, including most of those who hawk their opinions to a general audience. He received a different sort of upbringing from most, too. As his years lengthen, he finds himself ever more frequently revisiting the teachings of his youth and reviewing them for continuing soundness and applicability.

     Many of those lessons are still quite serviceable -- infinitely more so than the guff that's displaced them in more recent years. In part, that's due to an underlying shift in premises; half a century ago, no one would have dared to posit that right and wrong are relative, or that there can be no absolute moral standards, or that "good for you" and "bad for you" are anything but matters of opinion. Today one seldom hears anything else. If you don't believe it, either you don't have children or you haven't paid enough attention to what their "teachers" have been telling them.

     Accordingly, your Curmudgeon has decided to trot out, one by one, the sturdiest and most useful of the simple wisdoms with which his own parents and teachers equipped him. It is his opinion that their promulgation could do quite a lot to correct the faults of modern American society, and even more to quell the rising tide of dissatisfaction with life that afflicts so many of our teens and young adults.

     Of course, opinions will vary. Read on, and judge for yourself.

     High among the homiletic primaries is this one: don't allow yourself to form bad habits. From the ordinary meanings of the words, this would seem self-evidently wise. For a "bad habit" is a behavior pattern that does harm to oneself. Of course, there's a heavy murk around that word "bad," whose variable interpretation has been the ingress for a lot of irrationality, but we'll get to that some other time.

     There are any number of habits on whose badness Americans would generally agree -- and not by thin majorities, either:

  • Avoidance of exercise;
  • Routinely bad nutrition and overeating;
  • Impropriety of disclosure (i.e., the habit of revealing sensitive facts about oneself or one's family, friends, and acquaintances to persons who ought not to be told);
  • Excessive television watching;
  • Smoking;
  • Drinking to excess;
  • The use of recreational drugs.

     The above is, of course, a partial list. Other bad habits less dramatic in their effects would draw general concurrence as well. But there has been a sea change in American attitudes so complete, yet so quiet, that the very worst of all habits, by which millions of persons have utterly destroyed themselves and their kin beyond all hope of renewal, is almost never addressed. Indeed, when it's mentioned, most persons either refuse to acknowledge it or turn away to conceal their embarrassment.

     The habit of which your Curmudgeon speaks is living beyond your means.

     This venerable phrase has almost been effaced from our culture. Yet our nation's habit of living beyond its means is a regular news feature, reported through innumerable channels at least once per month. What else does the federal deficit signify? What else does the American trade deficit signify? What else does it mean when the dollar drops in value against the currencies of other lands? (It's been quite a long time since a physician last clapped your Curmudgeon on the shoulder and told him that he's "sound as a dollar," and not because your Curmudgeon is quick to take umbrage at insult.)

     What's bad in the large is just as bad in the small, yet nearly all of us do it, and very few of us will admit to it.

     Likely you, Gentle Reader, are nodding, perhaps a bit reluctantly, at the unwisdom of "living beyond your means." But you haven't seen your Curmudgeon's kicker yet:

If you've borrowed money, for any reason whatsoever, that you can't immediately pay back out of your own reserves, you're living beyond your means.

     Yes, that includes home mortgages and car loans.

     A century ago, "mortgage" was a dirty word. (Car loans were, of course, unknown.) In fact, the word means "death pledge." It denoted a promise to return the mortgaged property to the legal ownership of the mortgagee -- the lender -- upon the mortgagor's -- the borrower's -- death. Indeed, it still means exactly that.

     Mortgages in the Nineteenth Century were almost exclusively the province and the bane of farmers. Private housing in non-farm areas was very seldom mortgaged. The income tax, the rise of the lending industry, and the demographic and financial conditions that prevailed after our two World Wars were the impetus by which Americans were goosed into thinking that living in homes they do not own, that could be ripped out from under them at any moment, was perfectly all right.

     It's hard to get reliable statistics on the matter, but according to a financial professional of your Curmudgeon's acquaintance, no fewer than 75% of all private homes are mortgaged. The deeds to those homes are encumbered in such a fashion that the persons who "own" them could be stripped of them at any time. It would not surprise your Curmudgeon too greatly if those provisions were invoked to put force behind a Kelo-esque eminent domain proceeding; financiers and politicians have always traveled in the same circles.

     But even apart from the hazards involved in living in mortgaged housing, it's almost always unwise to undertake a mortgage for reasons of simple financial prudence:

  • It's a long-term obligation, typically 15 years or more;
  • The lender is legally privileged over the borrower -- that is, nearly all the options rest with the lender, nearly none with the borrower;
  • The borrower's income, upon which he depends for his debt service, is almost never guaranteed;
  • A default on a mortgage is regarded as the worst of financial sins, and in the worst case can ruin an individual's financial standing for the rest of his life;
  • In the event of a default, the borrower seldom recovers any significant percentage of his notional equity in the mortgaged property.

     If a mortgage, which is secured by real property and carries tax advantages that are attached to no other form of debt, is unwise, then what need one say about chattel loans on cars and other movable property? What need one say about credit-card debt, which carries extremely high interest rates and has ruined millions of families in the past quarter century alone?

     Many a reader has been saying to himself "But how could I get the things I need without incurring these debts?" for several paragraphs now. Such questions arise from a perverse sense of "need" far more often than not. Americans are hooked on material self-indulgence; easy credit is the pusher that feeds our habit. Most of what we have, we do not need. We want it, and we certainly enjoy it, but those are far different things.

     "Need" is the gateway drug. "Need" is habitually "defined down" over time: from a house, to a car, to better clothes, to a better car, to a really nice house in a "suitable" neighborhood, to designer jeans and sneakers for the kids, to the latest iPods®, to a PlayStation 3 ® and all the "hot" games for it, to a Giant Economy Size bottle of Chivas Regal to dull the pain from having to pay for all that stuff.

     Man's needs are food, clothing, shelter, and heat. All else is discretionary. The truly prudent man does not incur debt to pay for discretionary items.

     Let it be admitted that most Americans, despite their debt anchors, manage to skirt the shoals of financial disaster. But an appalling number do not, and a significant fraction of those never quite recover from the wreck. Compound interest, which master financier Baron Philippe de Rothschild called "the eighth wonder of the world," is in fact the eighth horror of the world for those habituated to debt. Its ability to drain all the vitality from one's present and hope from one's future is unequalled by anything but cocaine and heroin.

     In what might be the supreme irony of ironies, innumerable Americans look for their salvation from their government. Not only is our government the most egregious abuser of credit in the history of the world, it has an unadmitted interest in encouraging debt to the widest possible extent. Widespread severe debt is the motivator for governmental abuse of the currency: inflation. Inflation in our fiat-currency system gifts Washington with billions of "free" dollars with which it can increase its power over the rest of us. But Americans with substantial savings will not tolerate inflation; Americans deeply mired in debt, seeing the chance to pay down their obligations with "cheap" money, will embrace it eagerly.

     If you're a young person who has yet to acquire any debts, don't! Live beneath your means; acquire savings. Only borrow when utterly forced to do so, and only as a capital investment in yourself: that is, for tools or an education. Be ruthless in assuring that every dollar you make arrives in your pocket with no debt-service strings attached.

     A young man with a white-collar salary, who restricts his consumption for just ten years and puts his unspent balance into conservative investments (i.e., steady 3% to 5% returns), can usually produce the entire purchase price of a house at the end of that period. He'll have no trouble affording the cash purchase of a used car. Does it mean that he'll live in a less opulent style than that enjoyed by his coevals? Yes. But it also means that the fangs of the debt habit and the shackles of compound interest will have no chance to snag him.

     An older man who has lived free from debt can be certain of mobility and security. He will have savings. No occupational reversal will have the power to dispossess him. Neither will misfortunes of nature render him helpless. He will have leverage in all negotiations that a man chained to debt and beholden to creditors would not possess. He will be as free as his individual efforts can possibly make him. When he passes from this world, he will be able to leave his progeny a substantial patrimony. More, he will have already shown them an invaluable example.

     A sturdy wisdom indeed.


Linda Fox said...

One caveat - if your job involves a commute, and you haven't a reliable means of transportation, you might purchase a new, low-end car ($15k or less) - NOT leased - as a way to get past the hurdle of not having sufficient savings to put a down payment on a used car.

Take excellent care of that car, ONLY using it for job-related transportation, and POSSIBLY making a once a month trip to the grocery store to make bulk purchases.

Aggressively look for others needing a ride to your place of employment, or a nearby place, and plow that money received into paying off the car. Consider doing Uber for the same reason.

I was once in a position where the needed down payment wasn't there, and I didn't need to put money down on a new car - I bought the Geo Metro, at that time about $7k, and ran it for 11 years. It more than made up for the investment.

Do NOT lease, or buy a more expensive car. This advice is just for the cheap ones.

Unknown said...

I agree with all of it, and add this one, if I may. It isn't mine; the first person I heard say it was Stuart Crane. Live on half your income and wisely invest the rest. It's required most of my life to learn its simple truth, because, if a person has succeeded in living off half his income, he has naturally learned most of the good maxims of which you speak in your post, mainly the difference between 'need' and 'want.'