Money the Old-Fashioned Way

David Bach wrote a series of books on getting wealthy based on home-ownership. In the first half of this decade, his logic made sense: you can mortgage a new home, make the payments, and then watch your equity and personal wealth rise. In places like Orange County, California, the average home's value more than doubled between 2000 and 2005. Automatic Millionaire Homeowner? You betcha. It's how to make money without even trying, he coached.

It used to be that a home was, well, just that: a home. Then people figured out that home values appreciate, and in the last decade, they appreciated faster than the rate of inflation. But when the value of the finished product rises faster than the cost to produce, that leads to oversupply because people see easy money, and oversupply means that a correction in assessed value is coming.

David wasn't wrong. He preaches the long haul and learned his chops during a time when there wasn't a bubble in housing. Long-term, buying a house and living in it is a sound strategy for wealth. The thing is: this is the age of flipping the house, not investing in it. That depth of investment requires permanence and ours is a transient society. In? The home as the new ATM. Out? The home as a vehicle for retirement security.

Now, I'm exaggerating - not everyone sees their home as temporary. But there was a commercial a couple of decades ago for the financial firm, Smith Barney, and the tag line was that Smith Barney made their money the old-fashioned way. "They earn it," stated the venerable John Houseman.

"Old-fashioned."

That phrase once had a romantic and sturdy air to it. Not any more. No financial institution today would try to impress upon us that their method of money management relies on "old-fashioned" practices. But here's something sobering:

People in their 20s and 30s grew up in an age of unprecedented technological advancements - a factor that has affected their views of the future.

"This generation feels that somehow or another they're going to figure out some technological advancement that's going to get them out of their financial troubles and outsmart the market," says Manning, who served as adviser to the forthcoming documentary "In Debt We Trust." The documentary paints a picture of national financial crisis stemming from the personal-debt burden.

[Generation Y] was kind of shielded from a lot of financial responsibilities. The generation's financial literacy is abysmal, with personal finances to match. Only 52% of high school seniors passed a recent national financial literacy test, meaning adults entering the work force do not know enough about basic budgeting, interest rates or taxes to make sound decisions for their own lives.

According to the National Association of Realtors, today's median first-time homebuyer is 32 years old and puts down just 2% on a $150,000 home.

From the article:

The problem is not lack of smarts, but can be chalked up to an environment in which parents coddle their children, bank deregulation has made the financial landscape confusingly complicated, and consumerism rules.

I want the works
I want the whole works
Presents and prizes and sweets and surprises
Of all shapes and sizes
And now
Don't care how
I want it now
Don't care how
I want it now

A lot of parents believe that their job is to take care of their children, when in fact their job is to train their children to be self-sufficient adults. Vast difference.

I'm not sure how to change our culture to once again cherish making money the old-fashioned way - earning it, saving it, investing it - but I suspect it might start by appealing to the retirement needs of parents who constantly have to jump in and save their kids. If the coddling ceases, the survival instinct will kick in.

Does that sound mean?

Keep in mind that I'm referring to 19-year-olds and not 9-year-olds. But then I think that should be obvious, shouldn't it?

by Brett Rogers, 5/4/2008 2:33:22 AM
Permalink

I know a couple of 30-somethings whose parents pay for their cell phones. It's absolutely ridiculous, and not helping them at all.

At the time I didn't appreciate it, but I'm glad my parents were "tough love" when it came to money. And I delight in seeing them retire early, after driving the same truck for twenty years, ordering water with the occassional dinner out and consistently living below their means. I never went without anything, and the lessons I learned by watching them handle money are invaluable.

Posted by Annette (dmartinigirl.blogspot.com), 5/5/2008 10:34:00 AM

Mucho applause to your folks... that's how it should be. Shielding people from the true costs of life only encourage to do dumb things - like vote for politicians who want to raise taxes.

Are those 30-somethings Democrat voters?

Posted by Brett Rogers (http://www.beatcanvas.com), 5/6/2008 9:14:32 AM

How'd you know? One used to work for Preston Daniels and is VERY active in and pretty vocal about it.

Posted by Annette (dmartinigirl.blogspot.com), 5/6/2008 10:22:31 AM

I just love reading posts/comments like this. There are others still out there who get it. :)

I agree it all starts with our parents/family (those who raise us). For me it wasn't so much as tough love, we just didn't have the money. So they worked, I worked as soon as I was old enough. Learn from example. To me that is life lesson 101.

The "entitlement" or "me/now" mentality is what is going to destroy our economy, no make that our country. And it isn't just the consumer, businesses, and government are on board and it's full steam ahead.

I want to see a candidate start talking about "personal accountability." You want something? Get off your ass and work for it. Government won't provide that, it isn't our role. Say that, and I don't care what party you are affiliated with, you'll get my vote (and a standing ovation).

Posted by Pale Rider, 5/6/2008 10:37:21 AM

Ok at the risk of being a ditto head (God forbid). I could not agree more. My grandmother had a saying that was something like there are not poor people but there are people with poor habits. Her point was exactly around setting priorities (theirs was their kids' education), working hard and living below your means. I don't think father has purchased a new car in 25 years - when he buys one it is "pre-owned" (since used is so yesterday).

Posted by Rich, 5/7/2008 9:28:30 PM

One last thought - for the folks like Bach that preach home ownership a big part of it is really the forced savings - not the appreciation as much although that is certainly in the mix. The idea is that you have an asset where you are automtically building wealth (read saving) by making your payments (unlike renting) and it should at least keep pace with inflation. For those that purchased in the last few years years you are certainly not keeping up with inflation or building equity for that matter - even in the conservative midwest.

Posted by Rich, 5/7/2008 9:31:25 PM