It’s all about the Benjamin’s…

I had originally planned to write something different tonight, but after reading Sharon’s post today I decided some things I wanted to say couldn’t wait until later.  I’ll wait here while you go over and read Sharon’s story.  (Dum dum dum dum dum dadadadum dum dum dum dum dum dum …are you now humming the Jeopardy theme?  🙂  You’re welcome) 

Now that you’re back, what did you think?  I like what Sharon has to say.  I’ve been moving along those same thoughts lately.   My difference is that I think it will be far, far worse than most people think.  Most of the people who work in America now are accustom to their cushy lifestyle.  Life now is nothing like it was in the 20s, so we have a lot further to fall back to a base level before we can make any progress.  I know I’m being a pessimist when I say this, but I really think the impending picture of Peak Oil, mortgage/financial market meltdowns, layoffs and general rabble rousing will make the Depression seem like a cake walk. 

We’ll see.  I could be wrong.  But either way we’ll be prepared.  If things don’t go bad then we’re just more secure than we were before.  If things do fall apart then the plan is to have a place to live.  We finally put our money where our mouths are recently.  We did something really nutty.  All those financial pundits will say we’re nuts, but we don’t really think so.  You see, we stopped saving for our retirement.  Yeah.  I know.  It’s crazy.   It’s insane.  CCCAAALLLL THE CRAZY PEOPLE!

But here’s the thing, we know this is the house we want to be in for the long term.  We know that it’s a reasonable size with a fair amount of land area to grow a fair amount of crops.  We know that it’s in the city and it’s close to things we might need.  And we know that we would feel a lot better if we had it paid off.  So we decided to stop saving in our 401ks and IRAs, for now.  Besides, what’s the point of these accounts anyway?  If things go awful and we need the money Uncle Sam takes 40% before I can get any right?  And if things go awful the stock market won’t be going up right?  So the real reason they exist; to take advantage of tax deferred high income investment growth, won’t be happening.  Why add more to the pot?

Why not use that money to get our morgage paid off faster and that way we’ll own a chunk of space we can call ours and have a place?  If things don’t go bad, like I said, we’re still fine.  But now we have a house free and clear and some serious bank each month to work the retirement savings, if it’s even important to save for retirement in 10 years.  Of course assuming we’re able to stay gainfully employed.  Yes, I did say 10 years.  10 years is a long time away, but assuming no additional payments, with the schedule we’ve set up it should be around 10 years from now when it’s paid off.  I have no idea what the world will be like in 10 years, I just hope we can hold it together long enough to make it that 10 years.  But, 10 years is shorter than 30 so we’re moving forward.  And if we are able to get enough equity in the place that should protect us on the downside as well, even if it’s not paid off.

But what about your tax write off you say?  Mortgage interest is “good interest”.  What?  It’s good to pay someone interest?  Are you hearing yourself talk?  That is nothing more than good advertising.  Next time you do your taxes ask your tax person what the “benefit” of your tax write off is.  You’ll be surprised.  Same thing with student loans.  Get rid of that debt! 

Now, one major reason I think this will work for us is because we’ve always been LBYMers.  When most people in their 20s were out partying and buying new furniture and cars and whatnot we lived with cast offs and limited our partying.  We did buy some new things on credit, one car and one living room set.  The car is still with us, a Honda Civic (almost 10) , and will probably be for many more years.  The furniture set is too.  We know that if we set this direction down we can follow through with it.  That may not be so with you.  You need to look yourself in the mirror and see if you have what it takes.  (I’m lucky that I have an American wife who DOES NOT like to shop)

We also have had the benefit of well paying jobs and have used those opportunities to save diligently for retirement.  I know that with what we’ve already saved, assuming no additional contributions and a decent yearly return, we’ll pass that magical 7 figure mark before we’re 60.  But who knows what the dollar will be worth by then?  That may not be enough money.  Hell, the Dow might be back at 2000 by then.  Who knows.  One thing I do know, the Dow has averaged 11% a year for the past 75+ years, but we’ve never had a world climate like we do now for companies to operate in.  We are in a world where resources are scarce.  Oil, wood, coal, natural gas, tillable land are all being used up or fully utilized.  The corporate business model doesn’t work without an unending supply of resources to suck in the front end, both of people and natural materials.  I think the latter will be in high demand but low supply in the future, which possibly means wage deflation if workers are in low demand/high supply situations.  Keep an eye on that.

This was a long, possibly boring way for me to tell you to read what Sharon wrote and get serious about it.  Be serious about it.  You may not believe all this and that’s fine, but maybe you believe some of it?  Is that enough to make you want to do anything about it? 

Don’t you wonder why gas is approaching $4 a gallon already and the magical “Don’t buy gas today” strikes don’t workWhy do you think prices for things you are buying at the store are going up every time you go there, but the government is saying there isn’t any inflation?  Do you really think paying interest is a good thing? 

If you’ve got some spare time read this guy and watch his videos.  He talks about things in a very good introductory way, if you are new to this stuff.  It’s time to get with it America.



10 responses to “It’s all about the Benjamin’s…

  1. Sharon’s article was interesting, yet I don’t agree with all of her points.

    I think she’s correct in that most people will be priced out of the grid before it starts breaking down.

    Coffee is a luxury that may need to be given up, but beer or other forms of alcohol can be made pretty much anywhere. If you can grow apples, you’ll probably have more than you need to eat eventually, so why not turn some of it into cider?

    Vegetarianism is more of a political/ethical choice to my mind. We’ll all be eating a lot less meat & animal products in the future I’m sure, but if I get a crack at a good steak, there’s no way in hell I’m passing it up.

    I bought my current house in spring 2006… in other words pretty much at the top of the market. I knew this going into it and did it anyway. Convincing my wife to sell our old house and rent or move into a condo or something just wasn’t going to happen. We’ll be living in a much smaller place someday, but not yet.

    I personally think paying off one’s mortgage is a poor idea. With the eminent domain laws and the abilities of government to change taxation rates, if either your house or the land it’s on becomes more desirable, you can be removed from it even if you own it ‘free & clear.’ I saw this all the time out here in the burbs where I work… the old farmers would hold onto their farmland as long as possible hoping for maximum gain on their land before selling it to developers. Eventually, the last few holdouts saw their farmland get re-zoned from ag to residential and their property taxes skyrocketed. The developers then sat back and waited for the farmers’ resolve to crumble and they picked up those acres on the cheap from desperate people trying to fight off bankruptcy.

    Paying off other debts is a good idea I think. The house is ‘secured debt’ at least, and quite frankly 20 years from now if I can’t afford heat & power for it, it’s worthless to me and I’d rather walk away and stick the bank with as much of the debt as possible.

  2. i hear yeah matt. being a savvy economic guy i will assume you understand about paying off principal instead of interest. the law might be different in Iowa but here in NC, i can prepay the next month’s principle and skip out on paying the interest. it works though only if i tell my mortgage (from the french for “death pledge” by the way) company exactly where to apply my extra payment. if i don’t tell them they just apply it to the interest of the last payment of my mortgage. in other words, an extra $100 doesn’t do much for me unless i tell the mortgage companies to use it to pay off the principle of the next three payments. then i skip three payments ahead without paying that interest. wow, that sounded confusing.

    really though i was just commenting in support of your plan. hell, we’ve stopped saving for college. i’m guessing the education my little one will need by then to be completely different from what I went to university for. plus we can pay off the house by then so I could go back to work for four years just to pay off a state school while she attends.

    eminent domain is not very common and could happen to a rental as easy as it could to an owned home. it seems like nothing you can plan for so nothing you should worry about. with all due respect to bart, i think paying for a house 3 times in thirty years is a bit silly. why not pay it off as quickly as possible and eliminate the interest you offer up to the fat cats?

    plus when and if you do pay it off, you’ll free up either a big chunk of your monthly budget or a big chuck of the time you spend earning it.

    i also expect “development” to cool quite soon. and local farm land is getting a lot of attention lately, although bart is right. current taxation rates, coupled with single use zoning has been gobbling up farmland for residential use outside of towns and cities. at $8 a gallon though, i don’t think we’ll see lots of new subdivisions going in 15 miles outside of everything.

    while i do work with developers and understand that business, i don’t claim to understand finance well so take any advice of mine with a grain of salt.

  3. Bush is out of office in 2 years. We’ll see how many of these problems clear up under the new administration. I bet a couple. Maybe I’m an optimist. Then again, maybe I’ll be living in your backyard in 10 years.

    Congrats on finding Ron Paul, about the only person with an R behind his name that doesn’t give me the heebies.

  4. I think what Sharon is getting out more than the eating of the meat is the intensive resources necessary to “grow” the meat. Without the necessary inputs the output will naturally need to decline, and that will naturally lead to less meat for consumption. I’m not sure this transition will be all that willing for most people, but I think it’ll happen.

    I disagree with you completely about housing Bart. Kuntsler has the best idea about how the suburbs will mostly become in the future, and in that scenario there is no reason for anyone to desire your house, let alone the government.

    Eminent Domain has been proven in court, to this point, with the case in CT, but the likelihood of them taking your house for something other than to redevelop the area seems small. Why would they want it? If we think that development in the future will be limited or non existant, what’s the risk?

    Furthermore, I think the local governments will need to do all they can to make their citizens happy and content so that they will stay on the tax rolls.

    Tom–The problems aren’t something that will clear up in 2 years. The world is running out of oil. (Among other things) Some problems should clear up when you get some people in office who are halfway intelligent, but then again they could do things just as wrong but in the other direction. And no national effort will fix this. It needs to be local, and the system needs to be analyzed and fixed at that level.

  5. Also, I did say that this is what works for my situation. I work in financial services. If the financial world crumbles like I expect then there is the very real possibility that I’m no longer employed. If that happens, having equity in my house in the near term will be way more important than other possible scenarios.

    Besides, I only have two other debts. One is a credit card locked in at 1.9% and the other is my student loan and the impact of paying that down is less than paying off the mortgage.

  6. Regarding Bart’s point about skipping out on his mortgage and sticking the mortgage company. I not so sure this is such a wise plan. I don’t think the mortgage companies are going to sit around and let everyone and their brother default on thier loans in the future, eventually forcing them to go bankrupt. Ever hear about the debtor’s prisons back in the day? Who’s to say the mortgage companies won’t lobby the government to enact similar legislation? This might be one possible way to get more farmers we will need in the future. Can’t pay your mortgage? Too bad, off to the country you go to work off your debt on a farm owned by the mortgage company when they foreclosed on some poor farmer. I think you’re better off in the long run owning a house.

    I agree with Matt on the saving for the future and share similar thoughts on future econonomic situations. I don’t contribute to my 401K plan at work because if it does play out like I think it will, the stocks in my 401K will be worthless. Might as well pay off your house and other debt now. That’s my $.02.

  7. I see my Blogger 101 course in creating controversy has paid off…. 😉

    A couple things. First, I’m not a lawyer nor an MBA so I am talking out of my ass to a certain degree when dealing with this stuff.

    Second, I’m approaching things from my personal situation. The house I currently own is not sustainable in any way, shape or form. It’s a typical large suburban vinyl-clad plywood box that will become more or less unlivable when natural gas prices rise to the point that I can’t afford to adequately heat it in the winter. There are hundreds of thousands, if not millions, of these kind of homes all over the country, and I think in 20 years’ time or so the value on many of them will be around zero.

    If that’s the case, why should I bust my butt to pay off the mortgage only to take a huge loss on it? There’s talk about bailing out victims of subprime mortgages right now in DC, and we’re only seeing the front end of that storm. When there’s millions of Americans who are in danger of defaulting, something will happen. Getting your house foreclosed on will become a much more common scenario in the coming decade.

    If the place you live in right now is something you’re comfortable living in without access to electricity or natgas, then by all means pay off your mortgage. That’s not my situation, though.

    For eminent domain, the one point I was thinking about with regards to that is when food prices really jump some day, perhaps some politician somewhere will remember that there’s a lot of great farmland lying underneath the crumbling infrastructure of the suburban rings. If the people in the city need food, maybe those last diehards in their suburban shanties will need some ‘help’ in vacating their properties for the common good. We’ve never really seen what eminent domain can do in times of trouble. We may very well find out.

  8. I think that one of the largest problems we all have is that we always see these problems through glasses colored by our situation and our experiences. Bart doesn’t feel that his housing choice is sustainable. It doesn’t sound like it is from the way he’s described it to me over the past few months. I feel like mine is. That influences the way each of us sees this future, and the choices we make.

    One thing to remember too is that the largest owner of foreclosed homes during this mess won’t be the mortgage companies. It will be the local governments. If prices decline enough, and the buyers dry up enough, the mortgage companies will get tired of feeding their alligators and eventually let the property go back to the city for failure to pay taxes.

    At this point I think that local citizens who are more together will take the initiative to acquire the properties for their personal use and add them to their property. You’ll end up with mini farms within the city limits. (Provided the tax rates don’t get too out of hand) I’m in the process of doing this now. The city has a decent sized chunk of land close to our house for a creek easement. While I don’t want the creek pieces there is extra land there that I could put to use cultivating food. If we can work out a price I’ll buy it and sock it away for my use in the future. It’s not large enough for anything more than a shed really, but would work great as a space to plant fruit and nut trees and perhaps have a movable chicken tractor to “mow” the grass.

    As far as your comment about tearing down properties to bring food supplies closer to the city, I agree that this will happen. But I don’t think it will be by force. While people may be sent to work camps to grow food for people, no one, the city included, will have the resources for massive tear downs of large properties and the compunction to remove the slabs and fill that in with dirt. My vision is that we’ll see people scavange the useable building material from the properties and then crops will be grown around the structures that are left. Already today when a building is left vacant in a slightly seedy area people sneak in and steal all the valuable materials. When they are in even shorter supply this will happen much more frequently. And we’ll end up with a lot of strip malls and retail centers just sitting around because no one will be able to pile up the resources to tear them down. Think how much energy it takes to tear up concrete. We won’t have it to use on that kind of thing. Possibly if the aforementioned work camps move in and use human labor to tear up the parking it could happen, but even in that case those properties would be owned by the city so why would they bother messing with homeowners when they have all this land available of their own?

  9. Hey Matt, thanks for commenting on this – interesting discussion!

    Bart, I think you actually have a decent point – the only issue to me is the question of what the backup plan is? That is, let’s say you can’t pay for it, and you get foreclosed upon after you’ve been out of work for a while. Where do you think you are going to go that will be better? The vinyl box you live in, if it is on a chunk of land, may not be sustainable, but that’s most of what’s out there, and the alternative may well be hoovervilles – much smaller vinyl boxes on no land. I’ve seen pictures of FEMA trailers and Duraville shanties – my house is imperfect, but it looks awfully good in comparison ;-).

    Like you, I’m talking out my ass – my only connection to the world of finance or economics is making fun of economists 😉 – but as you can tell, it doesn’t stop me any. But I think as the scale of the problem rises, the likelihood of any sort of good bailout drops quite a bit. The first victims may get bailed – the ones in the middle may only get screwed.

    Realistically, plywood is better than cardboard or aluminum, and I suspect you underestimate what can be done to make a plywood box sustainable – afterall, the first folks who lived here lived rather sustainably in thatch and mud. Dig a cistern next to your house, put a thousand gallon water tank below the frost line (really not that expensive), and put a hand pump at your kitchen sink. Tah Dah – water, no electricity, no going outside with a yoke and buckets. Super insulate one room in the house, put in a small woodstove. Tah Dah – worst comes to worst, you and the rest of your family put mattresses on the floor and sleep there, cooking on the woodstove. Presumably, as you say, there’s some dirt underneath – plant some crops in it, and eat them. You have just achieved food, warmth, and water – basic needs.

    Seriously, almost everyone in the country is going to be in the same crappy situation. Sure, rich people and a few lucky pilot programs will get to have perfectly designed, sustainable societies. The rest of us will make the best of it where we are. But I’m not sure that has to be so awful, if we get our butts in gear.

    As for eminent domain – the government has a serious shortage of farmers, and already controls quite a lot of bioproductive land. At best, I think it will start jerking suburbanites out of their developments fairly late in the game. And if you make the land bear fruit, they might not have much incentive to do so.



  10. Sharon, good points… I’d love to make a detailed response to them but I had surgery on my ankle yesterday and am too goofy from the pain-killers to write anything more than a short ramble… My train of thought left the station yesterday without me. 🙂

    Backup plans… my personal one is that I have several family members in the area who own their houses free & clear on large enough plots to grow at least some food. My wife’s parents live about 1.5 miles away from us, and that will likely be our bolt-hole so to speak.

    There are things we can do to fix up the house and make it more livable, and we’ll likely do that at some point when it becomes necessary. All things being equal, the odds of me being able to pay off my mortgage before the economy goes to hell are probably nil, and that’s the assumption I’m operating on… my situation is differnt from other folks, though, and I do realize that.

    On further reflection I should have made that clear in my original comment, but this way we got a lot more stimulating conversation out of it.

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