How To Create A Cycle Of Poverty And Die Broke

If you are broke, there are three occasions that make it perfectly okay to complain about it: health problems, divorce, and job loss.

That is because those three things are economically and mentally devastating in nature, and can plausibly be caused by third-party actors screwing you over (bean counter employer letting you go, cheating spouse that takes half your stuff, unexpected cancer diagnosis, etc.) rather than mistakes that you make yourself. Although to be sure, those three things can be fueled be your own behavior—you could chain smoke two packs of Marlboro 54’s per day and eventually get lung cancer, you could be spending your days on the job reading The Conservative Income Investor rather than working (hey, some things should be forgivable), or you could be the crazy spouse that uses the kitchen dinette set to practice your quarterbacking skills, with your husband/wife being the unwilling wide receiver.

I recently finished reading one of the worst personal finance articles I’ve encountered online, written by Jim Gallagher of The St. Louis Post-Dispatch. It’s about a couple named Michelle and Jeff M. that live in the state of Missouri. They are probably very nice people. If my writing in this article sounds harsh—which it will—I’m not attacking them, but rather, their conduct that I don’t want you to emulate.

Here’s what happened. Jeff and Michelle had run up tens of thousands of dollars in credit card debt, and then reached the conclusion that they were living beyond their means when they received a $10,000 medical bill following the birth of their third child, during a year in which Jeff learned that he would no longer be receiving annual bonuses at his job. They decided the change.

So far, fair enough—you make mistakes, you diagnose what went wrong and what is causing your unhappiness, and then you craft a plan to change your life and make it better. That’s how intelligent adults behave in the face of adversity, and that is exactly what Jeff and Michelle did at first.

They cut their budget, deliberately lowering their gas bill and removing unnecessary expenses from their budget.  They started shopping at Aldi’s, and making deliberate decisions about where they spent their money. Jeff picked up extra odd-jobs. Basically, they took an active approach to their financial life, and they started to see the forward progress that their actions deserved. Within fourteen months, their credit card debt disappeared. At this point, the story was a great profile in success—if you spend deliberately, good things will happen to your household’s balance sheet.

And then, I reached the end of the article, which could have been written by the village idiot of financial planning:

“Their credit score improved. That helped when they sold their home this year and moved up to one big enough for their expanded family.

Austerity is over. They’re planning a vacation again.

The experience turned them into committed cheapskates. On the Web, Jeff blogs about trying out running shoes, then buying them half-price on the Internet. They still shop at three grocery stores to catch the lowest prices.”

(1)    First, they bought a bigger house. This goes against everything that intelligent people do to build wealth. When you study the early records of Charlie Munger, Walter Schloss, Peter Lynch, and Donald Yacktman, you will see that they all had fanatical focuses on keeping their fixed monthly costs as low as possible. Your income is the lifeblood of what you can use to build wealth. In particular, the gap between what you spend and what you earn is the raw material you get to deploy intelligently to become richer, and this family decided that raising their fixed, monthly expenses was in their interest. When you live at your means, you are almost guaranteeing that you will never end up a millionaire.

(2)   Then, they wrote the line that possibly caused me to experience physical revulsion. “Austerity is over. They’re planning a vacation again.” It’s like saying, hey, I lost fifty pounds by doing this weird thing called running and keeping my mouth shut when I saw other people eating cheeseburgers, but now that I look good, pass me the gooey butter cake because I’m sexy and I know it!

The line “austerity is over” causes me to tremble for them because it shows that they have very little concern about the welfare of their future selves. Instead of saying “austerity is over”, they could have said this: We are going to continue to spend below our means, and now that we have paid off our debts, we are going to funnel that money towards real estate, bonds, and dividend stocks. We want to see money trickle into our accounts for doing nothing but being passive owners, and we are going to build our family’s house balance sheet into a fortress. Instead, we get this: “They’re planning a vacation again.”

(3)   And it ends with Jeff saying that he tries on shoes at local shoestores and buys them online instead. Yes, that action should be perfectly legal. But it crosses the threshold from frugal into cheap. Being intelligent and frugal is being a doctor that drives a beat-up old car because it works fine. Being cheap involves taking advantage of the resources of others to benefit yourself. When Jeff goes to that shoestore, he is taking advantage of the time, expertise, and merchandise of the shoestore so that he can personally benefit—he is extracting tangible and intangible resources from others without giving back anything in return. If you are going to do that in life, fine. But don’t brag about it and pat yourself on the back for it. That’s the kind of character trait you should try to either eliminate or atone for in your life elsewhere, not hold up as a model for others to emulate.

When you find yourself in a bind, and then engage in intelligent behavior, you don’t abandon the intelligent behavior as soon as you start to see positive results. This family had the opportunity to adopt a new lifestyle—and I pray for them that they change their minds and re-adopt the habits that led to success—but they didn’t. They could have shoveled ten thousand dollars per year into retirement accounts and plain-vanilla brokerage accounts so that they could start receiving $500 and $800 monthly kicks in “automatic income” within a few years, but the decided not to pursue a path that would lead to financially successful living. As soon as they got back to ground zero, they decided to get a bigger house, go on vacations, and declare the period of austerity over. Does any of that sound conducive to long-term wealth building?

The good news is that you don’t have to be like them. You don’t have to demand the pampered luxury of a bigger house, vacations that cost so much money that they require deliberate planning, and declarations of war against austere living. If your household has the mindset of “austerity is over”, do you really think you’ll be setting aside hundreds of dollars per month to build wealth?

When Benjamin Franklin predicted what would lead to the downfall of the American Republic, he said he feared there would be so much material excess and abundance that it would lead to sloth and the dissolution of a grinding, balls-to-the-wall work ethic (yeah, that’s my paraphrase). At no point in human history has it been easier to create wealth. For just $500-$700 per month, you could automatically have money buy shares of Nestle, Clorox, Johnson & Johnson, Procter & Gamble, ExxonMobil, ConocoPhillips, Becton Dickinson, and Dr. Pepper for a dollar or less in fees per month. The path to success lies before you. Take it.

 

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7 thoughts on “How To Create A Cycle Of Poverty And Die Broke

  1. Mason says:

    Agree completely with your take on this. Knowing StLouis , downsize out of Wildwood. Check the priorities and learn your lessons so you can't be in that position again.

  2. Paul N says:

    I wonder how long before someone calls you a "hater"? I'm sure if you link this to the article you read it would happen very quickly. Good post!

    1. Tim McAleenan says:

      Most likely true, Paul. I don't get excited about doing negative posts, because I do recognize the vunerability of writing a story online. Plus, if you criticize, it just encourages people to post picture-perfect stories of their financial life and discourage honesty. I would guess people have warts in their financial lives, and it's good to share them so that we can all learn and improve as a sort of collaborative thing. But something just hit me the wrong way when I reached the conclusion to the article and saw that–now that the family had climbed out of the hole and started noticeably improving their lives–they started to revert to their old ways as "the solution." That bothers me–they tasted a succesful strategy, and decided to reject it once they started getting their financial shit together. That's frustrating for me. I want everyone to experience the joy of the bank paying them–rather than the other way around–and I get frustrated when I can see how just a few tweaks would lead to a life of financial prosperity.

      1. Waterbuffalo says:

        I'd never go so far as to call Tim a "hater" because he certainly has a great point. However, there does come a point in a person's life when austerity actually is "over". If you have a stable 6 figure income, are saving at least 20% (and using it to buy the DGI stocks), and you can still afford a few luxury items on your cash flow (not on credit), then why not indulge a little bit? Just don't get so carried away that you cannot ratchet down in a hurry incase you suffer an austerity relapse. McMansions and Mercedes's can be sold. Vacations are fine if you have the cash to pay for them after savings and investment.

        That doesn't seem to be the case for the couple in the article though, but examples do exist. Some people out there actually do earn enough to live in a big house, drive a nice car, take a vacation, and still stash away 20% or more. I bet a large portion of the people reading Tim's articles are in fact upper middle class.

        But, if you have to choose between the big house and the vacation vs. the 20% savings rate, go with the savings – you can't go wrong with that.

  3. Falcon Cowboy says:

    Good post as always, Tim. Isn't it interesting that success in life mostly comes from doing nothing? By this I mean that choosing to do nothing is often the right course of action. Choosing not to spend more $ than you bring in, choosing not to smoke, choosing not to drink routinely to excess, choosing not to eat cheetos before bed time, choosing not to sell your stock positions low in a panic, etc. Basically, one can get more that 80% of the way to success just by sitting on one's ass and doing nothing. The other 20 % comes much more easily thereafter!

  4. I am reminded of this quote by Bill Earle "If your outgo exceeds your income, then your upkeep will be your downfall"

    Like learning any skill, building financial stability takes discipline and a proper application of rules and procedure to guide your decisions.

  5. Eric Mc says:

    Tim, my sentiments exactly. Somebody should throw two books at this couple. The Millionaire Next Door and Your Money or Your Life. When you finally get out of the hole you're not supposed to jump back in! When I sat down and assessed my financial situation just shortly ago I came to the conclusion that I need to live below my means and move into the green, just like these people. The difference being that I've never looked back due to this thing about getting paid for each day I stay alive… you know, those dividends! Nice article. I've read a lot of your stuff and your writing has helped me change the way I look at a dollar. I never used to respect a dollar. Now I see it as a possible 5 cent annual income boost. Take care!

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