When you think of financial “templates,” what comes to mind? For me, one example of a template is the accepted best way of achieving something.
The thing is, what works for most people may not work for you. In fact, if no one challenged the status quo, the conventional approach would never evolve, and we would keep doing the same things again and again.
But the status quo does evolve–in fact, the recession has caused quite a stir in commonly accepted thinking and shattered many long-standing financial templates.
Here is a list of ten of these templates that have had the rug pulled out from under their feet:
1. Handling existing debt. The traditional approach was to pay off the highest interest rate debt first, and to use as much of our savings as possible to accelerate payments. Current thinking takes psychology and emotions into consideration, and advocates that hoarding cash is more important than paying down debt.
2. Handling new debt. Old thinking encouraged people to leverage their assets and income and stretch themselves in the hopes of making their “investments” pay off. New thinking encourages us to be careful and very stingy with new credit, even when it comes to homes, cars, education, and other areas traditionally financed by credit.
3. Investing in real estate. “Buy a home, do it now,” was the real estate mantra of years past. Even as the housing downturn seems to be bottoming, the proponents are getting louder. But so is the “new thinking” crowd, proposing that renting is financially sound, and that home purchases are a “lifestyle choice,” not a financial one.
4. Investing in education. Just a few years ago, education was considered a necessity, worth the cost, and typically paid for with school loans. How things have changed–college is being challenged as a requirement for success, most new students are being cost-conscious with their school selections, and many are working to pay the entirety of their school bills up front.
5. Buying cars/transportation. The ultimate symbol of power–that’s the old paradigm of car buying. We bought new or leased, and we replaced our cars often. Cars have suddenly become symbols of greed and over-spending, and buying used has become much more prominent.
6. Investing our cash. Before the market correction, everyone was trying to be a market expert. We’d do our diligent research, chase the “best values” and try to outsmart the system. What do most people advocate investing in now? Index funds, devoid of any human management.
7. Frugality. It’s not that the idea was overlooked before the recession–many people didn’t even recognize its existence! Frugal people were seen as “freaks” who had nothing better to do than try to “be cheap.” Now they’re role models and we look to them for advice…
8. Travel and Leisure. Although not a financial template, this one is definitely one of the biggest components of many people’s budget. Travel used to be something that we would do when we retired. Today, many people are living “for today” and traveling regularly, as much as their budgets will allow.
9. Saving for Retirement. Old thinking (and it’s still there!) is to save to replace your income. But as Baker shows us, new paradigms are beginning to emerge as we challenge this thinking. Strategies for passive income, working indefinitely (and working from home) are potential alternatives.
10. Career Management. It’s pretty clear this one has been shattered–a single job for 40 years and retirement with a pension is a rarity today. The younger generations, especially, are working more jobs, more careers, and pursuing entrepreneurship and other non-traditional employment.
What can we learn from these ten examples? At the very least, don’t ever assume that the “proper” way of doing anything will work for you. Learn to trust your instincts when it comes to your unique situation.
I’ve noticed that whenever I’m at the leading edge of one of these shifts in thinking, it’s usually because I can recognize the inadequacy of commonly accepted thinking to my personal situation, and make the necessary adjustments.
Having the bravery to stand against the tide is what Untemplating is all about!
Good points, though I don’t quite understand why hoarding money would be more important than paying down debt.
The theory is that you can’t pay your bills with credit cars (most of the time). If you lose your job, you’re better off with $10,000 in the bank and $10,000 in credit card debt, than with $0 in the bank and $0 in debt. At least you can live off the cash for a while until your income resumes…
1) Paying the highest interest rate debt off first isn’t always the best idea. I have ~$8k that I am currently paying off interest free and ~$30k of student loans at 3%. I’m paying minimums on the student debt and aggressively paying the interest free debt. Why? The interest free debt is in collection. Paying it off in 2 years will have a much greater impact on my credit then paying off the student debt in 10. Besides, the student loan interest is tax deductible,
4) While the “I don’t need a degree” crowd is growing, the reality is also growing that a bachelor’s degree is the equivalent to a high school diploma a generation or so ago, and a master’s is becoming the equivalent of a bachelors… in terms of prestige and, more importantly, requirements for entry in the job market.
Colleges have been getting more expensive as most families and students purchasing power has decreased. Unless something changes drastically in the near future in education funding, expect to see the numbers and amounts of student loans to increase, not decrease.
I definitely hear you about the “new” baseline for education–that’s a changing template in itself. You can argue that a college education is not required to succeed, but what do you have to fall back on if what you planned doesn’t work out? Just a thought for discussion…
Personally, I love the paradigm shift to spending more time living now than after you “retire.” Tim Ferris’ introduction to the mini-retirement idea is one I can really get on board with.
At the same time, like Mike said, not saving for retirement is not a risk I’m willing to take. Loving your job and doing it forever is a fantastic outlook, but at some point, your body and mind are going to stop allowing you to take advantage of that.
Maybe we don’t need the nest-eggs required to exit the workforce at 55, but we need something to take care of those final years when we can’t work anymore but aren’t quite ready to be dead yet.
I’m also on board with the new idea that renting is just as financially savvy as buying a home – but that’s a direct reaction to the recently held belief that you should buy a home as soon as you can and just trade up every few years as you gain “magic equity.”
If you can identify a spot in the world where you don’t mind hanging out for a long time, buying a house is still a financially prudent move as long as you’re buying a place to live and not an investment. It’s a fantastic inflation hedge, and it keeps you warm. Renting for eternity will be far more expensive.
That said, there’s a “psychological freedom” that comes with knowing you can up and relocate anywhere you want with 30 days notice. Though, there are all kinds of ways to make that lifestyle work even if you do own a place.
I’ve always railed against the idea that housing should be an financial investment and that we should expect it to appreciate. It’s ridiculous that we should expect a piece of infrastructure that will wear and decay over time to become more valuable at the same time. In some areas, prices will rise in accordance to scarcity theory and supply and demand, but it will not magically be more valuable just because time has passed.
While I’m not to a point financially where home ownership is feasible, I fully intend on it, not for financial reasons, but for sovereignty reasons. As a tenant, I do not have control over repairs and mantenance, the number of pets I can have, the color of the walls, the length of the grass, and a myriad of other factors. But as an owner (exluding condo/HOAs, which I won’t consider), I do have that control.
It may wind up being a little more expensive in the long run, but as J Money wrote a few weeks ago, you spend money on the things you want to spend your money on. For some it’s travel; I don’t like traveling, I’d rather spend my money on creating sovereignty where I can.
Lifestyle choices definitely play the major role in rent/buy scenario. Personally, we plan to stick around our area for 10-20 years, so buying is a viable option, but for those who are kid-less and like to relocate frequently, renting might simply be the only option (even if you argue it’s more expensive).
I think there is psychological freedom from buying, too (mainly for the reasons Edward points out in this thread).
I’m currently living a mobile lifestyle in China while still owning a house in the US. Even in my situation I often question if it is the best thing. I do feel good knowing that I have a small place I love available to me, but it is a burden and when you have trouble (like a renter not paying rent) it really becomes a hassle and I question our decision to keep it.
Of course I don’t see owning a house as a good financial investment, I see it as a good life investment. You shouldn’t buy a house just because maybe someday you could make money off it. You should buy a house because it fits your needs and your lifestyle for years to come. And it’s not the best choice for everyone to be honest.
Quick reactions:
1. Taking “psychological” factors into account is not an excuse for doing something irrational. If you have self-control issues, automate your payment system and cut up your credit card.
2. True
3. Mostly true – If you buy, your monthly mortgage payment needs to be less than you would pay for rent, and you should put 20% – 30% down. That’s always been the smart thing to do. Never take advice from real estate agents. They get paid when you buy, so their advice can’t be trusted. Find someone to argue against buying before you make the biggest purchase of your life.
4. College and advanced degree education is still the soundest investment in the world. Go to the best school possible. Take out loans if you have to. You’ll pay them off in 10 years and have higher earning potential forever.
5. People always underestimate the financial prudence of buying a new car. Used cars aren’t THAT cheap, and if they are, you’ll make up for it in maintenance and a shorter life of the car. Buying new has its merit from a financial perspective, especially since the newest models last so long. Even American cars are high quality these days, but I’d still go with Honda.
6. Buy and hold. Lifecycle funds/index funds. Never pay for a financial advisor or an actively managed fund. They are a waste of money. There are no exceptions.
7. There’s a difference between cheap and frugal. Tipping 10% is cheap. Walking to the slightly farther grocery because it has lower prices is frugal.
8 – 10. True
Awesome observations. I think the main point to take from your comments is that even if these things ARE shifting, they may not be shifting in the right direction. Evaluating your own situation is key.
Re: #5
I bought a ’91 Camry in 2003 for $2000. Since then I’ve spent a bit less than $3000 in repairs and preventative maintenance, including fluid and tire changes that have to be done on any vehicle, regardless of whether or not it was new when purchased. So, over 7 years, I’ve spent around $5000. Economy class cars start at almost 4 times that price.
Assuming no major damage and nothing really expensive goes, I see it lasting another 5-10 years before it will be financially worthwhile to replace it.
That’s pretty incredible. We are choosing to replace our existing car in a few weeks, because reliability has proven to be very poor, and is expected to continue that way with this model.
But we are picking up a well-priced used car with excellent reliability ratings, and plan to keep it 5-10 years. It has enough room for future kids, too, which is a problem a lot of our friends have run into that forces a new car purchase.
Reliability is key. I actually paid $500 more than another car I was looking at because I didn’t feel that the other car would be able to hold up. And contrary to what Dave says above, I really don’t see models produced in the last 5-10 years to be as robust as as older Japanese and German produced cars.
After conversations with friends in that predicament, I’ve come to the conclusion that outside of minivans, car manufacturers simply don’t design with children in mind. One long-legged friend (i.e. his seat is always all the way back) went to a local used car dealership armed with a tape measure and only found 4 models with enough space in the back for the infant seat!
Yeah, try fitting a car seat into a Mustang, since that’s what we’re doing now! Haha.
When our larger car broke down, we knew it was time to switch up.
Regarding #9:
I’m firmly in the “I plan to work as long as I possibly can” camp. That said, I think it’s a big mistake not to save for retirement. For most of us, there’s likely to be a period of 20 years or more during which we can’t really do much work, but we haven’t yet kicked the bucket.
Health care is my biggest worry–I know I’ll probably WANT to work for as long as I can, but whether my body will actually hold up is another question. And we all know how expensive that can get…
One of the unfortunate things I take away from the above list – particularly #9 – is that our children will probably be bailing out our generation for our lack of preparation for retirement. We bemoan our bailout of the boomers, but we’re not preparing either. Not everyone can be a successful entrepreneur or ‘passive income’ generator. And the fun continues…
Very true. Just as people often “assume” that they will have enough for retirement from their day jobs…those who are pushing the envelope with entrepreneurship and passive income also often assume that their strategies will pay off.
But are people prepared to face a “Plan B?”