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Miguel’s Question(s) of the Day
By JLP | February 18, 2009
Long-time AFM reader, Miguel, sent me this email last night:
I was just reading something very disturbing in Paul Krugman’s Sunday NY Times column. Apparently, the Federal Reserve has just released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. And Krugman’s interpretation of the data is that: … there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001. As Krugman puts it, the surge in asset values had been an illusion — but the surge in debt had been all too real.
I’m not so sure I totally agree with Krugman’s perspective, notwithstanding the fact that he has a Nobel in economics and I well um… I suppose I don’t have any prestigious prizes to speak of in any field. I mean seriously, it is actually normal for our economy to ebb and flow in cycles, its just that after such a long boom we are going to get a real ugly bust. By the way, in case you didn’t know, Paul and the newspaper his column appears in are a wee bit on the liberal side (like ragingly so) and tend to view the Bush era with a negative bias (not too much of a stretch right now). But, I try to pay some attention to what he has to say, if only because a lot of people will be paying attention, and plus, he seems like a guy I’d enjoy having a chat over lunch with some day.
So, if what Krugman says is true, then that’s pretty scary and I wonder how much of it is observable in tangible ways that we can see in our everyday lives. For my own situation, let’s see now:
1) Personal Income – Check. My personal income is highly variable and has taken a huge hit. Looks like I’ve been busted back to 2001 levels for the moment, though still employed which is a big plus considering the number of people I know out of work.
2) Business Income – No effect yet. We have rental and business income which fortunately has not dropped off, at least not yet.
3) Investment accounts – Check. Investment accounts are down over 40% in past 12 months. Feels like we’ve been punched in the head, like we simply poured money down a black hole. It makes me physically ill to think about it.
4) Real estate value (home & investment r.e.) – Some reduction in value but not as severe as expected – I think we’re around 20% off the peak right now in my area. But r.e. values are usually lagging and very sticky. Given where the NYC economy is headed it would not surprise me to see our r.e. decline further in value.
So, I’ve been wondering… given what we know today, is there anything that I would have done differently the past eight years, given the opportunity to do it over again. I still feel like I’m a financially better off and way more prepared today than I was in 2001. In fact, I looked at my files, and it turns out (I had forgotten) that 2001 was the very 1st year that I broke into the 7-figure net worth club. Fortunately, my current NW, while recently diminished is still way ahead of the 2001 figure. Interestingly, however, although I am worth somewhat more now, I am also carrying a lot more debt, largely because of a bigger home & mortgage, and also some use of debt to buy investment r.e.
And that relates to the one thing I would take away from the present crisis, which is that I wish I had focused more on debt reduction vs. investment. There is a saying (don’t recall where I got it from) that goes something like “Debt is HARD, Assets are SOFT.” I now fully, painfully understand this one. There was a time when my liquid assets and investment accounts more than covered my debt. That was a nice feeling, knowing I had the means to pay off my mortgage. But, now I can no longer quite make that statement with the same level of confidence because my assets have shrunk (seemingly overnight). The debt is still there staring me in the face… laughing its head off… “you will never get rid of me now you fool… ha ha ha.”
I find myself kicking myself for jumping on the band wagon, especially in ’05 and ’06… get into the market now or you’ll miss lots of upside… blah blah blah. On the one hand, you have to invest for the future. But, on the other hand, I should have had different priorities and done more housekeeping when I had the resources to do it. All in all, I still feel very blessed both monetarily and otherwise. I am better off today than I was eight years ago and hopefully, well-positioned to capitalize on the downturn by snapping up under-valued assets when the opportunity comes along.
I was wondering how you (and your readers) feel about these questions:
• Are you better off today than in 2001? How or why?
• What would you have done differently the past several years if you could redo it?
- Miguel
For me and my family, there’s no question that we are better off now than we were in 2001. We bought our house in 1999 for $89,000, refinanced it in 2007 in order to get some cash to do a major renovation. The house is still worth a lot more than we paid for it—even when you consider the refinancing.
The 401(k) is down substantially over the last year or so but it’s still above 2001′s level—although not by much.
What would we do differently if we could? Nothing really. I think we have done okay.
What about you?
Topics: Question of the Day | 14 Comments »
February 18th, 2009 at 10:33 am
You think you’re better off? You clearly are not factoring in the TRILLIONS in debt that you owe now more than you did in 2001.
The Iraq war was trillion dollar waste. The first stimulus under Bush was another trillion dollar waste.
The first stimulus under Obama is yet another trillion dollar waste.
YOU the taxpayer are on the hook for it. Whether you pay for it through higher taxes, reduction in government services or seizure of your assets at some point in the future, the money will need to be paid.
If the money isn’t paid, your standard of living will deteriorate exponentially. If you don’t think it will happen, just ask any Zimbabwe, Iceland or Ireland citizen to understand what’s possible.
Outstanding US debt and liabilities currently exceed world GDP output and you think you’re better off? Good grief.
February 18th, 2009 at 11:30 am
Rich,
Good point.
February 18th, 2009 at 11:52 am
Good question.
It depends on how you look at it. Networth was, I was better off in 2001, because I was still in college. My only debt was some student loans.
Now I have credit card debt, a car loan, mortgage, etc…, so I’m sure I’m worth less than I was.
However, I feel like I’m better off in that my ability to earn money is significantly better than it was in 2001.
Even if I am technically in a worse financial spot, I feel like I am more able to improve my situation.
Not only that, I am better armed with a lot more knowledge and experience. And even though my 401K is down, it’s long term value isn’t any different to me.
So I would say that I’m better off now than I was in 2001.
February 18th, 2009 at 12:03 pm
2001 was 2 years out of high school, sitting in college. I was completely broke and jobless so I can not compare much. Now i have some money in a 401k and lost a bit but i had so little in there I am now buying at the right time.
Personally I am better off now, withstanding Rich’s point.
February 18th, 2009 at 12:11 pm
We’re much better off than in 2001. But we’re big savers and spent the years squirreling away money. Our only debt is our mortgage, which is getting paid down quickly.
I got lucky and bailed out of pretty much all stocks the day after the election. It wasn’t so much a no-confidence vote in Obama as a feeling that there’d be a long, ugly period ahead, and I figured that “hold & hope” wasn’t going to work. (My “go back in” target is S&P 700 or thereabouts)
Our biggest financial regret was not bailing out of an investment we got into around 2003 when we first sniffed troubles in early 2007. It was a “legit” investment – just one that was illiquid and “went to zero”. Fortunately – unlike many – we didn’t leverage our house or whatever to invest in it, so our losses can’t go “below zero”. But we’ve officially zeroed it out of our net worth calculations. It isn’t officially dead, but a whole lot of things have to go right for us to get anything out of it.
February 18th, 2009 at 2:14 pm
Regrets? Of course. Here they are:
When buying our “dream” house, I s/h stopped contributing to 529s and paid down debt incurred from the renovations (lots at 0% credit card offers; however some on the equity line.) We’ve taken a $30,000 hit to the 529s. I won’t even say what the 401ks are down or I’ll weep…
Second “ouch” is when my husband rolled over his former retirement balance into a new fund family–all at once. Of course, the market tanked after that. Of course it would have been against our nature (yes, we’re aggressive investors) to have parked it in a money market, but dollar-cost averaging is (in hindsight) what we s/h done.
Our net worth and earning power is greater than 2001 only b/c that’s about when my husbands earnings dramatically increased, but I wish we would have not been so focused on the 529s and had been thinking more about US!
In summary, I have no optimism for the future, (reread Comment #1 above) but continue to fully fund DH 401k and invest $500 mo (100, 100 and 300 for the oldest) in the 529s for the write-off it provides us. (I used to do 400, 400, 600 for the 529s.) Community college may be in the cards for a lot of families now…including ours!
February 18th, 2009 at 2:17 pm
@David, your net worth would increase for your home’s value and to some extent, for your (depreciating) vehicle. So, unless you’re upside down on your house b/c of a market value decline, you probably have a higher net worth than in 2001.
February 18th, 2009 at 2:43 pm
what about private banking and investing is that a smart decision ?
February 18th, 2009 at 9:19 pm
I would say that I am worse off, on the whole, than I was in 2001: and if your 401(k) is down around 2001 levels, then you are too.
The positives: I have paid off $20K in credit card debt and $85K in student loans (not counting interest) since 2001, thanks to a fortuitous entry into (2003) and exit from (2007) the Los Angeles real estate market. I also make more money than I did in 2001 — but that is because I work two jobs (one full time and another nearly so). Not such a great deal when you have three kids under 10.
The negative: I don’t even want to think about how much my 401(k) is down. I have been working my BUTT off since 2001 contributing the max year after year. And it is now down around the 2001 level.
I don’t think that this makes me about “level” with where I was in 2001. Why? Because I am eight years older now than I was then! Eight years closer to retirement (or, if things continue to go badly, maybe not). Eight years of compound interest, of making my money work for me, gone, and I am never going to get that back.
Where I was in retirement savings was pretty fabulous for a 30-year-old. But for somebody who is 38? Not so much.
So it’s not just the raw numbers on the 401(k) statement. They don’t factor in the huge opportunity cost/loss.
February 18th, 2009 at 10:20 pm
Thanks for the responses. It’s difficult not to be bitter right now, but I think the comparisons to the Great Depression are quite overblow. Just as the bubble made it seem like the party was going to continue forever, the bust makes it seem like things will never be the same again and we’re all doomed. I’m 40-something and have seen a few cycles come & go. I entered the job market in NYC soon after the crash of Oct 87, Black Monday. Things were seriously bad, jobs nowhere to be found, hopelessness all around. Banks were going bust right & left over the deflation of the commercial r.e. bubble.
Granted I know this is going to be a bad one, and I sure as heck wish I listened to that little voice in my head that was telling me to get out of the market, but who am I kidding. I know that I’m in it for the longhaul and that timing the mkt is a fools game for all but the most professional among the professionals.
All we can do now, is try to be as prepared as we can to ride out the storm.
February 18th, 2009 at 10:26 pm
@#9 Amen Jadzia! Finance 101: the time value of money. It’s going to be tough to recover from this year. Given your kids’ ages, you must have to pay for childcare?…Is it worth working the 2nd job? Have you figured your financial/tax life by the numbers, w/and without the 2nd job? Are you forgoing child tax credits and other tax benefits b/c you now make too much?
I’m just working part-time, tho’ this time of year it’s closer to full time. If it wasn’t for my kids being older, it wouldn’t be worth it (especially since I’m treated as an independent contractor.) Paying my own taxes, not being able to contribute to an IRA b/c my DH is in a 401k (and we make too much), etc.–it all bites ;(
February 19th, 2009 at 1:07 am
#11–We don’t really pay much for childcare — we have a sitter two mornings a week and it’s only $50 (i.e., $10/hour). When my husband is working, it’s nights. I’ve run the numbers a million ways and we do come out ahead this way. But it sucks! And what ESPECIALLY sucks is that I feel like I am going to be working this hard, WAY too hard (pretty much all I do is work), and there is just no end in sight. Not if we want the kids to go to college, not if we want to retire someday. And we do NOT have an excessive lifestyle — we’re in a modest house, we’re a one-car (long paid off) family, kids will be going to public school, I’m not blowing all my cash on Manolos, etc., etc., etc. Ugh.
February 19th, 2009 at 7:40 am
@#12 Hear you on the Manolos. Sketchers (from DSW) for this gal! Hang in there, Jadzia. There’s always the lottery, right JLP?!!
February 19th, 2009 at 6:16 pm
Well, in 2001 I was a freshman in college, still working at McDonald’s and was on my way to accumulating student debt. Today, I’ve been recently let go from my full time job, working part time for less money to get some extra money, and still looking for a regular position. Personally, I think I’m in worse shape, if for no other reason than I have eight fewer years left in my life.
As for what I would do differently, I made a mistake or two during my undergraduate career, mainly getting out of the Pre-Pharmacy path I was following, that have left me much less secure financially. So, that’s the main thing. Beyond that, I wish I had focused on finances and money management earlier in my life, as I’m sure I’d be in better shape now.
(Also, with regards to Rich’s first comments, while we as a nation are much deeper in debt than we were eight years ago, we have had the spectre of multi-trillion dollar deficits in entitlement payments looming for decades. Compared to the Social Security and Medicare shortfalls, even the added debt from the various stimulus packages and wars is small potatoes.)