A View Through Glass

Rants and ravings of a curmudgeon of Generation Y

Month: October 2013

No, 20% of your net income should not be consumer debt

The other day I came across the following article, Debt and Credit: Known Your Limits, which has a guideline in it stating that consumer debt (“non-mortgage obligations such as credit cards, auto loans and installment plans”) should not be more than 20% of your net take home pay. I’m sorry, but that strikes me as a really bad idea and it might be due to the fact that I subscribe to the same school of thought as what Dave Ramsey presents in The Total Money Makeover: A Proven Plan for Financial Fitness and what Mr. Money Mustache advocates when he says that your debt is an emergency.

If we use $45,000 as the average household income in the United States and a very rough estimate of 35% of the gross being taken to cover taxes, heath insurance, retirement, and so forth we arrive at a net income of about $29,250. On a monthly basis that is about $2,625 and if we were to follow the “advice” that up 20% of your net income can be consumer debt then that means that monthly payments up to $487.50 would be considered “acceptable.” That’s a horrible idea since it leads to people thinking that because their monthly credit card payments haven’t yet reached that 20% figure that getting more debt is acceptable. However, if we use a minimum payment calculator, a $525 monthly credit card payment works out to carrying a balance of $19,500 at 18% interest. That means that if you make the minimum payment you will end up paying $28,675.23¬† in interest over 408 months! So somebody please explain to me how that is a good idea?

Now, I suppose that the author of the article might have car payments in mind when they came up with that figure as opposed credit card debt in which case the figure might make nominally more sense; however, on the same token, do you really need a car that costs $525 a month just to cover the payment? Using the previous examples, Mr. Money Mustache is a pretty strong advocate of not even owning a “clown car” in the first place where as Dave Ramsey advocates for selling any vehicles that you have when you are in debt and paying cash for a “clunker” that will get your to and from work each day. Two extremes, but I can see where they are coming from and myself personally, I’d rather not have the car payment.

Now I tried to do some searching around to see if this advice was echoed elsewhere and baring some interesting articles in the New York Times about consumer debt (e.g. “How Much Debt Should Households Have?“, “Crisis Prompts a Rush Back to the Mortgage Basics“) I really couldn’t find much. The article that I found in Time on “Consumer Debt: How Do You Compare?” seems to be quite representative of most of them in that it notes that the debt loads tend to be uneven but it states that the average household debt in 2011 was 11.5% of after-tax disposable income but on the same token, that figure also includes mortgages so is largely useless as a metric of consumer debt.

At the end of the day though, no, 20% of your net income should not be servicing consumer debt. You might be able to make a case for a car payment if you can’t afford to pay cash for a car (you can’t use this excuse as you get older though) but Saturday Nightly Live had a skit that perfectly sum my position on credit cards:

SNL: Don’t Buy Stuff You Cannot Afford from Northpointecc on Vimeo.

Review of “The Millionaire Next Door” and “Stop Acting Rich” by Thomas Stanley, PhD

This review covers two books by Thomas J. Stanley, PhD, namely The Millionaire Next Door: The Surprising Secrets of America’s Wealthy and Stop Acting Rich: …And Start Living Like A Real Millionaire and while both of these books are quite interesting in their own right, there is also a bit of redundancy between the two of them.

“The Millionaire Next Door” presents the research of Thomas J. Stanley, PhD and William D. Danko, PhD into the habits and behaviors of millionaires as well as high earning individuals. The book presents the concept of prodigious accumulator of wealth (PAW), average accumulator of wealth (AAW), and under accumulator of wealth (UAW). The book also defines the following formula to determine where you lie the with regards to PAW, AAW, or UAW:

Expected Net Worth = ([Age] * [Net Household Income]) / 10

If your net worth is greater than the expected net worth then congratulations! You are a PAW! There do appear to be some flaws with this formula though as someone in their mid to late twenties might have more than the expected net worth, but is still considered an UAW by Stanley and Danko. I suspect that the formula is skewed more towards individuals in their forties and later but this is not disclosed in the book.

Much of the rest of the book is devoted towards comparing the differences between PAWs and UAWs and a lot of it boils down to frugality and living below your means as opposed to at or above your means. Since this book is one of the ones that really started me down the road towards pushing for increasing my savings rates, I am biased towards it in a possible manner. However, it is a fairly interesting read and does give a good over view of what it takes to move from a UAW to an AAW to a PAW.

This stands in contrast to “Stop Acting Rich” which is effectively a continuation of “The Millionaire Next Door” and while interesting, you can easily pass by without loosing much. Much of the book is devoted to comparisons between UAWs and PAWs with regards to how they dress, what they drink, and so forth. While this is interesting and is interesting enough that it might be worth picking up at the library I would be hard pressed to recommend someone actually buy the book for the content. Much of it boils down to “Be frugal” and to not spend money to keep up with the Joneses.

The writing between the two books is quite strong and flows quite well. “Stop Acting Rich” does run a bit longer than “The Millionaire Next Door” but in all honestly “Stop Acting Rich” is effectively a continuation of “The Millionaire Next Door.” “The Millionaire Next Door” is definitively one to read if you haven’t already and “Stop Acting Rich” might be worth picking up at the library if you like “The Millionaire Next Door,” but I would be hard pressed to recommend you pick it up as well.

A Review of “A Million Bucks by 30” by Alan Corey

The other day I finished¬†A Million Bucks by 30: How to Overcome a Crap Job, Stingy Parents, and a Useless Degree to Become a Millionaire Before (or After) Turning Thirty by Alan Corey this book proved to be another very quick read weighing in at 211 pages which are formatted to not have that much actual text per page. But enough about the statistics of the page, how’s the content? Meh.

The summary of the book does look pretty interesting: a college graduate with a degree in “Management of Information Systems” moves to New York City with the goal of making $1,000,000 by age 30 and the book chronicles how he went about pulling it off. Plus, h0w can you resit the bold “WARNING: Do not attempt to use this book unless you are prepared to become filthy rich.” on the back cover?

Well, the problem lies in the execution: as a financial guide the advice pretty much boils down to live frugally and to flip real estate and as a memoir it is just too sparsely written to really hold your attention for that long. Plus, some of the fugal living tips – “Extreme Cheapskate Strategy” in the book’s phrasing – are of dubious legality, such as reusing popcorn bags, or are pretty obvious, such as using the library.

One of the financial tips that I did think was clever was to open up a second savings account that you have limited access to and have money be deposited directly out of your paycheck to it. The logic being somewhat along the same lines as automatic deposits to retirement accounts: if you are saving automatically and accessing the money is hard, odds are you aren’t going to spend it. The author is a big advocate of spending less money than you make in order to maximize your savings, but as others have also said of the book, he is quite extreme and I don’t think most people would be up his savings techniques.

As noted earlier, the way the author made most of his money was by flipping real estate in New Your City at a time when the market was going up. So needless to say a not insignificant degree of luck was also involved, although in the book the author also does appear to do have done a lot of work to identify potential locations in New York City where the neighborhoods were starting to improve. So points for doing the research and being to identify the neighborhoods, but the same token, I think the author makes things seem much easier than they actually are. Plus, given the current real estate market, could someone pull it off again?

With regards to the book as a memoir, well, a lot of time is spent in the early twenties and several chapters go by when the author is 24, but the in the last few chapters he wraps things up at 29 very quickly. Some of the stories in the book actually are quite amusing and I think and expanded of them could actually make for an entertaining memoir, but as this one stands it is quite thin.

So as it stands, I think the $0.01 I paid for the book at Goodwill was likely fair and for a quick read from your local library it might be worth a couple hours of your time, but the $13.95 price tag on the back cover is simply too much. The financial advice you can largely find on the internet in various blogs, and the memoir is just a bit too thin.