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A debtors tale: analysis of 5 families I know



August 10, 2010 – Comments (51)

A massive amount of commentary is made about debt in the world today.  So many charts and graphs and statistics, some of which are certainly accurate and some of which are certainly hype. 

I think it is often helpful to try to sit back and get a realistic view of a situation when investing.  The first time I did this kind of excercise, it was 1999/2000, I didn't have any money aside from a trashbag full of table waiting tips that my longtime biz partner and I had saved to start our first biz's.  But it was the dot com bubble, and everybody was talking about stocks.  We'd log onto and marvel at the soaring p/e ratios, and the soaring share prices, and ...  we had a friend who had inherited some money and was all about tech stocks.  

We argued that at a p/e of 100 or whatever it was, CSCO was destined to come down, way down (we had read Dreman's book from the mid 90's advocating value stocks, low p/es etc.).  He argued that this was different, this was a new economy.  I argued that the market cap of CSCO was so high ($600B+ at its peak, I believe) that there was no way.  It would have to get bigger than health care as a whole to have big growth for the company from here, bigger than all of cars, probably bigger than food or housing.  To grow 10-12%/year for 10 years it would have had a market cap in the trillions, or 20% of GDP.  No way a company making routers has a cap that is 20% of GDP.  And so that was it, in my mind it was settled, it was coming way down.  It had to come way down.  The scale of the market cap had simply gotten too preposterously huge. 

I was thinking about debt in these kind of terms the other day.  What does it really mean?  What is the debt situation of an average couple?  What about the people I know?  Are they desperate-debtor statistics?  If so, are they broke/screwed, or are they ok?  Lets take a look at a few couple and people that I know. 

As with every blog of mine, all names are changed to cause confusion and protect the innocent, and the guilty.  

Jason Monrow.  Ole Jason is semi-famous in these parts.  He owns a local business that has been aroudn for 15 years, does about a million dollars a year, has 4 modestly paid employees and one well paid manager plus himself.  He keeps about 30 grand of cash in the bank, spending when it gets over that, and saving when it goes udner that, his debt would be related to a large number of cars (all with payments) so I'd estimate his debt (all in depreciating assets) at perhaps $100,000-150,000.  He doesn't own a house (rents) and if this was a company that would wind up as "debt" on the balance sheet even though such a classification is debatable in my view.  We'll forget the lease debt.  He probably has income of around $100k/year.   So his debt/income is about 1:1, probably.  All in all thats not that bad of a situation, I don't imagine.  The US is certainly in a worse situation (its debt exceeds tax revenues).  Assuming inventory at his biz is worth $70k, his debt/net asset worth is 1:1, which isn't stellar and his net worth is probably close to zero. 

So where does Mr. Monrow rank in the world of debt statistics?  Debt:income of 1:1... is that considered dramatically bad?  If his biz was shut down he'd default on all those payments in weeks, but it getting shut down seems to me as a customer highly unlikely.  

Kory and Callie.  Married w/3 kids, have the stereotypical split-level suburban house that cost $210k, they owe $180kish.  She's a stay at home mom, he works for a Dow Jones company & makes I'll guess $100k.  He has a company car, she has a brand new chevy crossover thingie (probably about $30k), lets guess they have $10k of net savings, which seems overall reasonable, as Kory told me once that he was saving money, albeit at a modest pace.  So their debt:income is probably 2:1, which must be horrible.  Their debt to asset value is probably around 1:1 also, and their net worth would probably be fairly minimal at around $25k. 

So thats a pretty bad set of statistics...  But they are above water and saving money.  They'd be screwed if he lost his job and couldn't find another one, of course.  

Bill and Jennifer.  She works as sort of an independent jewelry sales consultant, he has a start up used car business and residuals from time as an insurance salesman, their total intake is probably around $90k.  They owe $130k on their condo, no kids, he drives his inventory and she drives a Toyota, i don't know if they have a payment on it or not.  So their debt:income is pretty bad 1.5:1 or so.  Debt/net worth is a little better, perhaps a little better, and their net worth is probably around half a years salar or so.  He recently took a job that wlil pay him six figures, and their household income will rise to perhaps $150k.  So their debt:income will be 1:1 or better.  

So debt:income of 1:1, debt:asset worth of around 1:1.2, and debt:net worth of perhaps 4:1 will be their situation when he gets the new job.  The debt:net worth of the others above is probably far higher, as their overall net worth is fairly small.


Each of the 3 cases above, frankly, I think represent people who are in good financial shape.  In each case they do or could save money, in each case they have a clear handle on their financial situation and its getting better over time, not worse (except in Monrow's case, as he blows every singlecent he gets over $30k in his account immediately because, frankly, money means nothing to him as far as I can tell).  

Now, if they lost a job, businesses went under, etc., they would be in tough shape.  No denying that.  Moving on.


Big Bobby.  Bobby is famous in these parts for being rich.  In fact, he is the most famous guy for "beingn rich" anywhere remotely near these parts thats anywhere remotely near my age (we are the same age).  So well known for being rich that I would wager if you took a poll in a local pub, probably 50% of people would tell you he owns the local shopping mall (he owns 0.5% of it, but is fond of telling people he is "an owner" of it, technically true I guess) and is a mega multi millionaire.  Bobby drives brand new Cadillacs and Porsches all the time, getting at least 1 new car every year, if not two, and he has a million dollar house.  When I show up at one of his restaurants in one of my cars, everybody runs around asking if it is Bobby's or you will even hear the staff telling each other to call bobby and ask if he got a new car.  

But the thing is, and its hard to discern this exactly, because ole' Bobby is really, really all about everybody believing that he is rich, but... I am old college buddies with the bookkeeper at one of his biz's and I guess the financial situation isn't pretty.  The house has no equity, him having taken out a home equity loan on it after a few years of ownership.  The cars are rolled forward, with negative equity adding up, and he owes more on them now when new than he paid.  I didn't know you could do that.  And the company credit cards are maxed out to pay for lavish vegas vacations.  Now, I am not judging silly spending in vegas, as I happen to hold (or so I've been told) the record for biggest bar tab at one of the clubs there, but at least I have the money.  

I have seen the books for the restaurants and they are doing well.  No equity in them, but they service their debt, pay all salaries, and kick off $100k or so each year.  His 0.5% of the mall is probably worth a hundred grand, and he generates significant cash flow from his business, without question.  

I guess Bobby is the poster boy for the debt bubble, eh?  Any and all credit anybody will give him he takes and spends at once, on superficial "look at me" stuff.  He should live in California or Vegas, I guess.  

So here we probably have 3 or 4 million dollars worth of debt, probably negative net worth, a significant amount of cash flow, and at least most of the debt is being serviced (the restaurants).  The hosue is unsellable as he lives between two old college buddies (who now work for him) an a neighborhood where there is no way anybody spends $1 mill fora house.  Maybe he gets $600k. 

How bad is his situation?  I honestly don't know.  It isn't good, and I've no doubt that a significant downturn in business would leave him bankrupt.  I also have no doubt that a significant upturn in business would see him just spend more and more.  

I guess thats the poster-child for all of this, eh?  But for every one Bobby there must be a hundred, if not hundreds, of Bills, Kory's, or Jasons.  


Old man Joe.  Joe's a farmer near the end of his life.  Farm is paid for, owes $80k for operating expenses for the year, which he will pay after selling this years harvest.  His normalized income is probably $100k now that he doesn't have payments on the farm.  So his debt:income is better than 1:1.  But he is probalby worth $1.2 million (the farmland), so his debt:net worth is extremely low.  

Grown man Joe.  Same guy, but 20-30 years ago.  Normalized income is proably $50k in todays dollars, probablyowed $400k on the farm.  So his debt/income was appalling.  Debt/net worth was still decent (once the farmland had appreciated slightly and been paid down slightly).

Young man Joe.  Same guy, new farmer.  Owed probably $600k on the farm (guessing),normalized income of $50k.  Debt/income was horrific.  Net worth was $0.  


Bartender Barry:  makes $35k has $15k left on his car payment.  income greatly exceeds debt.  His net worth is probably about zero (probably underwater on the car).  Does having a debt/income ratio of 1:2 (way better than most of the above) make him better off financially?


So there you have a cross section of people I know.  In most of these cases, their debt:income is horrific.  In fact, by that measure, ANY NON HOME OWNER is doing "well".  I would note that if all of the above just rented, their debt:income ratios would be vastly better.  But, over the course of a decade or two, they would wind up worse off financially.  Farmer Joe would have never paid off a house, the couples above wouldn't be paying off houses, and so forth.  

I don't dispute that we have a debt problem in this country.  Obviously the country itself does.  The countries debt problem stems from years of malinvestment:  handouts given, so as to ivnest in nothing, in exchange for votes.  

Big Bobby's debt problem is also a function of malinvestment.  Gigantic blackjack table tabs and money lost on cars and underwater on an ill advised house purchase.  

But, as in the case of Kory or Billy, often debt (as in a mortgage you can manage on a hosue you bought at a reasoanble price) is a GOOD investment that will leave him better off down the road.  So, sometimes, scary debt ratios (2x his income) isn't so bad.  

And sometimes impressive debt ratios (less than half his income), represents no investment, and not necessarily a good financial situation at all (barry), albeit not a dangerous one.


I would love other peoples thoughts on the debt situation, with a focus on a realistic, and not hyberbolic, view of it.  Clearly, if we were all perfect pictures of suburban life, nice job, house we can afford, which we have a mortgage on, maybe a car payment, and a little bit of savings...  we wouldn't be in bad shape.  But we would have frightening debt statistics.  I think a thorough dig into what the actual debt situation is (as in, what % of the debt is "malinvested" debt) would be alot more helpful than simply lumping every debt into one scary stat (as in good business debt or reasonable mortgage debt).  

51 Comments – Post Your Own

#1) On August 10, 2010 at 9:31 PM, MegaEurope (24.98) wrote:

If Jason's business does $1M of sales a year it is probably worth more than $70K.  Also his apartment is more of an operating lease (not a capital lease) so you're right, it should not count as debt on his balance sheet.


Renting is not an ideal strategy in an environment where the government is throwing massive amounts of money at homeowners (in the form of low interest rates, mortgage interest deduction, special tax credits) but it will work personally for the next few years.  So I have 0 debt to equity.

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#2) On August 10, 2010 at 10:16 PM, ChrisGraley (30.25) wrote:

This is a great thread!

I'd like to roll in a giant, arrow shaped, glow-in-the-dark, neon sign showing that...


People can live rich for a while by owing other people money, but they can't be rich in the end by owing other people money.

It's like driving drunk, you might get away with it for a while, but eventually it will end bad. 

I'm not saying that you can't borrow, but you can't borrow to the hilt and expect it to be a good thing. 



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#3) On August 10, 2010 at 10:23 PM, checklist34 (99.73) wrote:

Mega, that business in my estimation is worth exactly $0 for sale value, inventory only.  Its so completely dependent on him, he is the brand, other shops in town offer the same services, he has no competitive advantage besides himself.  The fact that he knows tons of people and all of that. 

I doubt it has value w/o him, its too dependent on him.  This is true, I suspect, of many succesful small biz's.  A hair salon comes to mind, or whatever.

I also have zero debt/equity.  But part of me wants to take on debt at 4% interest, seriously.  I am sorely tempted to buy some CRE or something, but the area is rather significantly overbuilt.  One nice project in a great location is interesting.  

And farmland!  I am collecting it, at miniscule interest rates.  But its hard to find and sells frequently for silly prices, and often very quickly. 

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#4) On August 10, 2010 at 10:31 PM, russiangambit (29.49) wrote:

You should try analyzing families with kids. The cost of raising and educating kids in the US is very high. I don't get why so many families still go on to have 3-4 kids, I barely can afford to raise 2. Probably 30% of my  after-tax cash flow is spent on kids.  Not only these are direct costs of daycare and various lessons but also indirect costs of bigger house, higher property taxes and utility bills. And even after all this expense I am still afriad they won't be able to compete effectively with chinese 20 years from now.

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#5) On August 10, 2010 at 11:29 PM, checklist34 (99.73) wrote:

Chris, agreed.  100,000,087.324% agreed.  Big Bobby from our true story above lives in a hosue of cards.  Wouldn't be surprised to find out he owes the IRS an extra nickel, wouldn't be surprised to see him in bk.  I guess I wouldn't be surprised to see him string it along for a lifetime, either, he is not un-talented and works extremely hard.  

But, and I think this is the big important question:  how common is his story?  What percentage of the overall debt in the country is legitimate mortgages for houses families intend to live in that will, fullness of time, wind up being something between a good savings account and a fair investment* (see note below) vs true wastes by people destined to crumble under a debt burden?

All of the people above are "frighteningly indebted" by alot of the metrics offered in commentaries on the internets...  but in all honestly, only big bobby is really misusing debt.  And Bartender Barry, in good shape by some measures, is financially irresponsible to an extent in that he makes no investment.  

What % of all these scary statistics are actually stupid misuse of credit, and what % are dudes with houses?

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#6) On August 11, 2010 at 12:01 AM, checklist34 (99.73) wrote:

gambit, don't worry about the chinese, our story isn't finished just yet, and it is far, far from cast in stone that they fare better than japan or the asian tigers did not so long ago. Also, you are a sharp guy and this isn't the first, or second, time I've heard you post about your kids so you obviously care about them, I am sure they will have no trouble competing in their adulthood.  :)

I have a son, who lives with me, goes to a private school, and there is no way he costs me even close to $10k a year, health insurance and all.  In the mid 1970's through mid 1990s my family had 3 kids and an avg annual income of 18 grand and we got along.   Hand me down clothes, garage sales, mom planted agarden, we ate our own livestock.  Kind of an old-school upbringing and we didn't eat "poor", thats for sure.  We just had literally zero nice things, except a set of encyclopedias updated twice, which my parents thought was important.  

I bet today if I set aside $3,000 to buy some stuff (tv, whatever, couch) (a reasonable amount I think), parked all of my cars & got a $2,000 Honda...  My son and I could live on my McDonalds wages and be reasonably happy.  It'd be a very different life than we have now, but...  I will wager any amount that it could be done.  

But at the end of the day, all I am saying, and I am NOT being critical one bit, for I don't know you, yours or your situation...  a huge amount of our cost of living is chosen and not ordained.  



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#7) On August 11, 2010 at 12:12 AM, mymini2 (< 20) wrote:

My stats. 49 years old and married, 2 teen daughters. As of today I have zero debt and good equity. Sold my house in California and taking the capital gains exemption while I still have a profit. Moving out of California with a job in another state. Our income is almost 1/3 of what it was 2 years ago thanks to offshoring of jobs.  Trying to decide how long I will rent in this new economy after owning my primary residence since 24 years of ago. Help with the decision is needed.

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#8) On August 11, 2010 at 12:21 AM, WallstreetKnight (47.68) wrote:

For reference, how old are you?

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#9) On August 11, 2010 at 12:26 AM, WallstreetKnight (47.68) wrote:

Also, McDonald managers get paid reasonably well depending on location.  I think the median is something like 54K.

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#10) On August 11, 2010 at 12:28 AM, checklist34 (99.73) wrote:

mymini, owning for 24 years winds up being a pretty good investment... 

What do you do where your income dropped 67%?  Just curious.

Do you have a chunk of cash left over to make a nice downpayment, then grab a mortgage at 4% or whatever?  May be cheaper than renting (certainly would in my area, for a family of 4)

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#11) On August 11, 2010 at 12:36 AM, checklist34 (99.73) wrote:

I am 34, knight, why?  

I am not, at this time, qualified to manage a McD.  In fact, I have never had a job in my life that wasn't bartending or waiting tables (lifetime entrepreneur).  I could, however, get the $8/hour starting job (isn't every McD on the planet hiring?) and live on that.  Thats like $17k/yr, which means you pay practically no taxes (especially when you have a kid) so takehome would be well over $1k/month.  

If we quit going out to eat every other meal 1) I'd lose 10 lbs, 2) I bet a guy could get by for 2 people on $200/month and eat just fine.  Then you'd not have a car payment ($2k honda), you wouldn't have 4 cell phone lines for 2 people, you'd just have one (it wouldn't kill the kid to not have a phone), you'd rent movies instead of always buying them, I'd quit going to the bar or if I went I wouldn't spend money, obviously no Vegas, park all my cars and insurance would go from a thousand bucks a month to 50.  Public school, figure you shop at old navy or savers or Target for the kid and I can get by for years without getting new clothes, figure 50 bucks a month on gas (honda, remember, gets like 30 mpg).  Kid goes to a public school.  

I bet I could even save a tiny bit of money in case the car broke down.   

And... I bet if you actually worked hard at a McD you could be a manager in a fairly short time period.  And then you make $54k, and I bet I could buy a house with that.  Not a 6 car garage palace or anything, but a twinhome for like $100k.  Finish the basement myself, maybe worth $130 to sell (in this area).

"need" is a seriously, seriously relative concept. 

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#12) On August 11, 2010 at 12:38 AM, Starfirenv (< 20) wrote:

 checklist34- Great post (and thread). Credit/debt can be productive or destuctive, but cannot be blindly lumped together. Albert was right- it's all relative. I see credit/debt as a .357- it can save you or bury you. Thanks,+1. Regards

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#13) On August 11, 2010 at 12:38 AM, mymini2 (< 20) wrote:

Checklist. It was an excellent investment given I bought in 1994 in an expensive area of So. Cal. I am in Information Technology.  I have a chunk of change left over but believe in downsizing. I cannot imagine why I would want to take a loan on a house. I have a strong feeling that once interest rates do rise and prices drop as a result I will purchase with cash.  Maybe it does not matter much and I should just purchase soon as to not pay rent... Options, options,,, and lots of jobs going offshore!!!

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#14) On August 11, 2010 at 12:43 AM, WallstreetKnight (47.68) wrote:

I asked your age because you referenced someone in your example being 'roughly' your age, and I wanted to gauge what sort of circumstance that was (according to the example).  

The McD thing is intriguing to me.  I worked there when I was 16, and when I graduate from Uni next summer I am considering applying for a shift manager position after securing a 'career.'   I think the amount of equity I could build (outstripping my one-job peers) would be amazing. 

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#15) On August 11, 2010 at 12:59 AM, checklist34 (99.73) wrote:

Starfire, beautiful summary, beautiful. 

Its all about whats done with the debt.  Buy a house and live in it for 10 or 20 years = awesome use of debt, probably (you take care of it, etc.), because you save money in equity, etc.  

Use it for bar tabs on credit cards, etc., as in non-productive and non-investment uses, or use it to invest very unwisely, and it can be rather destructive.  

Our government, at this time, is probably not using debt very wisely (mostly to buy votes by giving away stuff)

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#16) On August 11, 2010 at 1:06 AM, awallejr (82.72) wrote:

mymini2 your request for help is impossible to answer without more information.  What will be your household income?  Any college fund set aside for your kids?  How much cash do you have?  What is your monthly rent? What are houses selling for in the area where you are living? Do you anticipate living in your new neighborhood for many years or just until your kids move on?

As for the issue of debt in general, I see alot of clients looking for help either with foreclosures or bankruptcies.  I saw this during the late 80s as well. Some people just know how to handle debt.  Most don't.  They get caught up borrowing for whatever reason (a home, car, college tuition for kids, a startup business), but if the monthly cash flow isn't there or declines things spiral downwards fast. 

Your Bill and Jennifer seem to be the most soild imo, tho Kory and Callie's story seems the more enticing from an old fashioned person's point of view.

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#17) On August 11, 2010 at 1:14 AM, ChrisGraley (30.25) wrote:

I need a second neon sign for post #11.

Ladies and gentleman that post explains why checklist is successful.

It's not rocket science. You just have to spend less than you make and invest the rest.

For the same reasons, I can lose my job tomorrow and be pretty confident that I can walk into the doors at MCD and get a job. I can live off of the same 17k as checklist and I have room to invest. I have more room to invest now than most people because I've lived below my means for most of my life. (Including a time that I worked for MCD at $3.30 an hour)

I've quit jobs before and been fired. I've never taken unemployment because I've never been without a job for more than a week unless it was on purpose. (Take it if there though everyone)

For the poster that thinks he's gonna sign up at MCD for a career, I would advise against that. Try to find a way to work for yourself. If you fail, the job at MCD will always be there.

The saying is true, it's hard to get rich working for someone else. That's hypocritical on my part because currently I'm working for someone else.

Seriously everyone, just spend less than you make and you'll be ahead of 95% of the population. 

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#18) On August 11, 2010 at 1:22 AM, Starfirenv (< 20) wrote:

checklist34- Simple is good. Thank you. Hey car guy, how's your resolution to get out more going? Reno's WAY cooler than Vagas. Shout me out. Tahoe is pretty nice this time of year. We could cruise the Gran Sport and be stylin' large.

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#19) On August 11, 2010 at 1:24 AM, awallejr (82.72) wrote:

 "just spend less than you make"

And how does this help the person who lost their job through no fault of their own? 

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#20) On August 11, 2010 at 1:27 AM, checklist34 (99.73) wrote:

mymini, IT for sure is getting shellacked by offshore jobs.  I am sorry to hear it is affecting you. 

I have sat down and thought long and hard over what to do with my house.  I paid for it, but now I am wondering if I should mortgage some of it at these very low interest rates, then take the money from the mortgage and invest it in something.  Say high dividend paying companies with apparently stable dividends.  pfe, lly, t, vz, mo, arcc etc come to mind.  The spread to be earned is not insignificant, and I think it is highly likely that over 15 years these securities would appreciate in share price.  

I got nothing, but I think you raised a really interesting point here...  house prices should indeed be negatively affected by high interest rates.  That, in turn, should be countered by higher prices resulting from the inflation that would be associated with high rates (rates won't go up w/o some kind of inflationary environment) which will eventually lead to higher wages and higher prices for assets.  

What happened to house prices in the 1970s?  Maybe, if you are concerned about higher rates in the future, thats something to look at.  If the high inflation and very high interest rates of that period resulted in compressed housing prices, your thesis may be right.  But if the inflationary pressures forced house prices up during that period faster than higher interest rates forced them down...  maybe you'd be safe to buy now and lock in a super low rate on maybe part of that house, or pay cash.

Just thoughts.

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#21) On August 11, 2010 at 1:59 AM, ChrisGraley (30.25) wrote:

 "just spend less than you make"

And how does this help the person who lost their job through no fault of their own?

awallejr the last time I saw, they still get a check. It's not a great check but the same rules apply. I advised in my post that they should take it too.

Listen, for a lot of my life I've lived off of less than crap, but I still lived my own life. I honestly to this day still don't understand how I paid for college, but I paid for it.

The four food groups for me, (for a period of 4 years) were tuna, ramen noodles, peanut butter, and free pizzas that I used to get from a buddy of mine. I ate one of those 4 things for almost every meal for 4 years.

I got past it, because I was never a victim. I had a lobster trap with a piece of glass on it for a coffee table, but I owned all of my under appreciated crap.

I invested the rest. (even when I didn't know how to pay for school.) 

You know, back then, when I got fired, it was through no fault of my own, but I still was never a victim.

When you create a path for victims, the victims will line up. They'll be the same victims that line up in the next crisis too.





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#22) On August 11, 2010 at 2:01 AM, checklist34 (99.73) wrote:


     It really is that simple.  My dad was an awful investor (bank CDs through the greatest bull market in history), but out of the just over $300k he made for a family of FIVE in the 18 years I was growing up he saved something like $60k for our college fund.  My brother and I got smart-nerd scholarships and my sister blew the rest.  I dropped out for a love of booze and chasing girls, but...

     Got a job waiting tables.  Always paid someone if anyone would take $20 for the busiest section, always picked up a shift if someone offered, volunteered to close for someone (its like 1 extra hour) and saved five figures a year waiting tables.  

     And it wasn't like I never had anything.  I bought nice cars for my peer group (used, but they were cool), drank bottled beer and fine liquors, whatever.  

      Just make more than you spend.  I was richer at age 22 than Big Bobby is today, which is perverse if you think about it, but perverse doesn't make it not a fact.  

      Its that simple:  spend less than you make.  Brilliant

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#23) On August 11, 2010 at 2:17 AM, awallejr (82.72) wrote:

awallejr the last time I saw, they still get a check.

The only check they would get would be an unemployment check and that doesn't last forever nor make a person whole. If you bought a house, for example, with the expectation that your current income would and did cover the mortgage, then you lost your job, well  that causes the downward spiral that eventually throws you into foreclosure and maybe bankruptcy.  So "spending less" is meaningless.  You still lose your home.

There is an old saying, "past performance is no guarantee of future performance."  While you might have managed years ago, that doesn't mean a family of four can do the same when the primary wage earner loses his/her job.

It is rough out there.  Trust me, I know.  I deal with it with clients on a weekly basis. 

You aren't surviving spending less than zero.


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#24) On August 11, 2010 at 2:22 AM, checklist34 (99.73) wrote:

I didn't buy cars for my peer group, I bought cars that were nice relative to my peer group. 

Chris, I am not trying to turn this into a "when I was your age I walked through 19 feet of snow naked to get to school" story, and I know you aren't either.  And I'm not trying to one-up, sounds like we are about the same here, I just can't possibly over-emphasize how true this is. 

But true:  we have almost no new clothes as children, almost all of them were hand-me-downs or rummage sale stuff.  I ate ramen noodles at least 1 meal a day, wash it down with some milk and a vitamin and you have a $1 meal.  Peanut butter sandwiches or cheese and bread.  

We went out to eat as waiters (my biz partner and I, w/whoever) and drank champagne and liquor and stuff (pretty expensive at the time), but when we lost our fannies on our first business attempt, we, literally, ate cheese and  bread and milk and vitamins and ramen for 75% of our meals for years.  My son ate well, forever indebted to biz partner for giving up HIS life so MY kid could at least eat real food.  I had, again no joke - if you don't believe me somebody sue me for lying and I'll prove it in court - a 20 year old car where the drivers side door didn't open and no radio and he had a 20 year old car with a broken front window, no a/c, no radio that cost $200.  We didn't get any new clothes for 5 or 6 years, and when we started making money, I am not kidding, we were so in debt that the new clothes we treated ourselves to (at that point we actually needed htem) were from Savers.  

He moved in with us into a 2 bedroom apartment, one of us slept on the couch, we had an old TV from our party days, VCR also, and a nice couch also from those days.  We didn't have cable, we needed internet for work.  We quit smoking and drinking.  

And you know what?  I say to my son that its alot better to be rich than poor, he says "yeah, its nice not to live in a stinky apartment, but you know we laughed alot back then and it wasn't so bad".  

Need is a hugely relative concept.  

An interesting aspect of all of this is that I am deeply unsympathetic to people whining and crying because they can't make it.  Its not fair.  They go to the bar, they have nice clothes, they have car payments.  

And, yes, I know how it must sound bad, or even ugly, coming from a guy with 9 cars, some exotic, and all of that.  But if I could do it, why are they too good to do it?  Sometimes I want to scream "why does everybody think they are so much better than me, entitled to so much more?".  Probably 80% of my life I was way, way below the poverty line, 10% I was normal, and 10% I am rich.  

I can't stand it. Can you honestly just refuse to work and live with more than I have had for 80% of my life on welfare?  I don't know the answer to that, but I'm curious.

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#25) On August 11, 2010 at 2:26 AM, checklist34 (99.73) wrote:

Awall, in the post above, if those folks lost their jobs and couldn't find another one they would be in dire straits, of course, or at least it would really hurt.  But if disaster doesn't strike, their use of debt will enrich them over the course of their lives (except, again, Jason, who has absolutely no love for money at all and is an exception to the human norm). 

Investment (a mortgage) always has risk, and thats one of them, and life I guess also has risks.  I have certainly faced that fact.

But, ... to acknowledge that there are situations where one cannot spend less than he/she makes doesn't render untrue the basic premise...  no?

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#26) On August 11, 2010 at 2:33 AM, checklist34 (99.73) wrote:

When you create a path for victims, the victims will line up. They'll be the same victims that line up in the next crisis too.

one of our societies biggest issues


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#27) On August 11, 2010 at 2:41 AM, awallejr (82.72) wrote:

You spend within your means.  I won't dispute that.  But simply saying that as an axiom really is meaningless because often times for the average person, they have no real control over "their means."  If a company is going to lay people off, those laid off have no control over that.

To say "well find other comparable work" is also meaningless if no comparable work can be found simply due to market conditions beyond an individual's control. 

We had a bubble that created alot of basically temporary jobs, yet jobs people didn't think would be temporary.  The bubble burst.  Many jobs were lost. There are no comparable replacement jobs at the moment for all those that lost their jobs. These are events beyond most people's control.  To say 'suck it up, deal with it" is as I have said meaningless. People can't "deal with it" since comparable jobs aren't out there, hence the downward spiral.

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#28) On August 11, 2010 at 2:44 AM, checklist34 (99.73) wrote:

starfire, you live in reno?  if so I will totally go there instead of vegas, that'd be sweet!

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#29) On August 11, 2010 at 2:51 AM, checklist34 (99.73) wrote:

knight, ... i guess from your post that you don't have a family (or the 2nd job at mcd's would be less interesting to you).  Check out bartending if it could fit.  Chase girls + make money at hte same time, can't beat that!

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#30) On August 11, 2010 at 2:55 AM, checklist34 (99.73) wrote:

awall, ...  it could be said that simply because an exception exists doesn't disprove a rule.  For example, if I said "human males are larger and stronger than human females", someone may say "no way, I know this guy whose wife could kill him, and true tho that may be, my original statement is still pretty valid.

The point isn't to be unsympathetic, its just to say that A) its been done and B) need is a massively relative concept.  

most people by the age of 40 could have saved a huge financial cushion for hard times also.  That they didn't could perhaps come back to the rule.

And bad things do happen, and what you are saying is true, of course.  But it doesn't disprove or invalidate the concept Chris threw out in my view.

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#31) On August 11, 2010 at 3:14 AM, awallejr (82.72) wrote:

It does only to the point that saying it is so makes it so.  While he managed to endure through his life doesn't mean ipso facto everyone should.  Different time periods and different facts warrant different different outcomes.

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#32) On August 11, 2010 at 7:08 AM, dragonLZ (99.69) wrote:

What happened to the friend who inherited money in 1999/2000 and was all about tech?

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#33) On August 11, 2010 at 8:21 AM, ChrisGraley (30.25) wrote:

awallejr, you sound almost disappointed that someone could pull themselves up from their own bootstraps without government help?

Are you sure about your motives?

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#34) On August 11, 2010 at 8:43 AM, rofgile (99.33) wrote:


 Thank you for the really fascinating and interesting blog - and all the others for really interesting comments.

 I find the original idea of the blog, that people can make different choices with different debt:earnings ratios - some which may seem risky or poor in wealth - but that they do well quite interesting.  

 I think debt as a tool to grow your earnings or own an appreciating asset is quite interesting.  The farmer would be using debt to grow earnings, I don't think any of the others count on that (maybe small business owners?).  But, the couples all bought houses with debt and have an appreciating asset.  


 I find this interesting because I am newly married (1 year), don't own a home, and have avoided buying a home because I don't want to take on a large debt at a time when I am unsure about what jobs lie ahead in the future.  At the same time, I've been growing value in equities (I am still 100% in equities for savings) probably around 10-15% over the last three years - and as such I have saved a small amount of money and have no debt.  Part of me wants to put more into equities and cut almost all frivolous spending, but I let myself spend on some things that make me happy - mostly things that let me make things (like a new kiln).  And I spend money / time learning languages - which also feels frivolous because I could be using that to work work work!  And.. I spend money on trips/experiences - because I remember those so much later on in my life.  I don't remember the 3 years of hard work I did, every day is very similar.  But I remember the camping trips and road trips - and now recently a trip to Spain.  I could lose all my stock assets in another terrible crash, or another person could have their house burn down - but knowledge in your head and experiences and joys in your head are things that can't be taken away (baring say a head injury or disease / etc).  And I think those are important too.  Its good to invest not just in money.. but in your soul and health too.  And that's something to consider I think too.


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#35) On August 11, 2010 at 8:55 AM, russiangambit (29.49) wrote:

#6 - cheklist, you are right, much of that expense is by choice. I could educate my kids myself instead of a private school, they don't really have to have swimming and ballet and other lessons and we could move to a smaller house etc.

But what I really was trying to get at is that most families with kids live like this. Where I know it is a luxury, they think this is the way it must be and they see no alternatives and they feel trapped by all the expenses and they never save anything. Expense for families with kids are therefore very high and are not comparable to those without the kids.


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#36) On August 11, 2010 at 9:29 AM, Gemini846 (82.65) wrote:

I liked this sectional comparison. My Business coach tells me all the time that "anyone can buy a 'bank car'". In your model I'm Bill/Jennifer - condo + 2 kids. Renting has allowed me to rid myself of about 40% of the rediculous amount of debt I aquired in college from living like Big Bobby until my dot com business failed. Sure my friends are all out buying houses, but I sure am glad when I got my shot to buy a house in 2005 I passed.

My landlord has informed me that they need to raise my rent finally. They tell me I'm no where near the market value they could get for the place, but they haven't had to do anything to it but paint the outside in 3 years. Maybe I'll shift to saving up a downpayment but I know by next summer I'll have paid off most everything but my student loans so its real tempting to just finish getting out of debt.

Anyway. Hope that adds to your case study.

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#37) On August 11, 2010 at 11:14 AM, fireman9119ca (73.91) wrote:

Great Post CL....

 If we can change our focus from 40 000 dollar cars and houses so big we cant fill the rooms to 3000 Hondas to affordable housing life is very very managable and much less stressful.

We have the option in N American to live great lives, travel anywhere in the world and so many of us chose to bury ourselves in massive debt til we croak.

It is scary that every new firefighter that comes into the station is driving a brand new 40 000 truck.  They work so hard to finally get the job with decent pay then have no problem blowing most of it on stupid truck payments.

They ask me how I can afford to live in Canada and travel to the Carib  many times a year.  I simply point to his truck and say "I dont own one of those". 

 It amazes me that so many people in our culture judge you by where you live, what you drive and the material things that you (or the bank) owns,  it is really quite sad....

 One of my fav quotes from American Beauty....

 Carolyn Burnham: This is a $4,000 sofa, upholstered in Italian silk. It is not just a couch.
Lester Burnham: [shouts] It's just a couch!

Check if you are ever in Santo Domingo....look me up..

I am the weird rhythmless white guy that can't dance


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#38) On August 11, 2010 at 11:50 AM, Starfirenv (< 20) wrote:

checklist34-It's true. Anytime. I'll save this in faves, which I ck on. Shout me out. This turned into a really good thread- thanks for starting it.
#35 rofgile- My favorite commment. Once again Albert was right- investing is relative. Checklist did a post on "alternative" investments (coins, art, etc) which your comment reminded me of. Travel and other "life experiences" must certainly be considered investments. At the end of the trail, when I question what has enriched my life the most.....
Regards, Thanks All.

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#39) On August 11, 2010 at 12:22 PM, outoffocus (23.59) wrote:

We have the option in N American to live great lives, travel anywhere in the world and so many of us chose to bury ourselves in massive debt til we croak.

Great comments all. But thats one of the best statements I've read in this blog.

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#40) On August 11, 2010 at 1:24 PM, awallejr (82.72) wrote:

"awallejr, you sound almost disappointed that someone could pull themselves up from their own bootstraps without government help?

Are you sure about your motives?"

Oh absolutely not.  I've done it myself. But we are the exceptions and individuals.  But when you have over 8 million people lose their jobs basicially in one year its a different ballgame.

I don't have sympathy for the person who recklessly borrows and speculates.  You roll the dice and lose, oh well.  But to the person who simply lost his job through no fault of his/her own having relied on that job when he/she bought that house for their family for example.  Yeah I do have sympathy for that person. 

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#41) On August 11, 2010 at 3:21 PM, EnigmaDude (98.06) wrote:

Great blog, but you left out the most important piece of information for each of your case studies.  How happy are they?  If Big Bobby is living the high life and having a great time, so what if he goes bankrupt.  He's young enough to start over and do something else with his life.  On the other hand, he might be really unhappy and just trying to convince everyone that he isn't.

Debt ratios are one measure of wealth but they don't tell the whole story.  Thanks for getting this thread going though.  Lots of great comments here!

EDude (a BK survivor)

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#42) On August 11, 2010 at 4:18 PM, JaysRage (90.49) wrote:

My wife and I are the exception to the typical American profile.   We both work and earn mid-level incomes, even though we essentially live as if we have one income.  We are in our mid-30s.  We own both of our modest cars and have paid down 1/2 the equity on our modest house.  We carry zero additional debt, we max out our 401Ks and our ROTHs and we have enough left over to give generously and allow me a short-term investment porfolio to generate wealth.

I know someone that fits all of your profiles, and I know a fair amount of people that also carry significant credit card debt and student loans in addition to house or car loans.   Probably 30% of my friends, single or couples,  are living paycheck to paycheck and I circulate in conservative financial circles.   One is now under-employed and is basically bankrupt.   He is single and in his early 30s.


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#43) On August 11, 2010 at 4:25 PM, JaysRage (90.49) wrote:

By the way, a house as an increasing asset is a conversation worth having.  Sure, the price will likely appreciate, but I think maintaining a house through time cost more than the price appreciation, so houses as an "investment" is overblown in all financial circles.    Commerical real estate or land.....yes....single family homes.....not so much, in my opinion.  

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#44) On August 11, 2010 at 4:37 PM, outoffocus (23.59) wrote:

By the way, a house as an increasing asset is a conversation worth having.  Sure, the price will likely appreciate, but I think maintaining a house through time cost more than the price appreciation, so houses as an "investment" is overblown in all financial circles.    Commerical real estate or land.....yes....single family homes.....not so much, in my opinion

Agreed. Also, thanks to the housing bubble and the recession, I think it will be a few years before housing returns to normal.

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#45) On August 11, 2010 at 6:06 PM, ikkyu2 (99.38) wrote:

401(k)s and Roths are valuable at the pleasure of the government, and only at the pleasure of the government.  Won't you all feel silly when in 2020 or so, Congress imposes a V.A.T., and you now have to pay a 20% tax for the privilege of spending all that money you saved and grew tax-free all those years?

The only thing that holds its value worth a damn is land.  If you own some land free and clear, you are rich.  If you do not, you are a peon.  That is the story of America in two sentences. 

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#46) On August 11, 2010 at 6:18 PM, QualityPicks (54.81) wrote:

I don't think you live near any of the better areas in CA :)

In here the situations are a bit more extreme than your cases. There are more people with worse ratios and way more debt. But there are also truly rich people too.

I know of about 5 friends or more that were in debt neck deep, and I believe they were for sure going to lose their homes, etc. However, none of them has lost their home. It just boggles my mind, I can't understand it. None of them seem stressed anymore, and I haven't heard of them struggling anymore. I don't know why exactly what happened.

So who knows, maybe the debt is manageable in many ways. Or maybe they are just not paying the mortgage anymore, or got their reset extended for a few years, or maybe they refinanced, got a mod, or some unfair thing like that thanks to all the government programs and help from the Fed. I believe is a combination of all those things.

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#47) On August 11, 2010 at 6:52 PM, badnicolez (< 20) wrote:

I have one question: how on earth are any of these people saving enough for retirement (aside from old Joe)?

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#48) On August 11, 2010 at 7:03 PM, lctycoon (< 20) wrote:

"401(k)s and Roths are valuable at the pleasure of the government, and only at the pleasure of the government.  Won't you all feel silly when in 2020 or so, Congress imposes a V.A.T., and you now have to pay a 20% tax for the privilege of spending all that money you saved and grew tax-free all those years?

The only thing that holds its value worth a damn is land.  If you own some land free and clear, you are rich.  If you do not, you are a peon.  That is the story of America in two sentences."


Not in the USA.  Remember, the government taxes you to use land that you believe you own.  If you don't pay real estate taxes, how quickly will you lose the land that you thought you own?  I agree with you that real estate is a good investment (but NOT an owner occupied home, which is actually a pretty poor investment).

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#49) On August 12, 2010 at 11:15 PM, BeatBuffet (50.75) wrote:

Checklist34, if you have time analyze what you think of my financial shape:

 Age: almost 27

Income: $40,000 gross/ $32,000 net

( hopefully increasing in the near future, started a business in 2009.. gobbling cash right now rather than minting it)


(Outstanding/Available): 6500/17000

4500 credit card debt

2000 equipment purchase


Equity & Assets:

Liquid (and net 30 receivables): 4500

Securities/Investments: 12000 (oh god it was so much more before this recent bear market)..

 I own a total of 3 vehicles (2 that work, with the non-working being the most valuable of the bunch by far.. lol): $5,000


Rent: $900 (ouch)



So, I'm not fully invested.. but I might not be in very good shape?  For some reason I can't seem to make myself sell my stocks and buy a house, partly because everything where I am (DC) is really expensive.  I'm not sure what kind of appreciative values million dollar homes have even if you got the money..  Should I keep my money in stocks (I do pretty well usually... currently beating the S&P by about 60% on a weighted basis (deposit/withdrawls tied to s&p of as of that day) since I started investing again .. after spending all my stock money in college on rent and other things....  Is being in the market foolish at my age and in my shape?

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#50) On August 13, 2010 at 3:30 PM, miteycasey (35.10) wrote:

You guys are making me question if I want to go to the vending machine and get a Diet Coke or just drink water.

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#51) On August 15, 2010 at 3:55 PM, Tastylunch (29.54) wrote:

You are an interesting fellow Checklist. I wonder sometimes if you know how unique/special you really are.

I have to be honest though buddy, even though I have done somewhat similiar things to what you have without anywhere near the same highs or lows, I sincerely doubt most college educated Americans have the mental fortitude to handle the ramen regimen you described.

I guess us entreprenuer types have a high tolerance for pain, or perhaps it's our ability to handle such pain that makes us entreprenuers? :)

Don't know if you've ever seen this study and my favorite Ted talk, but it's conclusion is that the number one predictor of success in life isn't skill, intelligence or connections

but the ability to delay gratification

the interesting thing is this effect seems to be universal across cultures and social backgrounds.

My guess is that no matter what system America adopts there will always be a large number people who just don't have the inner toughness spend less than they make. There may be more or less under different systems but there will always be quite a few. It just seems to be human nature.

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