Life or Debt 2010: A New Path to Financial Freedom

Introduction:

Will the Circle Be Unbroken?

Giving money and power to government is like giving whiskey and car keys to teenage boys.

—P. J. O’ROURKE

I really hesitate to start our relationship by bitching, but I can’t resist telling you this: If you’d read this book back when I first wrote it nearly 10 years ago, we almost certainly wouldn’t be meeting like this today. Because if you’d followed the simple steps in this simple book back then, by now you’d have no debt whatsoever. You’d have no credit card debt, no mortgage, and no car loan. And you’d almost certainly have money in the bank as well—maybe a lot. You’d have little fear of losing your job, because you wouldn’t be living paycheck to paycheck. In other words, you’d be well along the path to financial freedom.

But I’m guessing that since you’re reading this now, odds are good it’s for the first time. That’s fine. The techniques that worked back then will work just as well today! And there’s never been a better time to start a new life, one that centers a lot more around working toward your personal vision of happiness and a lot less around working your butt off just to keep the bills paid.

But before we start talking about your personal situation, let’s first look at the situation our nation finds itself in today. It’s important for a couple of reasons: First, because our problems as a country have a hell of a lot to do with one of our problems as individuals, namely, debt. Second, because I really feel like blowing off a little steam about the ridiculous and completely preventable situation we’re currently in. Do you mind?

As I write this in the summer of 2009, virtually every industrialized nation on the planet is scrambling to recover from a near meltdown of the world economy. And every day, in every form of media, people from professors to pundits to politicians pontificate about causes and solutions. What’s ironic—and moronic, if you ask me—is that the answer to both couldn’t be simpler and can be summed up with the same word: debt.

In the summer of 2005 I was waiting at a traffic light and saw a sign on the side of the road that said something like 1% MORTGAGES!!! along with a phone number. Since I make my living doing consumer news stories and had a minute to kill, I called the number, expecting to generate a story about yet another fraudulent business. But the story I uncovered while sitting at that light wasn’t fraud, just lunacy. The person at the other end of that number was a mortgage broker and he was offering mortgage loans whose monthly payments didn’t cover the interest on the loan. In other words, this broker was offering mortgages that would be charging a normal rate, which at the time was around 7 percent. But instead of paying the 7 percent interest that was accruing every month, you only had to send in 1 percent. The 6 percent you weren’t paying would then be added to your mortgage balance. Which means that instead of reducing your debt every month, you were increasing it. Now, that may not sound like a big deal to you, but I was genuinely shocked. Shocked that any lender would ever offer a deal like this and shocked that any borrower would consider accepting it. So I asked this mortgage broker if he’d be willing to repeat all this on camera and he said he’d love to.

True to his word, when I arrived at his office the next day, the mortgage broker excitedly explained on camera that only an idiot wouldn’t want a mortgage that got bigger every month. In fact, this guy was even trying to convince me that I should take one out myself. The reason they made so much sense, he explained, was that even though you owe more on your mortgage every month, the value of the house you were financing with this idiotic loan was going up even more. Which begged what I hope is now an obvious question: What happens if the house stops going up? He looked at me like I was a complete simpleton and responded with something like This is South Florida. Everyone wants to live here. Houses will always go up. And it got even better. He went on to explain that not only did you not have to pay the full interest; you didn’t even have to make a down payment for these loans. You didn’t have to prove you had income sufficient to make the payments, or even have a job for that matter, because these were no-documentation loans, known to mortgage brokers everywhere as no-docs.

Last year, on my way to one of the many foreclosure stories I’ve done since then, I stopped and did a standup in front of his vacant office.

You don’t need to watch experts on CNBC to understand the underpinnings of the world’s current credit crisis. It’s not at all complicated. It happened because huge lenders offered stupendously stupid loans to hoards of people who apparently believed that trees grew to the sky. You can’t really blame the people who took out these loans. After all, home prices were going up at a rapid clip. And since they had no money of their own in the house, the worst that could happen to them was they’d move back into the apartment they came from and have a black mark on their credit history.

Having been around the block a time or two, I knew this would be the fate of many of those borrowers: that they’d lose their home. But since that’s the risk they were taking by borrowing money they couldn’t repay, I felt little sympathy for them and none for the companies stupid enough to offer loans like that.

What I didn’t know back then was just how widespread this lunacy was—that thousands of stupid loans like this were being sold to unsuspecting borrowers nationwide by mortgage brokers who were at best salesmen and at worst con men. And that those loans were being bundled up by the billions and sold to blue-chip businesses, even governments, all over the world. In short, I didn’t realize the extent of the lunacy. Otherwise I most certainly would have sold my house back then before the housing market crashed, and it was worth about twice what it is now.

In any case, thus began the snowball that turned into the foreclosure avalanche now burying pretty much everyone: the lenders who underwrote these stupid loans, the myriad people all over the world who invested in them, and of course you, me, and everyone else who either owns a home, has a job, or pays income taxes.

The direct cost of this little adventure is now more than two trillion dollars. And that’s just the price in the money our government is currently printing in an attempt to prop up the economy and the banking system. The indirect cost is much, much higher. Many of the companies that either made or invested heavily in these stupid loans are no longer companies, having either failed entirely (Lehman Brothers), been swallowed up by healthier companies (Countrywide, Wachovia, Bear Stearns, Merrill Lynch, etc., etc.), or been taken over by the American taxpayer (AIG). And all that failure has cost the livelihoods of many of the people who worked at these companies, as well as the life savings of people who invested in their stocks. Because of the resulting recession, 14 million Americans are now out of work. Virtually everyone who owns a house has seen its value decline, many to the point where their mortgage is greater than the value of their home.

Of course, not everyone has suffered to the same degree. Some have actually benefited. For example, bankruptcy lawyers and credit counselors are staying busy. And the people ultimately responsible for all these problem loans, the CEOs and other high-level employees of the companies behind this mess, were already rich. So while they may not make their milliondollar bonuses this year, unlike so many other Americans, they won’t be facing foreclosure.

What makes this sad tale even more pathetic is that the government only has one way to reverse the crushing crisis brought on by debt. That solution? Why, more debt, of course! You’ve seen the stories: The government has poured billions into getting the banks lending again. That’s what’s behind programs like TARP (Troubled Asset Relief Program), TALF (Term Asset-Backed Securities Loan Facility), and Cash for Clunkers. All these multi-billion dollar programs are about making it easier for us to borrow money. Because the only way to get out of a recession and put people back to work is for all of us to head to the mall, car dealer, and newest subdivision. And if we don’t have any money, the only way we can buy is to borrow. So the government is doing all it can to make the prospect of borrowing irresistible by offering incentives to buy things (Cash for Clunkers) and houses (credit for first-time home buyers), and lowering rates to as close to zero as they can get them. They’re begging us to borrow to the hilt… which is, of course, precisely what got us into this mess in the first place. And Uncle Sam is leading the way by borrowing himself. As I write this, the total debt of the United States is more than 11 trillion dollars. That’s enough money to pave the interstate highway system in 23-karat gold. Enough to build more than 16 million Habitat for Humanity houses. Enough to double the size of every police force in the United States for 32 years. It’s close to $40,000 for every soul in our country. And one day it’s all going to have to be repaid.

But if the government had simply spent a mere billion or so ten years ago and bought everyone in America a copy of my first book on this topic, they could have saved the trillions they’re spending now, because odds are good that none of this would have happened. After reading this book, you won’t begin to think of taking out a mortgage loan that gets bigger every month. You won’t want more house than you need or can afford. You won’t follow the herd and borrow to buy silly stuff you neither need nor genuinely want.

But I digress: back to our nation’s current mess. While our circumstances today are historic in size and scope, they’re not unprecedented. We’ve been on this ride before, and we’ll be on it again. Because capitalism, while a wonderful thing, comes with unpleasant side effects. And one of those side effects is cycles of boom and bust, of regulation and deregulation, of misery and prosperity. It’s a circle that’s been unbroken for hundreds of years, and since it affects your financial well-being, it’s worth understanding.

My parents were part of what is now called the Greatest Generation, a moniker they definitely earned by surviving both World War II and the Great Depression. The late 1920s brought a huge stock market bubble, not unlike the housing bubble we just went through. And it was followed by the Great Depression. In the 1930s, unemployment approached 25 percent, more than twice what it is now, and there were no unemployment checks. The stock market declined 80 percent. When banks failed, and hundreds did, there was no FDIC to insure deposits, you simply lost your money. So if you think it’s tough these days, imagine what that was like. But there was a silver lining to that dark cloud: The Greatest Generation became tough. They learned that life isn’t fair. They learned that even if you work hard and play fair, you can still lose it all when the fat cats put their paws in the wrong place. They learned that their only protection was to save a dime every time they earned a dollar and not to trust their employer or their government for their financial security. They saw firsthand what happens when good loans go bad, so they learned to borrow only in extraordinary circumstances.

They also got behind legislation that changed the financial system so it would be tilted more to the benefit of the have-nots. They created Social Security, a means to help people when they become too old or sick to work. They created the FDIC, which guarantees that nobody would lose money in a bank failure again, at least within the insured limits. They created unemployment insurance at both the federal and state levels. They passed laws to keep banks and brokerage firms separate so Wall Street bankers couldn’t victimize people by manipulating markets or getting too big to be effectively regulated. They passed laws making it easier to form unions, so that members could ask for and receive pensions, health care, decent wages, job security, and safe working conditions. They passed laws that said if you went to war for Uncle Sam, you’d get a free education, and if you got wounded, you’d be taken care of for life. And as the twentieth century progressed, they added health care for the elderly and poor in the form of Medicare and Medicaid.

In short, the Greatest Generation harnessed their collective power and changed the United States in major ways in an attempt to ensure that a tragedy like the Great Depression couldn’t devastate their children the way it had devastated them.

Fast-forward to today. While we’re not back to the days of the Great Depression, when it was basically every man for himself, we’ve definitely taken a big step backward from the security my parents had and the security they tried to leave for me. When I was 17 back in 1973, the main thing that kept you out of college was bad grades. These days a bigger problem is graduating with $100,000 in debt. When I was a kid, one worker earning the minimum wage could actually keep an entire family alive; that’s where it got the name minimum wage. Now, two adults earning that wage together would have a hell of a time surviving. Good employer-paid health insurance was ubiquitous 50 years ago. Now people are actually switching careers or staying in jobs they hate because they’re justifiably afraid of joining the one in six Americans who have no coverage at all. Virtually every employer used to offer a pension plan: Now you’re supposed to fund your own retirement with a 401(k), and more and more employers aren’t even providing a matching contribution. Today, unemployment won’t even cover the rent, and the only way you might retire comfortably on Social Security is if you’re planning to retire to a cardboard box. The GI Bill no longer pays for a full education at the college of your choice, and the Army has recently been accused of dishonorably discharging soldiers rather than paying for the care of their stress-related ailments. There’s no such thing as job security: how could there be when what was the largest company in the world, General Motors, filed bankruptcy? And the regulations and oversight that were designed to keep Wall Street from screwing Main Street have become so watered down over the decades that we very nearly had Great Depression II.

So in many ways we’ve come full circle, close to the place we were 80 years ago. Sure, the government’s talking about reinstating regulatory oversight and offering health care to all. And we’re still not looking at busted banks and 25 percent unemployment. But the truth is that no matter what anyone in Washington is saying, the security my parents helped create and the baby boomers counted on no longer exists and is unlikely to return. The reality being faced by young people today is more like that of the Greatest Generation. The circle is unbroken.

So if you’re in your forties or fifties, don’t sit around waiting for things to return to normal. Because the world created by the Greatest Generation wasn’t the norm, it was the exception. Normal is the world they faced and the one we face today: where even when you’re playing by the rules, you can lose. Where a group of CEOs who wouldn’t think of inviting you to their country club can cost you your job, make your house worth less than you paid for it, and trash the only retirement plan you have.

So how do you deal with this new reality? Stop whining and start acting. And the actions I’ll suggest are the same as those that worked for the Greatest Generation. Trust nobody—not the boss and especially not the government—with your physical, financial, spiritual, or emotional well-being. Create your own version of joy by carefully considering the relationship, or lack thereof, between material possessions and happiness. And create your own version of financial freedom by living below your means.

That’s what this book is about: finding freedom, both financial and spiritual. I want you to have the freedom to quit your job and become self-employed. The freedom to retire early and travel the world. The freedom to make a positive impact in the world by offering your time and money to the people and causes that deserve it. To sum it up, the freedom to pursue happiness, a right guaranteed to all of us by one of the greatest documents ever written, the American Constitution.

And Life or Debt is more than just this book. It’s also an online community designed for people just like you. It’s a place to download some of the forms you’ll find in this book, share stories, thoughts, and tips with other people in your situation, and learn new stuff that can help you stay on track. I’m often online there doing live webcasts, talking to people, and having fun. So stop by lifeordebt.org before, during, or after you read this book and say hello! And if Twitter’s your thing, I’m @MoneyTalksNews.

1

My Story

Anyone who lives within their means suffers from a lack of imagination.

—OSCAR WILDE

This chapter is about me and my life. It’s not necessary for you to know anything about me at all for this plan to work for you, so if you want to skip this part of the book, feel free. But I think it kinda makes sense for you to know the person you’re getting advice from, so here’s the abbreviated version of how I came to be writing Life or Debt.

Ever notice how practically all self-help or motivational books start out with the author revealing some sort of emotional catharsis that suddenly caused them to see the light? You know, stuff like "There I was, forty-five years old, living on the street, and eating from a Dumpster, when suddenly