N.Y. Times Financial Reporter Faces Financial Ruin

He should have known better. Edmund Andrews is a seasoned economics reporter for a major newspaper. He'd covered the Asian financial crisis of 1997, the Russian economic crisis of 1998, the dot-com crisis of 2000. He warned people about risky mortgages even as the current mortgage crisis developed.

So why did this middle-aged economic expert take out his own extravagant, risky mortgage in 2004, plunging him into the depressing world of unpaid bills, badgering debt-collectors, strained personal relationships and panic attacks? Today, his house awaits foreclosure and his once pristine credit score lies in shambles, making him a poster child for "Victims of the Mortgage Crisis."

His recent N.Y. Times article describing his personal woes deserves a slow, reflective read.

Here are some of my takeaways:

1) Rather than taking comfort in "what everyone else is doing" or "what many experts are saying," don't make big financial decisions without thinking them through dispassionately and rigorously.

Warren Buffett's mentor, Benjamin Graham, put it this way concerning investing:

"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." (The Intelligent Investor, revised edition, 2003, p. 524).

2) Get plenty of objective wise counsel, particularly on issue where emotions may hijack our reason.

Mr. Andrews had tons of information available to him. But emotions (e.g., "I'm in love and must find a decent place to live!") can bias information to serve its purposes. I recall, I believe it was a researcher, saying that if you torture the data enough, you can make it tell you whatever you want it to. When we want something badly enough, it's human nature to torture the figures to make them tell us, "It's okay to buy the house."

3) Before you flaunt the tried and true rules of thumb, make sure you're truly an exception.

So what are some tried and true rules of thumb for home buying? Unfortunately, when the mortgage crisis was brewing, the rules of thumb changed. From one blog a couple of years ago:

"Northwest Community Credit Union says 1.5 times your gross annual income:

If you and your spouse have a total income of $50,000 the general rule would be that you shouldn't borrow more than $75,000 for your home.

CNN Money says 2.5 times:

The rule of thumb here is to aim for a home that costs about two-and-a-half times your gross annual salary.

Washington Mutual Bank suggests anywhere from 3 to 5 times:

As a broad generalization, most people can afford to purchase a house worth about three times their total (gross) annual income, assuming a 20% down payment and a moderate amount of other long-term debts, such as car or student loan payments. With no other debts, you can probably afford a house worth up to four or even five times your annual income."

In retrospect, no wonder Washington Mutual went down.

When mom and dad bought their house 40 years ago, the rule of thumb given to them was that you could afford to purchase a house up to 2x your salary. That's if you put down 20% and don't have other significant debt. (They were neither making car payments nor repaying student loans.)

Crown Ministries suggests this rule of thumb: "Purchase/rent only if payments – mortgage, taxes, insurance, utilities, phone, and maintenance – don't exceed 38 percent of your net spendable income."

4) Don't assume "Best Case Scenarios." Always consider "Worst Case Scenarios."

Mr. Andrews knew that his salary would only cover the new house payments and his alimony payments. He assumed that his partner could land a good enough job to pay for everything else in their lives. What if she didn't land a job? What if she didn't land a good enough job? What if the job doesn't last? What if there's an economic downturn? What if emergencies happened?

Typically, Americans are overconfident about their investments, their abilities, and their future. Don't let your overconfidence lead you to over-borrow.

Other insights from this story?

What's It All For?

Most money books give advice on how to amass wealth, but fail to ask the deeper questions:

• "What am I doing all this for?"

• "How do I define success?"

• "Precisely what am I trying to achieve by bettering my personal finances?"

In Enjoy Your Money, I argue that most of us are searching for deep and lasting happiness. To see if that's your ultimate goal, do this little dialogue with Socrates (substitute your financial goal for the "Corvette" and substitute your name for "Bob"):

Socrates: Give me one of your financial goals.
Bob: I want a Corvette by my 35th birthday.
Socrates: Why do you want a Corvette?
Bob: Because Corvettes are super fast and look cool!
Socrates: And just why do you want something that's fast and cool?
Bob: Because people would look up to me and respect me.
Socrates: And why do you want people to respect you?
Bob: Because if I could get people to respect me...I suppose they'd want to hang around me.
Socrates: And why do you want people to hang around you?
Bob: Because if people wanted to hang around me, I'd be happier.
Socrates: So, you want the Corvette because you think it will make you happier. In other words, if you knew that buying a Corvette wouldn't make you happier, you wouldn't buy it. Right?
Bob: Right.

I think Socrates would tend to lead us back to happiness as one of our ultimate goals no matter what our financial goals may be, which helps us to clear away a lot of fog and simply ask the question, "How can I be a happier person?" Attaining certain financial goals may indeed make us happier. Others may not. We'd do well to think it through.

Fortunately, Psychologists have done some pretty extensive studies to try to narrow down what makes some happier than others. Interestingly, once we've crawled above the poverty line and have basics such as food and shelter, just making $5000 or $10,000 more per year doesn't do much for our happiness. What does?

In part, psychologists have found that giving people are happier people. Those who seek hardest for wealth in itself are less happy than those who seek hardest for the welfare of others. I noticed that today, as I was inexplicably down this morning. With my mind distracted by life's heartaches and troubles, life looked grim.

Around noon, a neighbor knocked on the door, leaving a card. In it, she thanked us exuberantly for a little act of kindness we did last Saturday. Having just found out that her husband was recovering from a stroke, my wife and I walked over to find him trying to fix his lawn mower. I asked what we could do to help and he suggested that it would take a couple of hours for him to pick up all the pine cones left from the winter, so that he could mow.

No problem. I asked David and Paul, my 15-year-old twins, to come over and help out our neighbor. It took a bit over an hour. While we were picking up, another neighbor saw us and asked if I was making extra money (which wouldn't be beneath me, I might add). I told him about the stroke and he said, "after you get the pine cones picked up, I'll do the mowing."

To us, it was no big deal. To the family reeling from an unexpected blow, it meant the world. And hey, what could be a better memory to build with my kids?

So we brought a bit of happiness to a struggling family. In return, they gave us a deep feeling of fulfillment. Even now, three days later, their card pulled me through a downer morning.

So my answer to the "what's it all for?" question involves serving others. Is one of your long-term goals "to be the greatest possible assistance to the less fortunate by using my God-given gifts and abilities?"

I'm able to pick up pine cones. What can you do?

As Albert Einstein once stated concerning life's meaning:

"The life of the individual has meaning only insofar as it aids in making the life of every living thing nobler and more beautiful." (Albert Einstein)

Meaningfulness...and happiness, today's scientists might add.


This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Ramsey Reflections, Part 5

Continuing reflections on Dave Ramsey's Town Hall for Hope...

Takeaway #6: Three Things to Do If You're Losing Hope

1 - Get up! Take action! Get moving!

Don't wait for Congress or the President to rescue you. There's a great place for you to go when you're broke: to work! If you don't have a job, talk to everyone. Think creatively, be proactive.

2 - Don't participate in loser talk!

One survey found that your income will likely be within 10% of your closest friends. Some have "The Spirit of Eeyore" upon them, because they sit around moping with their loser friends.

Read "Who Moved My Cheese?" Our cheese has been moved. We've got to start thinking different. Be a reader. Keep learning.

3 - Learn to Give Again

Give extra during difficult times. If you don't have money, give of your time. Serve the homeless, serve soup at the union mission. Visit someone in a nursing home. The more you give hope, the more hope you'll receive.

Thanks, Dave, for an inspirational, fun-filled, hope-filled evening!

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Ramsey Reflections, Part 4

Continuing reflections on Dave Ramsey's Town Hall for Hope...

Takeaway #5: Don't Fear

Your faith in God should keep you from fear. If a spirit of fear pervades our lives, we're paying too much attention to the news and not enough attention to our heavenly Father. Dave's wife reminded him of this one day in New York, when Dave allowed the depressing talk of others to get him down.

But faith and work must be kept in balance. As someone said, "Trust as if it all depends upon God; work as if it all depends upon you."

Once upon a time, a person came to visit a beautiful ranch and commented to the owner, "How blessed you are that God has given you this wonderful ranch." To which the owner replied, "Truly, I'm blessed. But you should have seen it when only God had it."

Some of the greatest companies began during recessions or depressions. Dave listed several, including Hobby Lobby and Microsoft, encouraging us to keep working and innovating. Don't be immobilized with fear!

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Ramsey Reflections, Part 3

Continuing reflections on Dave Ramsey's Town Hall for Hope...

Takeaway #4: It's a Great Time to Invest!

For the long term, that is. As far as stocks are concerned, it's like K-Mart is running a blue-light special on stocks. We don't know if they'll go down further. We don't know when they'll come back up. But for the past 100 years, they've always bounced back, and buying them when they're so far depressed is a good idea.

Don't buy gold. Sure, it's gone way up recently. But don't buy it while it's so high. Some buy gold because they fear that our currency might be in danger and that we'd have to return to trading gold. But the last time people went to trading gold after an economic setback was during the Roman Empire.

Real estate can also be a great investment. You can get great deals and the interest rates are lower than they've been in decades.

But don't invest if you don't have the money to invest. In his early years, Ramsey went from controlling over $1,000,000 of real estate to losing it all. Six months later, a friend sat him down, told him to quit whining and take responsibility and move on. He did.

More next blog...

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Ramsey Reflections, Part 2

Continuing reflections on Dave Ramsey's Town Hall for Hope...

Takeaway #2: Don't Go Hysteric!

At this point, we're not looking at a full-blown depression. So we have 4% more people out of work. Granted, many are hurting, and we don't want to minimize that. But we're not all standing in soup lines, the stock market hasn't tanked nearly as much as in the Great Depression, and the worst of the foreclosures are restricted to five states.

Ramsey's point? Employment is well over 90%. Scramble around and find work! Get new training for new jobs! As Solomon said three thousand years ago, "The diligent prosper." Sitting around sulking and watching negative news doesn't qualify as "diligent." Get out and make something happen. That's what Americans are known for.

Takeaway #3: Look for the Silver Lining

Yes, it's a storm. But storms often have silver linings.

First, recessions and depressions have a way of shaking us up and re-ordering our priorities. Our grandparents, who experienced The Great Depression, might pull out an old nail and use it again. Many of us have become wasteful and flabby.

Second, recessions weed out the slackers in our fields. Some serious realtors are selling properties again, and have less competition.

Third, recessions make us work harder at serving our customers. A restaurant that fails to provide great food while making customers feel special deserves to die. Money is simply a certificate of appreciation for a great service or a great product. If you're providing neither, prepare to be run over by those who do.

Fourth, a recession can bring us back to our senses about wise money management. Now is a great time to reintroduce a lost word in the English language: "No!"

So someone wants you to loan them money to buy a house. But they're broke. You say, "No. You're broke. You can't afford a house." When broke people buy houses, they become broker. That's why they call the people who seal the deals "brokers."

So your teenager doesn't have a decent job but wants you to buy him a Corvette. You say, "No. You can't afford a Corvette. Why should I help you to buy one?"

More to come...

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

Ramsey Reflections, Part 1

Last night I attended Dave Ramsey's Town Hall for Hope. I figured that since some people are looking to me as some kind of money expert, I should be up on an event of this magnitude.

What's the occasion? Why would Ramsey go to all the trouble to do a free telecast and do enough advertising to attract over 1,000,000 people to personally attend at the 6,000 locations? He wasn't announcing a new product. He wasn't running for office. He seemed to just have a passion to do all in his power to snap America out of despondency over the economy. Over the next several blogs, I'll try to summarize my main reflections and takeaways.

Takeaway #1: Don't Allow Bad News to Immobilize You!

Bad news travels through a lightning fast T2 line; good news through snail mail. I've noticed that, even during good times, the news is quick to print how many jobs were lost in any given month, but fail to report that the new jobs created during that month more than made up for the losses. Bad news sells. As a result, everyone is soaking up reports of dismal job markets, retirement funds disappearing, businesses going under. Ramsey example: the stock market went up 20% in recent weeks. How many saw that in the headlines?

Ramsey's fear is that many are immobilized by bad news. So you lose your job or your hours are cut back. Rather than learning new skills to start a new job or beating the bushes to see who's hiring, you sit at home, watch Oprah, and complain to your friends about the dismal market.

The Ramsey remedy? Choose Tigger over Eeyore. Be an optimist instead of a pessimist. Be proactive rather than reactive. If you've just been thrown off a cliff, you've got a choice: either allow your body to bounce along the cliff, or spread your wings and fly. Perhaps you've been thrown out of the nest for a reason. Don't despair! Move on to the next thing.

(More Next Blog)

This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.