Why not just live large while in debt?

Vanessa asks on a GRS post:

I always thought the first rule to getting out of debt was to stop digging, but maybe not? And aside from a few bagels, it doesn’t seem like Honey’s lifestyle has been too compromised. Makes me wonder why I budget so strictly, when I could have a little debt and perhaps be a lot happier.

Kasia adds:

Why are people so negative and critical about someone else’s progress? Consumer debt and mortgage debt are completely different. You have to live somewhere and owning your own home even if you’re paying off a mortgage means you have an asset to your name, renting just means you can be kicked out at any time by a temperamental landlord. Either way you’re paying to live there so why not pay off your own home instead of someone else’s if you have that opportunity?

 

It’s about managing risk. A house can trap you unless you’re willing to foreclose on it. If you already have a good portion of your income stuck in debt-servicing you’re in a very vulnerable state when there’s a job loss or relocation.

In addition, Kasia shows a fundamental misunderstanding of the housing market.  Purchased houses also have a part you’re “throwing away”– mortgage interest, taxes, insurance, and maintenance. In our case, the taxes and insurance alone is 1/3 of our mortgage payment, and of course the interest part is the bulk of the payment when you start with a new mortgage.  On top of that, houses tend to create lots of regular “emergency” expenses (pipes break, trees fall, water-heaters die etc.) that the landlord takes care of when you’re renting.

When you have lots of consumer debt that you’re servicing, a house can add enormously to your risk because it’s a large required monthly expense whether you’re living there or not.  Things may be fine if you can just sell the house when times are bad, but bad times often mean it’s difficult to unload your house, even at a loss.

Living beyond your means is a precarious balancing act. Everything is fine until an emergency that’s too big happens and/or you run out of credit, and then you’re trapped. But if you’re ok with foreclosure and bankruptcy, then well, sure, why not live on the edge? Of course, if you’re high income, you may only be able to restructure debt in bankruptcy, not completely discharge it.

So to all those who are thinking, “why am I making sacrifices when I could just live like ‘Honey Smith’ and be happy?” It is an alluring thought, it really is. And there’s some probability that they’ll make it ok without bankruptcy or foreclosure. But the majority of people who try this are going to end up in bad shape.

So Vanessa– don’t give up.  Being able to spend like ‘Honey’ does without debt and with an emergency fund and with savings feels great (even if you don’t actually do the spending, the ability alone is nice), and it’s worth the sacrifice.  The sooner you start, the smaller the sacrifice you have to make and the quicker you end up with financial freedom.

And Kasia, ‘Honey Smith’ is not a good person to look to for financial advice.

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36 Responses to “Why not just live large while in debt?”

  1. Holly@ClubThrifty Says:

    This comment isn’t about Honey- just a general comment.

    I know a lot of high-earners in “real life” who spend every penny of what they earn without stressing about it at all. They’re the kind of people who borrow as much as the bank will give them for a new house and sign up for every expensive event that comes along because they are bored. I think it’s just a mentality that gets built on an underlying selfishness.

    I know at least one extremely high earner who refuses to save for her children’s college because she “did things the hard way” and wants them to struggle like she did. But she has plenty of money to buy herself giant vehicles and travel all around doing whatever she wants all the time. And she just bought a giant house by borrowing money from her retirement- something that is hard for me to understand when you make as much money as she does. Sorry for the rant =/

    Of course, my comments are about a few people I know in my personal life and they certainly do not apply to everyone in this situation.

    • nicoleandmaggie Says:

      NYTimes had an article a few years back about what happens when people like that lose their jobs. When high earners lose their jobs it can be a disaster if they’ve been spending beyond their means, or an opportunity if they’ve been accumulating wealth. Somewhere in our archives we have commentary on that, but it’s obvious the benefits of living under your means as a high earner when you look at say, Cloud’s current situation.

      https://nicoleandmaggie.wordpress.com/2011/02/07/i-know-were-preaching-to-the-choir-but/

    • Rosa Says:

      something I heard Suze Orman say a long time ago has really stuck with me – people have a pretty set tolerance for risk. So a person who doesn’t save at all on a moderate income probably won’t on a high income and vice versa. It sure has seemed true as I watch people around me change jobs over time.

      • nicoleandmaggie Says:

        IIRC, the research actually shows that wealth is correlated with risk tolerance for the same person– that is, people really do move along the diminishing marginal utility curve. http://nicoleandmaggie.wordpress.com/2011/10/24/marginal-tax-rates-why-they-make-sense/
        And IIRC, people are risk seeking over small losses with potentially big gains… there’s probably a psychologist (or behavioral economist) out there who remembers this better than I do.

      • Rosa Says:

        I meant the perceived (or not perceived, by some people) risk of not having a savings cushion.

        It seems like, given a certain setpoint of preferred savings, marginal utility would mean richer people would save less of their income, expressed as a percentage instead of a flat amount, and not “more because they have more excess to save/invest”, right?

        To a certain point at least, until you hit the “can’t possibly spend this much money” level of wealth.

  2. scooze Says:

    Thank you for calling out Honey Smith. … I have often been left scratching my head after reading her articles. I commented on that last one that a $10k EF seemed really low when purchasing a new home. And to pay PMI! The most distressing thing for me is how other readers seem to defend her. The mentality that one should buy as soon as one is able to do so, regardless of the possible consequences, is way too pervasive.

    • schooze Says:

      Stupid autocorrect. My name is Scooze!

    • nicoleandmaggie Says:

      The ones that defend her don’t bother me as the ones who say, “Her life seems pretty good, why shouldn’t I do what she does?” And the thing is, some percentage of people who live like that are not going to lose a job or hate their job or have a big medical expense etc. etc. etc. and they’ll make it until they get dementia or die, leaving only their creditors. But for some percentage, living like that is going to cause a disaster that could have been avoided.

      I figure most of the GRS readers who would point out problems are like I am normally– they see her name on a post in a blogroll and go, “Guess I’m not clicking on GRS today.” It’s much better for my blood pressure and my self-concept as a mostly nice person when I don’t.

  3. Debbie M Says:

    On throwing money away on a mortgage, when I first bought my house, $30 of my $610 payment went to principal. That made me pretty angry. Then I realized that paying an extra $100 cut off over *three months* of payments from the end. Mwahaha!

    On wishing I could live like people in debt–I have felt like this sometimes. How can they afford so much more than I can when I don’t even have any interest payments besides my mortgage? I want a big house and a maid and a lawn maintenance team and a dishwasher and eating out whenever I want!

    The answers are a) they can’t actually afford all that and/or b) they make more money than I do. And clearly I don’t want those things I listed as much I want to travel, to live centrally in my favorite city which is not-all-that-cheap, to be able to pay for emergencies from savings, to retire early, and to not have to work at a high-stress, high-hours job in the meantime. (I am getting a dishwasher soon, though.)

    • nicoleandmaggie Says:

      It’s pretty amazing how much work those early mortgage pre-payments do compared to the later ones. Pre-payments are more amazing if you’re paying PMI (which one should really not do)!

      Having a dishwasher is one of the luxuries (along with a/c) that I *still* marvel at on a regular basis. It provides so much happiness (or at least it takes away so much irritation!).

      • becca Says:

        It’s so valuable for happiness to maintain that state of wonder at our own luxuries, instead of acclimating to them! It’s also so crucial to remember that it’s *not* a pro-social adaptation to view those as luxuries for *other* people. Particularly A/C. Particularly for those with health conditions living in anything other than the mildest or coldest of climates.

        Ultimately, I’m trying learn not to judge anyone’s lifestyle too much, though it can be very challenging. After the last year, I figure we’re all just a medical or legal disaster or two away from poverty. Except maybe the most entrenched money among the 1%- and no one is in that class who didn’t get some pretty amazing luck.

        That said, I still bring out the judgeypants for people who are just terrible at advice. Particularly if they are pretty visible on the internet.

      • nicoleandmaggie Says:

        How about if they get paid to give bad advice 1-2x/week?

    • Rosa Says:

      I grew up not poor, but wildly insecure with periods of scarcity and periods of plenty. I will pay a LOT of time and income for stability and safety. Way more than I’d pay for a maid. Some people feel differently, and some people just don’t really feel stability is even a possibility they could want/achieve.

      • becca Says:

        @nicoleandmaggie- then they get paid to accept judgey mcjudgeypants internetry 1-2x/week ;-)
        (seriously, I wouldn’t be shocked if HS is clickbait)

        @Rosa- yes, that’s a good way of putting it- there are lots of people out there who feel stability is fundamentally elusive. Also, I think people take on debt generally because they’re seeking security… we all just define it differently. Student loans or business loans are easier to see as about security. But to be blunt, I think for a lot of people playing a lot of social games, appearing wealthy (or “like us” among circles of more wealthy people) seems integral to security. Academics are the weird ones, really, for playing their status games with intellect more than cars (not exclusively, but mostly).

      • nicoleandmaggie Says:

        Ugh, click bait makes me feel so used. Though mostly she doesn’t get judgey mcjudgeypants anymore because nobody who would judge her reads her stuff if they can help it. (Unless they’re seriously procrastinating.)

  4. TheologyAndGeometry Says:

    I don’t know anything about this Honey Smith person, but I’m going to come down on the side of it being okay to assume some debt (or delay paying back some debt) if it would make a persons life “a lot happier”. For example, a person gets a new job where the bus commute takes 5x longer than a car commute but that person (maybe a new college grad) can’t afford to pay for a car upfront. Taking out a loan to buy a car and shorten that commute is going to go a long way in making hir life “a lot happier”. Another example: Having good quality child care may delay a persons’s ability to pay back a mortgage as quickly as possible, but being able to work without worrying about the kids is worth it. So yes, it is obviously unwise to spend way beyond one’s means, but to categorically say a person who carries some debt has to be miserable until that debt is repaid when a little money could fix a situation seems short-sighted to me.

    • nicoleandmaggie Says:

      Absolutely. The basic rules are that debt is ok (even good) when it’s an investment in an appreciating asset. For a first car or childcare or education, you are the appreciating asset. And, as you point out, there’s heuristic limits on how much one “should” spend. (So don’t buy a fancy luxury car, don’t go into education debt that’s more than one year’s predicted income for your major at your school, etc.) One isn’t living large when one buys a reasonable car in order to get to work.

      That is most definitely not Honey Smith’s situation. And one should definitely not buy a house with no money down and 200K 380K in debt, especially when that includes both high interest consumer debt and non-dischargeable student-loan debt.

  5. Sandyl FirstgenAmerican Says:

    This article made me happy I stopped reading GRS long ago.

    I think the simple answer to Kasia’s question is that you’re screwing over your future self by living beyond your means today.

    I do know at least one work colleague who’s retirement plan is to die in as much debt as possible while living it up til then. This plan assumes you drop dead instantly and as far as I know, aside from suicide, there isn’t a good way to guarantee that plan comes to fruition.

  6. Foscavista Says:

    I wonder how people who are still in debt (especially with unsecured debt) can dole out financial advice. I can see how afterwards, like Suze Orman and Dave Ramsey, but not during. It’s similar to taking advice to lose weight from a person who just started a diet and exercise regime.

    • nicoleandmaggie Says:

      That’s really what’s bugging me the most. I mean, I’m fine with someone who is getting out of debt talking about what they do and backing it up with good advice (JD Roth’s early stuff as he was figuring things out is fun to read), but AFAIK, the main reason that HS’s house of cards hasn’t come crashing down is that she’s gotten some windfalls that she didn’t spent 100% of, which I guess is good, but it doesn’t make her advice good (and also they hadn’t run out of credit yet). The advice she gives will work for the lucky and will be disastrous for the unlucky. So even if she gets out of debt in 67 years or whenever it is that her husband ends up paying off his student loans, that doesn’t mean her advice will be widely applicable.

      Suze Orman also gives bad advice about spending on high interest credit cards in her Young Fabulous and Broke book. She’s since recanted that particular advice because of the recession showing how dangerous it is, but I do know people who were like, “Suze Orman said it was ok”. And it’s true, economic theory says to smooth your consumption, but that’s assuming risk neutrality and/or perfect foresight.

      So I guess I’m saying that I don’t mind it if people who are still in debt give advice as they’re climbing out of debt so long as that advice has a good research base. Which is the same as all the self-help advice people give– I want to know if it works and for how many people and why and how (or some combination thereof, given that research is still being done on many of these things).

  7. chacha1 Says:

    “Honey Smith” has irritated the hell out of me since the get-go, and is a prime reason why I took Get Rich Slowly off my favorites list after J.D. waved farewell. I will still go to read HIS articles and do visit his other site, even though it is mostly stuff that is not hugely applicable to me (in large part because I already figured a lot of that stuff out. I am older than he is!).

    For finance stuff, I have to confess I have been liking Mr. Money Mustache. Never thought I would, but read a couple pieces and thought “this guy’s voice appeals to me.” So even though I have no interest in building my own house with my own hands, and at 48 am a little old to be talking about “extreme early retirement,” and don’t actually care about retiring early because my life expectancy is ridiculously long AND I like my job and would rather stay in it until I feel really secure … I think the tools he offers are more useful than the tools GRS has been offering in the Age of Honey.

    Re: the usefulness of debt: I have been trying, for the past five years, to stay with mostly a cash-basis lifestyle. There are certain things I pay for with my credit card but I try to pay ALL new charges off monthly and am whittling down a small balance I am carrying from leveraging some very expensive cat healthcare & car repairs. To me it is just a lot less stressful to know that I *could* in fact pay off the entire balance in one fell swoop if I got sufficiently irritated with it, than to pay it off and be without an emergency fund (I have a small one at present, due to having just put a large chunk of money down on real estate and over $2K on expenses related to sorting out my MIL).

    Paying it down slowly means I have unallocated cash to use or save, and that is a freedom to me. I’m well aware that I am “losing” money paying interest. But I’m losing money paying interest on our lot for the retirement house, too, and would rather pay that off faster vs make a big deal out of the credit card balance.

    • nicoleandmaggie Says:

      I like early MMM stuff and I like the current MMM stuff. There was some time in the middle there where he was too extreme and too defensive about who didn’t do *exactly* what he’s doing (which was weird because he was, at the time, living in a ginormous house, so he had his un-environmental luxuries too). He also deleted a lot of blog comments that brought alternate valid perspectives because any questions were complainy-pants.

      He seems to have stopped doing that and maybe become more secure about his branding and use of luxuries (in moderation). Plus he’s moving into a smaller more energy efficient house so I feel like he’s less of a hypocrite when telling other people how to live. Maybe hanging out with JD Roth is good for him, I dunno.

      Without the exact numbers, I can’t say what’s the best set of options with CC balances vs. land mortgage vs. everything else. But it doesn’t sound like you’d have to declare bankruptcy or default on the land if you lost your job.

  8. Linda Says:

    Oh, wow. I had to go read her last posts to get an idea of what you mean. I’m not sure why she is writing for a PF blog, unless they think she is a great example of what NOT to do to ever get rich, slowly or not!

    • nicoleandmaggie Says:

      You should read her try-out post… full of all sorts of bizarre rationalization and justification and beliefs that if the average cost of something you can’t afford is 40K and you only spend 10K, then you’re actually SAVING 30K. She’s a very cheerful debtor though… makes it look easy!

  9. Rosa Says:

    so…I stopped reading anything with her name on it a long time ago. Did her husband get his own business off the ground ever? Because that’s an example of “worthwhile” risk I could get behind (even though I don’t think I would do it, it’s a goal a lot of people have with their personal finances and there are good & bad ways to do it) but it seemed doomed from the outset.

    • nicoleandmaggie Says:

      No, I think he’s working for the man. She mentioned his salary once, and I remember thinking it was really low for someone with that amount of law debt, though she thought it was very high, and it was considerably higher than what he wasn’t making for his own business. Combined I think they make somewhere in the low six figures (her salary is in the 40s, I think?) Leigh could answer these questions better than I could though because I *usually* don’t click!

    • Leigh Says:

      Based on comment #63 here: http://www.getrichslowly.org/blog/2013/12/09/when-the-right-choice-isnt-obvious/ they used to make the same amount before Jake took this new job. Honey’s last raise was 2% which turned into $50/month, so her income is somewhere north of $30k/year. His income tripled with his new job, so his income should now be somewhere just over $100k.

      He did get his business off the ground and then sold it (though I don’t know where that money went…), taking this new job. I’m guessing that most of Jake’s debt repayment came since he took the new job. If so, he’s actually doing not too poorly!

      • Rosa Says:

        Jesus, they make in the same ballpark as me & my husband (when I’m working, which I usually don’t haven’t much the last 3 years – but my last fulltime job paid $34K) and I can’t even imagine the constant anxiety I’d feel carrying their levels of debt.

      • nicoleandmaggie Says:

        I vaguely recall it being just under 100k for him and just over 40K for her. But I could be misremembering. It probably doesn’t really matter.

        Obviously the problem is not the debt but the worrying about the debt! That’s the seduction– the idea that everybody is thinking about it all wrong. If you just get really good at rationalization you can enjoy life while living it up on money you don’t actually have. Is everybody doing it all wrong? No! All you have to do is read the NYTimes circa 2008 to see what happens when these houses of cards collapse en masse.

  10. Donna Freedman Says:

    I’m old-fashioned: I don’t sleep well when I’m in debt. It would be hard to live large when I couldn’t keep my eyes open.


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