Dorkfish
04-12-2011, 10:20 AM
I might have mentioned somewhere in the past that I'm a pilot. I don't bring it up thinking it might impress anyone, but it's important for the context of this story. We spend considerable time talking about this and that in the cockpit and pilots are notorious for coming up with convoluted investment and tax-avoidance schemes. Usually guys bring it up with an air of pride in the cleverness of their plans. I don't say a word unless they ask my opinion then they get clubbed like a baby seal.
I recently flew with a guy who is a prime example of where I'm trying to keep the younger guys on this board from going. He's 37 and makes approximately $150,000 a year. When I was younger and making $25k I couldn't imagine making that kind of money. All money problems would end. Right? As it turns out, money problems only end - ever - if you handle money correctly. Read on....
He mentioned he has about 8 acres 45 minutes outside of (insert big city here). He recently entered the U.S. Forestry Service's forestry management program. The Forestry people do soil samples and whatnot and decide you can plant "X" number of "Y" kinds of trees. Doing so allowed him to get his property designated as "agricultural" and thereby get a massive property tax break from the state. So far, so good. But you need equipment to tend 8 acres. And a place to put the equipment. Like a barn/workshop. Turns out the Service will finance the building of a barn and all you have to do is lease it back from them. This is where things start getting out of control. In his mind, it all revolved around the property tax break. But in my mind, it was immediately obvious as he told the story that the financing charges in the lease were going to eat his tax break like a tea-time snack. He's sending 100-cent dollars to the leasing financier to get back 75-cent dollars from the Tax Man. To cap it all off, I asked him what the trees will be worth at harvest time and he wasn't sure. I asked him what the status of the land and barn was at the time of future sale of the property. He didn't know. It gets worse....
Why doesn't a guy making $150,000 a year have 25-30k for a barn? Let's take a look. He drives a leased, late-model Maxima. He will soon upgrade to another leased vehicle for more $$$ - an Infiniti M35. At some point in this story, I remembered that we had flown together in the past because he then told me of his wife's loaded late-model Suburban. I remember, because he was about to buy it - on payments of course - when we last flew together and I gently tried to talk him out of it by asking him if he didn't already have enough payments. Apparently, he decided he didn't. His house is of unknown size, but on 8 acres where he is, he's probably paying a pretty healthy house payment. Which brings us to....
The pool! At some point I got a text from my wife saying our water bill had been about one-fifth the size we were expecting because we had filled up our new-construction pool. "Huh..." I said, as I read it. He asked what was up, so I told him about my new pool and detached 2-car garage project (which I don't normally tell people about because it can seem like bragging). That starts a conversation about the pool project he wants to do. Guess how he wants to pay for it? Well, what kind of debt haven't we seen him use yet? Bingo!! 401k loan!! Oh, my word, the understanding - the core belief - of this guy in the area of money was that if you want something, you get it now, and you finance it through whatever tool you can. He believes that because he never has any spare money. He never has any spare money because it all goes out in payments for previous stuff he has bought. He bought the previous stuff on payments because he didn't have any spare money then either. See the problem? What we see here is a banker's wildest dreams come true. A man that makes plenty of money, but whose first inclination is to finance everything in his world. Can you see that at some point this MUST stop? He already knew that 401k loans are a really, really Bad Thing. You unplug a good investment, the loan is due in full in 60 days if you get fired, and you have to pay it back with after-tax money. This is getting long, so let's just focus on....
"But I"m paying myself the interest!". This is the marketing tripe around 401k loans and he was parroting it dutifully. If anyone wants to see the actual math, I'll put it in another thread. Suffice it to say, his $65k pool project was going to require him to earn $80+k to do. I could not make him understand that no money was created in the "pay yourself interest" scenario - it's ALL your money. We ended the conversation with him slipping the back-of-the-envelope calculations in his bag to be reviewed/refuted later.
This is why I preach to the youngsters to get a handle on money early. NOW. Right now. If you don't, you'll just keep getting raises as you progress professionally and you'll never get anywhere financially. So many times I hear that "the poor" can't afford to pay cash for things. This is exactly upside down. Low income individuals need to develop sound, disciplined money handling habits and making payments on things is the exact opposite of that. Habitually making payments on things ensures you never get ahead - even when you start making $150k.
This is a good guy. A very good guy - funny, smart, hard working, dedicated family man. But his understanding of money handling embodied the marketing message of the Debt Industry. So he'll NEVER be able to just buy a car.
I recently flew with a guy who is a prime example of where I'm trying to keep the younger guys on this board from going. He's 37 and makes approximately $150,000 a year. When I was younger and making $25k I couldn't imagine making that kind of money. All money problems would end. Right? As it turns out, money problems only end - ever - if you handle money correctly. Read on....
He mentioned he has about 8 acres 45 minutes outside of (insert big city here). He recently entered the U.S. Forestry Service's forestry management program. The Forestry people do soil samples and whatnot and decide you can plant "X" number of "Y" kinds of trees. Doing so allowed him to get his property designated as "agricultural" and thereby get a massive property tax break from the state. So far, so good. But you need equipment to tend 8 acres. And a place to put the equipment. Like a barn/workshop. Turns out the Service will finance the building of a barn and all you have to do is lease it back from them. This is where things start getting out of control. In his mind, it all revolved around the property tax break. But in my mind, it was immediately obvious as he told the story that the financing charges in the lease were going to eat his tax break like a tea-time snack. He's sending 100-cent dollars to the leasing financier to get back 75-cent dollars from the Tax Man. To cap it all off, I asked him what the trees will be worth at harvest time and he wasn't sure. I asked him what the status of the land and barn was at the time of future sale of the property. He didn't know. It gets worse....
Why doesn't a guy making $150,000 a year have 25-30k for a barn? Let's take a look. He drives a leased, late-model Maxima. He will soon upgrade to another leased vehicle for more $$$ - an Infiniti M35. At some point in this story, I remembered that we had flown together in the past because he then told me of his wife's loaded late-model Suburban. I remember, because he was about to buy it - on payments of course - when we last flew together and I gently tried to talk him out of it by asking him if he didn't already have enough payments. Apparently, he decided he didn't. His house is of unknown size, but on 8 acres where he is, he's probably paying a pretty healthy house payment. Which brings us to....
The pool! At some point I got a text from my wife saying our water bill had been about one-fifth the size we were expecting because we had filled up our new-construction pool. "Huh..." I said, as I read it. He asked what was up, so I told him about my new pool and detached 2-car garage project (which I don't normally tell people about because it can seem like bragging). That starts a conversation about the pool project he wants to do. Guess how he wants to pay for it? Well, what kind of debt haven't we seen him use yet? Bingo!! 401k loan!! Oh, my word, the understanding - the core belief - of this guy in the area of money was that if you want something, you get it now, and you finance it through whatever tool you can. He believes that because he never has any spare money. He never has any spare money because it all goes out in payments for previous stuff he has bought. He bought the previous stuff on payments because he didn't have any spare money then either. See the problem? What we see here is a banker's wildest dreams come true. A man that makes plenty of money, but whose first inclination is to finance everything in his world. Can you see that at some point this MUST stop? He already knew that 401k loans are a really, really Bad Thing. You unplug a good investment, the loan is due in full in 60 days if you get fired, and you have to pay it back with after-tax money. This is getting long, so let's just focus on....
"But I"m paying myself the interest!". This is the marketing tripe around 401k loans and he was parroting it dutifully. If anyone wants to see the actual math, I'll put it in another thread. Suffice it to say, his $65k pool project was going to require him to earn $80+k to do. I could not make him understand that no money was created in the "pay yourself interest" scenario - it's ALL your money. We ended the conversation with him slipping the back-of-the-envelope calculations in his bag to be reviewed/refuted later.
This is why I preach to the youngsters to get a handle on money early. NOW. Right now. If you don't, you'll just keep getting raises as you progress professionally and you'll never get anywhere financially. So many times I hear that "the poor" can't afford to pay cash for things. This is exactly upside down. Low income individuals need to develop sound, disciplined money handling habits and making payments on things is the exact opposite of that. Habitually making payments on things ensures you never get ahead - even when you start making $150k.
This is a good guy. A very good guy - funny, smart, hard working, dedicated family man. But his understanding of money handling embodied the marketing message of the Debt Industry. So he'll NEVER be able to just buy a car.