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A Look in the Mirror: Are You a Borrower, a Consumer, or a Keeper
I am (slowly) working through my Personal Finance Basics , going into more details on each step. It is time for the discussion on #3: Spend less than you earn . I’m going to focus over the next few days on some techniques for budgeting (I’ve tried a bunch over the years). Today I want to step back and take a broad look at the topic. I think the importance of this aspect of your financial plan is illustrated well in the excellent book, The Bogleheads’ Guide to Investing . This book leads off with a story illustrating three common financial lifestyles lived by three fictitious couples: The Borrowers, The Consumers, and The Keepers. I think this paints a great picture of the contrast among these common lifestyles.
The Borrowers are living the high life. They have the best of everything – expensive cars, high-end clothing, a huge McMansion, and so on. They have numerous credit cards and they are not afraid to use them. When the balances on the cards become too high, its time for a cash-out refinance or home equity loan to clear the credit cards and start all over. Leased cars, no money down interest-only adjustable rate mortgages, and minimum monthly payments typify the Borrowers as they lead their life of luxury.
The only problem is that they are nowhere near able to afford their lifestyle. Forget about retirement, they will be working until the day they die. They are a job loss or a prolonged illness away from losing everything to the bank and their numerous creditors. In Texas, the term for this is "big hat, no cattle." (I find it strange that I’ve read a few different personal finance books that use that term)
The Consumers, in contrast to the Borrowers, do not live life restricted only by the limit of their credit cards. Instead, they live life restricted only by their take home pay. The question they ask themselves when investigating a major purchase is, "Can we afford the monthly payments?" Interest rates and the length of the loan do not matter, if they can wedge the affordable payments into their monthly budget, then what’s the big deal?
Again, this is an unsustainable lifestyle in the long-term. If their take home pay drops for whatever reason, the low monthly payments quickly become huge. Retirement will not be the dream of a huge RV, traveling the country, and golf courses. Instead, it will be a very restricted one governed by the check received from the government each month (assuming that is still going on by the time they are no longer able to work).
The authors contrast the first two lifestyles with the Keepers. The Keepers live according to a net worth mindset as opposed to the credit card mentality or paycheck mentality. They are concerned more with their net worth than their net income. The first thing they do with their money each month is to save some. They avoid debt as much as possible (certainly no high credit card rates as they pay off the balance each month) and participate in tax-advantaged retirement accounts.
While they make no more money than the Borrowers or the Consumers, they are much more likely to achieve their long-term financial goals (partly because they actually have long-term financial goals other than buying the latest and greatest stuff). While this lifestyle may not sound as exciting as the first two, it certainly sounds a lot less stressful to me. Plus, I like the idea of being able to stop working 40+ hours a week to devote my energies to other pursuits at some point before I die.
There are numerous other lifestyles
Of course, these are three very broad generalizations. In real life, there would be more lifestyles too numerous to detail. I think that we all know people that fall into these three categories though. Obviously, the book portrays the Keepers as the best lifestyle (the chapter in which this is found is called "Choose a Sound Financial Lifestyle" after all) and I would guess most of us (at least those reading personal finance blogs) would tend to want to live as the Keepers do.
So which type are you?
I do think my lifestyle matches up most with the Keepers. I track my net worth monthly (oh, time to do another update in a few days). We do use credit cards but pay them off each month. I don’t care anything about monthly payments – when I buy a car I negotiate on the price, not the payment. I should take more advantage of tax deferred investing options, however, as neither my wife nor I max-out our 401ks.
Some people, however, would certainly say that we are not living life to the fullest. They would claim that we should spend more of our money to enjoy today instead of worrying so much about saving for tomorrow. That is probably a valid point to some extent, but for me, I think the stress of not feeling like I was being a good steward of my financial blessings would outweigh any short-term benefit. Though I probably do lean too far towards the "hoarding" side of things and that is something I’m working on.
Well, what do you think? Do you even agree that the Keepers are the lifestyle to emulate? If you do, do you hit the mark?
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