A New Era of Personal Finance
29. Jun, 2009 
18 Comments
Last night, a close friend spent some time talking with my fiancée and I about life and money. We talked about our own financial situations, what we thought of the current recession, and what we were thinking about the future. We discussed our parent’s situation, and how different it was for them while we were growing up.
The one major point that seemed to shine through the conversation for me was that given the current situation, and given the advances in technology, our situation has changed. The old advice and timeless adages no longer seem to apply to us anymore. This came up in a number of different ways.
Housing
It has often been said that one of the best ways to grow your networth is to buy a house. Renting, it seems, is throwing money away. You’re just paying off someone else’s mortgage. There’s been a lot of debate as to whether or not that is, or ever has been, true. If you work the math, it might make more financial sense to rent cheap and put the rest aside for investments and savings. That way you are letting compound interest work for you instead of against you.
Just over 20 years ago, my parents bought a house in Vancouver. A few years later, they sold it and ended up making a fairly significant profit, allowing them to buy their house in Kelowna. They managed to pay off the mortgage in a fairly reasonable amount of time (15 years?) and were mortgage free until they relocated again.
Last year, the average price of a detached home selling in vancouver was nearing the 1 million dollar mark. If I was to attempt to purchase a house, I would be looking at 10 years of my current salary as a down payment. My monthly mortgage payment would be ten times what I currently pay in rent. That doesn’t even begin to calculate the increased utility costs, property taxes, or the fact that if the roof gets a leak, I’m on the hook for it.
Why not save that money used for a mortgage, and invest it while we’re still young? Why not put it into something that will give me 3 or 4% back every year for the next 30 years? Why not make compound interest work for me, and not against me
My friend told me that his parents pay less on their mortgage than it costs to keep him and his roommate in their apartment. Its shocking how much of a difference location and time can make.
We can’t afford to buy a home. Not in Vancouver, anyways.
Salary
It used to be that a family could be raised on a single salary. When I was growing up, my mother took time to raise us instead of working. At times, she would work a part time job, and eventually she would get a job where she could work from home so she could be flexible with our schedules. However, for the most part, we lived off my father’s salary alone. I don’t know how possible that is anymore.
As it stands, between my fiancée and I, we make somewhere between 30 and 35 thousand a year. Even with both of us working, things can get a little tight, and we don’t even own a car. If we were to have children, and if we were to go down to one salary a year, even if I doubled my salary, things would still be tight. At our current pay rates, we can’t afford to have children. I know that it is possible, because there are single mothers out there that manage to raise their children on a single wage. We would have to significantly change our lifestyle if we were to attempt to raise a family on a single income, which very well may be true for all parents.
Regardless, the black and white American dream that I watch on TV doesn’t really exist anymore. The solution? Wait until we have higher paying jobs, move somewhere it is cheaper to live, and change our expectations.
Cost of Living
This one didn’t really get much attention during our conversation, but it is often said that our generation has a much higher cost of living than our parents did. Whether it is because we have higher standards, or are spoiled, I don’t know. I do know that our parents never grew up with a huge satellite TV bill, or cable internet bill, or cell phone bill. While these things are seen as “luxuries”, they are becoming more and more necessities. The last time that you went without internet, how hard was it to google something? The last time you forgot your cell phone at home, how hard was it to text message your spouse to let them know you didn’t put the laundry on?
Yes, we could get by without television, and internet, and cell phones. But that is not how our generation works anymore. These expenses are hardly luxuries. We find our jobs on craigslist, we contact our bosses via email, and we meet up with our friends through SMS. Its how life we live our lives, and it is different (and more expensive) from the way that our parents lived their lives.
A New Era
It all comes down to the simple fact that while our parents taught us how to count, and how we have to exchange our coins for candy, the rules have started to change from when they were our age. The housing bubble, while partially deflated, still means that housing prices are astronomically higher than they ought to be. The recession means less jobs, for less pay, with higher qualifications, so we hold onto whatever jobs we can find. A higher cost of living means one salary from one company just isn’t enough anymore. A New Era has begun, and we are the ground breakers, the path setters, and we have to figure out what our personal finance means to us today, in this climate, and in this economy.
What changes have you seen from when your parents were your age? How are you adapting to the current economic climate? Sound off.
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Matt Goulart
One thing to look at is how the baselines has changed.
We might have had one income households, but our houses were also 1/2 the size. (I could look up the actual statistic later, but I know our houses are much bigger nowadays) That affects mortgage payments, utilities, taxes, etc. If you can’t afford the average house in your area and its 2,500 sq ft look for some 1,200 sq ft houses and see what the difference is.
There are also a lot of interesting economic theories that postulate that the switch to dual income households actually masked a downturn in our economy by essentially doubling our workforce and making labor more available. GDP and productivity kept climbing at constant rates, but being that the workforce had almost doubled, it was actually a dilution of the $/employee.
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Great additional thoughts, MLR. It is definitely true that the house size has changed. What makes it even more interesting is that why would I buy a 1200 sq ft house when I am renting a 900 sq ft basement suite! Would that extra 300 sq ft really make it worth the extra hassle/expense? In Vancouver, at least, that house would still probably go for a min. of 300k!
I don’t have the answer. It may very well be worth it. I guess we’ll have to wait and see.
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The winds of change are definitely blowing, and not necessarily in a positive direction.
Most continue to strive for material possessions when a return to a simpler lifestyle is what would benefit them most. My wife & I find much piece of mind & security in living below our means. We know that, Lord willing, it is only a matter of time before we have no debt and therefore have increased freedom.
Kevin recently wrote a guest article on DFA entitled, "Powerful Advantages of Renting a Home Before Buying" that is very pertinent to this article. I for one think that renting is the way to go now-a-days. At least for the foreseeable future…
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I agree that certain new things have become necessities – at least if you’re still under a certain age and need a job, career, etc. – the internet, obviously – and sadly, now, maybe having a cell phone, too – in some areas in the U.S., anyway, heaven help you if you hope to find a public pay phone (that works) (even in parts of Europe, I got strange looks when asking for one). But I don’t think the fundamentals of investing for the long-term have changed. I’m GenX, not Y, but I don’t believe what has supposedly gripped the GenY crowd (according to the media) that investing is too risky now… I think it’s about the same. As for things being more expensive in general, I think that’s true…. even just factoring in the inflation. But even all across the board I think things are harder now for those just getting started – the bar has been risen for getting new jobs and moving up generally.
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When my parents were starting out they lived in very tiny places. Mom talks of a bathroom so small you could wash your hands, use the toilet and take a shower all at the same time. She talks of a house where the bed was in a drawer you pulled out from under the walk-in closet. She talks about how in Guam, everyone had bamboo furniture, even the officers, because that’s the only thing the termites wouldn’t eat. They all evacuated to the same place when locusts swarmed.
We were on food stamps one year, and we ate better that year than we had before: my parents could afford to have steak once a month! Generally we had lots of pasta, peanut butter and jelly, and eggs (Dad doesn’t like beans or rice). We had one black-and-white TV (with no remote) and one telephone and one car. That was all in the 1960s.
Since then, their salaries have increased. Now we get hand-me-down computers from my parents! When I was in college I remember they got all new furniture and a new stereo. Now their house is bigger than mine, their TV is bigger, they each have their own cars–bought brand new and bigger than mine, and they both have cell phones (and I don’t).
So my point is, it’s not fair to compare how you’re doing now with how your parents are doing now. They’ve had more than a decade, probably two or three, longer than you have to save up for things and to build their salaries. I feel like I’m doing better than my parents did, mostly because I have no dependents and because I’m more responsible with my money than my dad is plus I’m just as lucky with good health and being able to get jobs.
Of course I’m 46 now myself, probably the age of the parents of some of your readers. So maybe I’m still in the lucky generation. Yet my salary–well, every year I check how it compares with the starting salary of teachers in my area. I finally passed them a few years ago, but they are passing me again next year (we won’t get raises, but they will). So, a lot of your readers are probably making the same salary as me, and this is the most I’ve ever made.
I think nowadays we’d rather have internet access than our own home. Especially if we move much–the internet helps you keep in touch with friends, but a house just drags you down. We almost all have indoor plumbing and don’t even have to share it with people in other apartments (only in dorms). We have electric or gas stoves (not wood burning) and central heat and, if we live somewhere hot, central AC. We have clothes that don’t need ironing and yet aren’t the gross polyester of the 1960s. We have ibuprofen and reliable birth control. So, we may have trouble affording some of the things our parents have, but we have other fabulous things that didn’t even exist until fairly recently. (Even very old timers had some fabulous things, too, though, like more beaches without oil spills and like transportation that could get them home when they were drunk–horses.)
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How old are your parents? My parents are Boomers who grew up in that Leave it to Beaver kind of family (though one of my grandmothers always worked, the other was a stay at home mom) but by the time we came along, things were looking pretty dire (compared to their parents – if you ignore the "growing up in the Great Depression" part of my grandparents lives) They had us starting in the mid ’70s, with significant savings from several years of being DINKs. It was a good thing, too – blue-collar jobs were starting to disappear, and oil prices caused simultaneous inflation and job loss in the US. Frugality was in then, too – quilting and gardening and cutting your own hair.
Interest rates were crazy-high, and so were mortgages – my parents first house had a 12% mortgage rate. That depresses the prices a lot, because your monthly payment is a lot higher on a lower-dollar-value home. My mom got fired for having me, and the industry my dad was in was hit hard by oil price shocks, so we ate a lot of pancakes for dinner and my mom dug up the back yard to grow potatos. My dad had the same stereo (his "hi fi") setup from his bachelor days for 20 years – he finally upgraded in the mid-80s when it seemed like cassettes were here to stay and my mom was working again.
Of course, as Boomers, they could get handouts from their crazily thrifty Depression-baby parents – and after the stagflation years came some pretty good years. Money socked away for our college funds timed the stock market pretty well. But we are definitely doing better (my partner and I have been together 9 years) than either of our parents were at the same stage in their relationship – not to mention, I got medical leave and could have had my old job back, if I wanted it, after my son was born.
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Some great comments on this article! Seems to have struck a chord with some of you.
My parents are just past 50 years of age, so a fair bit younger than some of your parents. That may be why some of the illustrations and examples that I am giving don’t quite line up with what your experience has been. Regardless, the point of the article was essentially to get us all to re-think our previous assumptions, so as long as we’ve done that, I consider it a success.
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FB @ FabulouslyBroke.com
Wonderful post!!!
But old habits and thinking dies hard.. We just need to be more flexible and open minded from now on, rather than relying on the same principles of the past, that don’t apply any longer with our new global economy..
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I think your perspective is highly, highly based on your location. I’ve seen the same types of thinking from a friend of mine who lives just outside New York City, too. Living in a particularly expensive city is much, much harder on the wallet than a smaller city. Here in Pittsburgh, PA, living the way my parents did is much more feasible. For instance, the standard 3/4 bedroom and 2 bathroom home costs between $110K and $170K.
I bought a 3 bedroom house (around 1400 sq ft) at age 27… helped in large part because I have a long-term boyfriend who is also contributing to the bills. But at this point (five years later), I could actually afford the mortgage and all the other bills on my own salary (<$40K) if I had to. And that includes cable, internet, cell phone, and meat for dinner every night!
I think you’re right that we have to think about which old advice applies to us and which doesn’t. But I also think you have to realize how the choices you make in how you want to live your life affect your situation.
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OK, I’m in my late 30s — not a spring chicken, not an old lady (I hope) but I’ve already noticed a pattern. Every couple of years there’s this trend where people start saying "the old rules don’t apply anymore!" And it’s always bunk. During the dotcom boom people were saying that the old rules of the stock market didn’t apply anymore. P/E ratios were a thing of the past and it was just going to go UP UP UP forever. Then, more recently, it was the housing market. Houses are a brilliant investment, they’ll keep going UP UP UP forever. In the 70s it was about losing out to foreign oil and now more about losing out to foreign workforce. From the threat of global fascism to the threat of global fundamentalism. And that’s just within my lifetime!
In fact, the history of the stock market shows us that it’s volatile, unpredictable, and mainly based on what the companies actually do and earn. The history of the housing market shows us that houses are not financial investments — they barely match inflation (their value lies elsewhere). Stock prices after the dotcom bust went back to normal. Housing prices are heading the same way. And the world will adjust to changes and come back to equilibrium as well — sometimes it hurts and is bloody, but it happens nonetheless.
And every single generation says "the rules have changed changed changed." I’m also thinking… not so much. Or at least not in any way that matters. Comparing costs with your parents or grandparents is so apples to oranges that it’s almost a non-issue. In some ways it’s harder in other ways much easier. In some ways we’re terribly spoiled and in others almost deprived. It all shakes out in the wash.
The real rules: Spend less than you earn. Use credit rarely and wisely. Don’t gamble or speculate. Avoid the herd and remember there’s no such thing as a free lunch. Don’t try to keep up with anyone else — let alone the Jones’. Those rules haven’t changed one bit.
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Yes, the word changes, but money fundamentals do not change. The late Sir John Templeton, investor extrordinaire, noted 60 years ago the four most dangerous words in an investor’s vocabulary is "This time, it’s different." (Ok, five words without the contraction!)
At my age, 50, I still follow the example put down by my depression raised parents. You buy a house and pay it off as soon as you can. Because the house gains so much in value? No, housing traditionally keeps up with inflation. You do it so you don’t have to pay the bank rent in the form of a mortgage. If you rent, you’ll always pay rent for housing. If you own your own home, you pay taxes and insurance….far less than rent. Most people spend 30-45% of their income on mortgages and rent. Think how much you could save and/or spend every month if you didn’t have to pay for housing. That is why you buy a home and pay it off quickly!
Don’t make enough in your jobs? Then get new ones that pay more. I switched from journalism (a low paying profession), to sales. Why? Because I enjoyed selling? No….because I desired more money. I sold cell phones for years and doubled my old newspaper writer salary overnight. Did I have to work hard? Of course! Hard work and ambition goes hand-in-hand with making money. My motto is "Do it for the money and the love with follow." Think about it.
The cost of living will always go up. Invest and save accordingly. Live on less than you earn, (or earn more than you spend!), stay out of debt, especially for "toys", learn how to make your money grow through asset allocation of stocks, bonds, cash and real estate, and plan on using that money wisely to enrich your life, your children’s life and your favorite charities bottom line.
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There’s no question that where you live and what you do where you live impacts these observations tremendously. The past nearly twenty years have been a roller coaster ride for me personally, and I have experienced the dizzying hights of the tech boom (it helped me buy our house and out most recent cars) and the horrible lows (getting laid off three times in three years back in 2002, 2003, and 2004). My salary has gone up and down in those times, too, but one thing that we made a commitment to was that, no matter what, we would make a family and that family would be supported by my income alone. At certain times (the late 90’s, it was a piece of cake). Lately, it’s been a lot more challenging, but I have some things that help me:
1. I carry no consumer or long term debt of any kind. My cars, house and all other aspects of my life are paid for.2. We opted to live in a smaller house than I grew up in, but it suits our needs.3. We monitor those so called modern necesitiesnecessities and do our best to keep their costs low… internet is median price, cable is basic offering, no frills, and our cell phones are pay as you go models, so we only pay when we actually use them.4. We made a commitment to spend less than we earn and no toy was purchased without cash in hand and even then, only after the goals that we set for ourselves have been paid for (which include 10% tithing, 15% retirement savings and a contributions to each ofour kids college funds.
Is it easy? NOt always, but it is indeed doable, if you are clear on what your goals are and how you intend to meet them. For the record, I’m 41, so I’ve had some time to absorb the impacts of 20 years worth of work. There have been ups and downs, and you will see them, too, just make sure you know what your goals are, and then follow through on them
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Why do you have to text your spouse about laundry? Can’t you send an email or (gasp!) call her or him? We’re 47, and have lived frugally most of our marriage. We live in a non coastal community (near Akron, Ohio), where houses are between $100,000-$200,000. I guess if I were looking at a million dollar mortgage, I’d think it’s not really an option. But are you so tied to your $35,000 yr jobs that moving isn’t an option? As it is, we bought a $150,000 house 10 years ago, in a decent school system, and while the value of the house has not jumped (it’s likely worth about $185,000 now), we have prepaid as we can, and have about 2 more years until its done. And we’ll be done paying a "roof" mortgage for as long as we live here (we’re thinking another 15-20 years) RENT FREE!! I’m with you Dave…get out from under a mortgage ASAP!But, I have no text service, and we have the most basic packages on cable and internet we could find (and we have teens…when I saw how much texting costs, I told my daughter she could get it if she paid for it…she declined).I guess it’s a balance…everyone has to decide for themselves what is important enough to spend their hard earned money on, and it’ll be different for everyone.
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I agree with many of the commentors that this view is probably skewed. When your parents were young didn’t they struggle? You come along and look at them many years after they’re established and think, "oh, they have so much," but they didn’t start that way, much like you things were likely very tight at first. One of the reasons I feel we’re in this current mess is that so many people grew up thinking they wanted exactly what their parents had, a large house, nice cars, expensive vacations, etc. and they wanted it *NOW*. Never considering that the accumulation of those items are the results of decades of being in the workforce and slow accumulation of things over those decades. Add to that desire a way of funding it via debt, and suddenly we have a generation of people who outwardly are living far beyond their parents (bigger house, bigger cars, bigger vacations) but are doing so at a huge risk.
Housing: Renting is cheaper now, but in ten years your fixed mortgage on a three or four bedroom home, to often include insurance and taxes, is typically less expensive then renting a two or three bedroom place. The "old" rule of thumb was never to buy if you were planning on moving in the next five to seven years. I agree that this idea that owning a home is the end all and be all of living is far overrated, but it does pay off under the right circumstances, just like renting pays off in the right circumstances. It all depends on your future plans, and always has.
Salary: It all depends on where you live. I was out in a rural area at one point where a just above minimum wage job, full time with benefits, allowed a guy to support his wife and their new child in a two bedroom furnished apartment whereas he wouldn’t even get an efficiency apartment in the city where I’d been living before. For what it’s worth, my family has been doing fine on one salary for the last twenty plus years. The reason most folks "need" two salaries is because of where they live and what they "want". They don’t want to wait and save for a new home/car/future, they want it now, now, now.
Cost of Living: In many ways, this is percieved. Do you honestly "need" cable or digital TV? Do you honestly "need" a 42 inch or larger plasma TV? Multiple computers? New car? etc. Also I agree that where you live makes an impact. My friends in NYC have struggled on higher salaries than me for many years, but they love it there and don’t want to move. Frankly I don’t think it was much different back in the day.
I graduated into a recession back in the 80’s. Spend less than you earn. Save what you can and never touch it, even if it’s only twenty dollars a paycheck. Put your money to work for you. These truisms worked pretty good fifty years ago. They still work pretty good today.
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I am going to attempt to respond to a few commenters. In regards to location, yes my perspective is very location based. My examples, my cost of living, my local housing prices, are based in Vancouver, which is one of the highest priced places to live in Canada. However, my point was a comparison between what my parents could do at my age (I’m currently 23) and what I can do at my age. They were only a few years older than me when they bought their first house in Vancouver. It was doable, affordable, and a smart decision. A few years from now, there is no way that I could afford a house in the same neighborhood.
Yes, I could afford a lot more if I lived in a rural area (like in the prairies), but to be frank, we don’t want to live there. We may consider moving to a cheaper place in a few years, but right now we’re young, we love where we’re living, and want to stay here – for now.
In terms of housing, yes, as Ivy pointed out, house prices have historically risen "up up up". Even with the current recession, they will most likely rebound and continue to rise. However, buying a house as an investment does not always make financial sense. There’s plenty of research that can go both ways depending on the situation. In addition, if you don’t stay in your house for 5-7 years, as Peter said, then you’re actually losing a significant amount of money.
And while it would be nice to live rent/mortgage free, as Dave says, it is practically impossible for my generation, in my location, to do so. I can’t buy a house and pay it off as quickly as possible – not where I live. Housing prices have escalated beyond inflation, beyond our starting salaries, to the point where buying a house is impossible without a huge loan from family/friends, and in this current market, would still be a risky move.
As for the cost of living, I don’t pay for satellite, I don’t pay for cable TV. I pay for internet and cell phone, because those things are practically necessities. Having a phone is a necessity, and I don’t want to pay two bills, so I chose a cell phone for the convenience, accessibility to communication, and safety (always having a phone on me may not be a necessity, but it provides a sense of security). These are costs that my parent’s generation didn’t have to deal with right out of graduation. They either paid for a landline or used payphones (I can’t remember the last time I saw a payphone) to communicate, and the internet was limited to the rich and geeky.
The point I was hoping to get across was that my generation, the twenty somethings, are encountering a different world than our parents did. So is my view skewed? Of course! I’m a different person, in a different location, at a different time in history. It is absolutely going to be vastly different from your life and your situation. The things that work for you might not work for me.
I can spend less than I earn. I can stay out of debt to the best of my ability. I can invest wisely. But should I buy a house? Should we live on one salary alone? Maybe, maybe not. Just because it worked for you does not mean it will work for me, or others that are my age. It is good for us to challenge assumptions, take nothing for granted, and figure out for ourselves whether or not the old rules still apply.
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Wonderful post!!!
But old habits and thinking dies hard.. We just need to be more flexible and open minded from now on, rather than relying on the same principles of the past,
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