Enough is as Good as a Feast

This is my favorite line from "Mary Poppins". Sometimes we glean wisdom from the strangest places, but good economic sense rings true wherever we find it. How much is enough? From a career perspective, it's always current compensation + n. At least in my industry, but that's not the focus of this post.

At the heart of our current economic woes is leverage. Using leverage to spend more than we earn, and losing sight of the difference between what we want and what we need.

So, how much is enough? This question can be applied to so many aspects of our day to day life. How big should a restaurant portion be (seriously, does anyone need a half pound burger?)? How many game systems does a kid need? How many pairs of jeans? How big a house? How fancy or big a car?

I made my children wait a very long time before I finally bought them a PS2 a few years ago. They have a few games. Maybe they get one at Christmas, but that's about it. Until they were teenagers, I refused to buy anything rated "mature". No one became a gaming addict. I was shocked to learn from my boys, that a lot of their friends had all the systems. Why? No wonder they spent all their time playing video games! How much is enough? How can a child learn about making choices or deferred gratification if they've been taught that they can have one of every flavor?

How many pairs of jeans, or handbags, or shoes are enough, and what kind? Does a kid really need 5 pairs of jeans, one for every day of the school week? Will they suffer permanent social outcast status if, heaven forbid, they wear the same pair twice in the same week to school? My family owned a clothing store, so I never wanted for nice clothes. Still, my parents impressed upon me that they still had to pay wholesale to the business for our clothes, so I got what I needed rather than anything I wanted. My father grew up during the depression, and while the family owned a business and was in good financial shape for the times, he wore the faded clothes from the store window. I cringe when I hear about people charging clothes on credit cards, and paying them off over time. Much too much focus on who has what kind of clothes! Don't get me wrong, I love fashion as much as the next person, but I couldn't sleep at night if I was in debt for it. Like my mother used to say: "if it's clean and paid for, it's no body's business".

No discussion of today's economic troubles can skip the how big a house question. This question really has a few parts. How big? What needs to be in it? Is owning always better than renting? Again, how much is enough? A few decades ago, families were frequently larger than is typical today, but they often managed to live in much smaller houses. I've met people who were one of 8 or 9 kids who grew up in modest Cape Cod houses with one bathroom. They turned out fine, and I don't think anyone went dirty. They learned to share, and how to wait their turn. Both excellent attributes. Over the past decade, there has been an explosion of home decorating shows on TV. They've raised the bar to a whole new level in terms of what amenities a house should have. Granite countertops, stainless steel appliances, marble bathrooms, all "necessary" if you want to maintain your home's resale value. Do you need these things? Really? These things are nice, and you might enjoy living in your home with them, but if you can't afford to pay cash for them then you can't afford them. So then save up for them, right? Unfortunately, that's not what happened. Deferred gratification went out the window. Enter the Home Equity Line of Credit (HELOC), and the Mortgage Refinancing with Cash out. Take out a second mortgage on your house? Sounds scary, but that's essentially what a HELOC is, just sugar coated. Refinance your mortgage, and take out your equity to spend on home decorating? I refinanced my mortgage twice, once from 30 years to 20 at a lower rate, and then again from 20 to 15 years at an even lower rate (always fixed rates!). It never occurred to me to sign up to pay more for longer! This of course explains why there are now so many people who once upon a time bought houses they could afford, but now have much bigger (now underwater) mortgages and are in deep trouble. They do, however, in many cases, now have granite counter-tops, wall mounted flat panel TV's, and restaurant grade appliances. None of these will be much consolation if they lose their house. I'll save "should everyone own?" for a future post.

I'll return to my basic premise that you can't spend more than you earn. HELOC's and Refi/Cash-outs are just another example of invisible money. Money, whether visible or invisible, still has to be counted. Borrowing more than you can afford to pay back on a bet that the collateral you put up will keep rapidly increasing in value is just what it sounds like: gambling. This makes a lot of Main Street an awful lot like many on Wall Street. Think about it.

Bottom line, Mary Poppins had it right. Enough is as good as a feast.

Postscript: I had to come back to this article and post this link to an article in today's New York Times entitled "Losing Its Cool at the Mall" http://tinyurl.com/c7wblw, a very interesting piece on the changing spending habits of teens (reported to be down 14%). Although this is bad news for some retailers, particularly Abercrombie & Fitch which is featured in the article, it's good news in terms of growing economic common sense in the teenage population. Is it fleeting?