Wealthy & Overextended?

I’m a fan of Showtime’s “Billions.”  I’ve been taping the episodes all season (we’re in Season 3) and I’m finally able to catch up and binge watch it!   I was viewing Episode 3 (of Season 3) and 26 minutes into the episode, the main character, “Axelrod” is having a deep conversation with a fellow hedge fund manager, “Michael Panay.”  Panay is having a bad year and has to shutter his fund due to enormous investor redemptions.  He informs Axelrod that he’ll be okay after the fund closure, with $40 million left intact, that’ll be enough to live on (We should all hope so!).  Always the devil’s advocate (with an ulterior motive), Axelrod names off Panay’s expenses: He has a NY City apartment, a home in the Hamptons as well as Beaver Creek (add mortages and property taxes to these!) his private jet, country club memberships, charities, private schools for the kids, a high maintenance wife, and the list goes on and on AND he has an epiphany, with $40 million he’s broke!

Do you feel sorry for a guy like that?  Hell No!  Do you realize this is what many wealthy families were left with among the ruins of the 2008 financial crisis?  Many a wealthy family had tremendous income coming in, yet they overextended themselves, living “high-on-the-hog.”  I think most of my readers are like me, somewhere between having a nice, comfortable lifestyle and exercising frugality.  These are almost opposite extremes, really.  At least in the FIRE community.

On one end you have folks that are making a great income AND are setting a high % aside for early retirement (I’m saving 30% of my gross income currently).  They have “things.”  Maybe they drive a nice car, live in a nice home in a quiet neighborhood in the suburbs, enjoy terrific vacations (hence my recent trip to Italy).  They make good income but they worry whether they’ll have enough to maintain their current standard of living in early retirement.

On the other end of the spectrum you have the type like Mr. Money Mustache.  A family that is super tightwad and extremely frugal.  This is the type who probably gets by with one car.  They don’t dine at restaurants often.  They clip coupons and live a spartan life.  This is very commendable.  That’s because not many of us live this way, though we all have a great deal of respect for folks like this.

I happen to be split right in the middle of these two.  I recently vacationed in Florence & Rome, Italy but I “travel hacked” to get there.  I live in a home too large for two people (3,100 square feet with a pool), but I have enormous equity, close to paying it off AND my mortgage payment is only $394/mo!  I’m making an intentional payment of $1,250/mo.  My wife & I love to ride our Harley Davidson on the weekends (I purchased it pre-owned and paid cash for it).  I drive a new 2018 Honda Accord Touring model with all the bells & whistles.  I justify this because my employer pays me a generous $550/mo. Car allowance, so the car is basically free.  I mention all this “stuff’ because I do live a great life in pre-retirement but I do all that I can to still remain frugal and thrifty.  I don’t piss away my paychecks and my debt level is minimal.

Many, many families are overextended.  Extremely overextended.  This post-recession economic strength has made many forget the trauma of the most recent recession.  Is it so hard to remember the high unemployment rate of 8-9 years ago?  The enormous number of foreclosures (everyone needs to re-watch “The Big Short”). The number of people we all personally knew who lost their job during this period?  I fear that by the end of 2019 the world will experience another recession.  What happens then?  Bailouts?  I doubt that.  What happens to all these passive index investors and robo-investors the next time the market tanks by 30%?  There will be lots of pain….

It’s time that everyone wake up from the ether, pull up their bootstraps, increase their savings and at the same time; stop spending money on useless crap!  Dine out less often (cooking can be fun and with the right partner, it’s sensual!).  Quit going to the movies, cinema tickets are $12!  That’s highway robbery.  A month’s worth of Netflix costs much less.  Will the ultra-wealthy like the aforementioned hedge fund manager in “Billions” change?  Of course not.  The next recession will hit and as a result of all these wonderful things they purchased on credit; their house of cards will collapse.  We in the FIRE community are smarter than these ultra-wealthy I just mentioned.  We all realize it’s far better to have a half-million in the bank, liquid and little-to-no debt; than to be worth $40 million and running from creditors…. Shun Debt.

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