I’ll explain all three.
Much of our financial advice comes from our parents, or parents’ parents, who pass down ultra-conservative, Depression era thinking when it comes to money. Real security came through getting an education and having one good job for life, as was the notion that you should pay down your mortgage and own your home outright as quickly as possible. Often, people kept the same job for life and bought a home with a large down payment with the intent to stay there for 30 years and never move or refinance.
Debt was considered bad and to be avoided, at all costs. During the Great Depression, banks called notes due and repossessed homes at farms at alarming rates. Your bank deposits and savings were not federally insured and when currency became devalued, many people lost their life savings. There were no credit cards, auto loans, student loans, or other debt vehicles to contend with. Many “old timers” considered the safest investment packing a coffee can with money and burying it in the back yard, or holding on to gold, or having slow and steady government bonds. The fear of loss was far greater than the hope for gain.
The way to get ahead was to “grind” and “pull yourself up by your boot straps.” The ultimate goal was to work a very long time so you get a secure pension and have your home paid off in retirement. These lessons of financial conservatism were instilled in the children of those who experienced the Depression, the Baby Boomers.
As the world changed, so did our thinking about money. Our parents’ advice about money no longer seemed relevant for the new rules of the game. College graduates entered the work world competing for $10 an hour jobs with $100,000 in student loans. People changed careers and jobs 5 or 6 times in their lives, and companies certainly had no loyalty, downsizing, outsourcing, and replacing seasoned workers with newer, cheaper employees. Additionally, most people moved or refinanced frequently, especially when interest rates were favorable and the real estate market was white hot.
Homes were not just places to live in, but slot machines – a chance to benefit from rising markets and cash in as the equity went up. Gambles like this were essential to get ahead, as the rising cost of living and wages that didn’t keep pace made it almost impossible to amass a big nest egg or be financially comfortable. If the investments didn’t work, there was bankruptcy, short sales, loan workouts, and the chance to start over again without the debt following you around the rest of your life. But if it worked, the pay-off was huge. Few people worried about paying off their mortgage because it was rare to stay in the same house for 30 years, and that money could be used better elsewhere.
The way to get ahead was to work hard but to work smart and take risks – the computer age and booms in technology and Internet companies created far more wealth than “keeping your nose to the grindstone.” Set backs and losses were just an inevitable part of the process of success, and debt was seen as a necessary vehicle that allowed you to risk someone else’s money, not your own.
Since everyone is different, there is no one right answer for managing finances and real estate that applies to everyone. Each situation is unique and should be treated as such - there is no one correct answer for every situation. Any investment is just a balance of risk and reward, and that applies to your real estate and mortgage choices. Before making any big moves, weigh all factors and gauge your risk tolerance. This approach finds a hybrid between Old School and New School methods.
For instance, a lot of people should have been WAY more conservative with their real estate strategies when the market was hot. The prevalent thinking was short term, whipped into a frenzy of greed and fear of missing out. People bought homes they couldn’t afford and treated them like ATM machines, empowered to fail by stated income loans, no money down programs, a frenzy of greed (from consumers to realtors to lenders to banks) and an ever-expanding bubble of rising prices. A healthy dose of Old School wisdom would have helped prevent the catastrophic real estate collapse that’s taken 5 years to crawl out of.
Then again, peoples’ thinking is often counterintuitive. They buy when they should sell, and sell when they should buy because of the aforementioned impulses – fear and greed – instead of any conscious business strategy and clear rationale. The last couple years (and now!) too many investors and potential homebuyers have sat idly on the sidelines. Instead, the masses wait for real estate to be “popular” and “hot” and “safe,” again, which means you’re at the top of the roller coaster and it’s the exact wrong time to buy! Instead, savvy investors take advantage of down markets and apply long term thinking to cash in. Sometimes, the most dangerous investment is the one you don’t make!
Which school of thinking is right for you? That depends on a lot of factors, of course. How close are you to retirement? Do you have a family and children to support? Does your income allow you to amass savings and fund retirement investments? How well is your money diversified? Are you prepared for medical emergencies or long-term care? What is your risk tolerance? Are you prepared to be a landlord? How about your tax situation?
Sit down with a team of trusted advisors to collect all the information you can so you can make informed choices, not react impulsively. Your financial planner, tax advisor, insurance agent, mortgage planner, and yes, your Realtor, should all be part of this team. Set your financial goals and map out the best plan to get there based on the RIGHT school of thinking.