Recession is the best Professor

by JT McGee

Chillin to the max and living the american dreamSo the other day I was just chillin’ to the max at my girlfriend’s house when her older sister starts asking me about real estate. Weird.

She goes on about how her and her boyfriend are looking at a house.

Now engaged, they’re ready to move on with their life and move out of mom and dad’s place. I can’t blame them. But what really intrigued me is what she said next.

“Oh my God, you wouldn’t believe how big of a loan we were approved for.”

I played along, “Really?”

I mean, they’re both gainfully employed, but they are still 20-somethings, and first time homebuyers. I had an idea of what they earned, so I multiplied it by 3 and figured that would be the number.

I was close. She announced the amount, looked at me, then just kinda smiled about the ridiculousness of the lending industry.

Then there was the bombshell: “There’s no way I’d borrow that much; that’s what got everyone into trouble in the first place!”

Hallelujah, homegirl!

Now look, I’m not one to judge, but even she’d admit that personal finance isn’t exactly her forte. But on this day it was. Not only did she realize that the maximum that she could borrow wasn’t how much she should borrow, but also that overextension on a first home was a certain pathway to failure.

She later admitted they were looking in range about half of their approval amount.

And that just makes me all giddy inside. If nothing else, it took a real estate crash, millions of unemployed, and virtually a full decade of recession to finally shake some people to the core. And lessons have been learned.

Sure, we’re no “greatest generation,” and we certainly wouldn’t label ourselves as such like the old folks have. Plus, unlike my (still) depression-weary grandpa we probably won’t be scoping out $.50 savings on a package of hotdogs, or collecting rain water to save money to water our gardens.

But we are learning. And it’s awesome. This is the American dream, man. We’re finally—finally!—learning from others’ mistakes.

Questions:

Have you noticed any changes in attitudes toward borrowing by those closest to you?

Any stories you’d like to share?

Photo by: audi_insperation

{ 17 comments… read them below or add one }

Jonathan September 19, 2011 at 10:07

I don’t tend to talk in any detail with friends about their finances (as curious as I am in reality), but I haven’t seen much change. It seems like people have less means to spend, but not than less inclination.

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JT McGee September 19, 2011 at 10:36

Hmm, I hadn’t really thought to distinguish between the inclination and means to spend.

Given where I and my friends are in life, it’s interesting to see how others see their finances. A lot of them who cry broke probably aren’t broke at all relative to their peers; it’s one thing to have $100 to your name, and completely different to have $1,000 to your name and $5,000 in credit card balances.

Do you think the opacity in financial standing contributes to the inclination to spend more? To put it another way, if those you know knew the financial position of others do you think it’d have a big impact on their decisions?

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Jonathan September 19, 2011 at 10:47

Interesting question whether financial transparency would change people’s spending habits – I think yes, definitely, but in which direction? If people’s own finances were public info – posted on facebook for example – I think it would cause people to spend less. On the other hand, people who live “within their means” by staying out of debt but have no savings might then rationalize it by saying “at least I’m not in $5k of debt like Billy!”

Speaking of people “crying broke,” my wife has a tendency to say “we can’t afford that!” to others, when we absolutely could. It may not align with our priorities, but we could pay cash for it, whatever it is, and barely notice. She knows that – in most cases, I believe she just doesn’t want to appear to be flaunting our relative wealth. I don’t think you can gauge a person’s situation by their offhand comments.

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JT September 20, 2011 at 12:37

I can see where financial transparency might do more to bring those who are semi-responsible down more than it might bring others up. “At least” is a powerful phrase, and a very valuable excuse.

I’m certainly at a different point in my life than you and your wife. When someone says they’re broke, it’s usually because they are, in fact, broke. I can think of several people who have only what is immediately available in their wallet. College students are by far some of the most likely to be “unbanked,” either by choice–never putting a dime in a savings account–or simply not knowing where to start.

I have a tendency to say that “I can’t afford x.” Usually, I can afford it, but I can’t see $y being a good trade-off for X good.

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Melissa @ BrokeTO September 19, 2011 at 11:55

Ah, that’s awesome, and exactly it! My cousin recently went through the same thing when deciding how much to borrow for her own house (I don’t know the numbers they ended up with). Instead of focusing on, “This is how much the bank will give us,” she focused on, “This is how much we can afford to pay monthly, and would still be able to comfortably afford if interest rates shot up.”

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JT September 20, 2011 at 12:38

That’s a good way to look at it. I see that you’re Canadian, so you definitely have more to consider than American borrowers. Rates are of little consequence to most Americans, who just pick a fixed-rate loan and call it done.

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Sam September 19, 2011 at 13:39

I’ve noticed a couple of my friends come around to leveraging up to buy more property with the rates this low.

I’m like a vulture, frantically looking! So juicy to see rental yields double te cost of ownership

Sam

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JT September 20, 2011 at 12:39

Om nom nom, leverage…there’s so much cheap capital out there, why not make use of it?

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Ashley @ Money Talks September 19, 2011 at 18:48

I don’t know… It seems to me that people are being more responsible in general… but maybe that’s just the “cool” thing right now and as soon as spending comes back in style they will be spending. We’ll see…

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JT September 20, 2011 at 12:40

Interesting perspective, for sure. Being “frugal” is the cool thing…kind of like spending $500 for a pair of ripped jeans in 2007. Weird. Funny how making a straight line of our finances is so difficult; it seems we as a collective have a tendency to overcompensate in both good and bad times.

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krantcents September 19, 2011 at 20:46

I have not noticed any changes, but they grew up with me and learned well. Roughly 7 years ago my daughter bought a condo and kept her mortgage payment low (equal to a weekly salary). She refinanced twice and the payment keeps going down. She makes extra principal payments and the payment is far less than her weekly salary equivalent. We talked about recently and she is going to pay it off in 5-10 years.

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JT September 20, 2011 at 12:42

Wow! Weekly net salary? That’s awesome!

She can’t be very old, so to have a paid-for place to live in after 5-10 years is a noble goal, for sure.

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20's Finances September 20, 2011 at 12:16

I agree. People are learning from other mistakes. In fact, it has helped me to solidify some of my personal finance beliefs.

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JT September 20, 2011 at 12:41

One of my favorite phrases/quotes/philosophies is “standing on the shoulders of giants.” If you can learn from others’ mistakes then you’re already ahead of the game.

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Financial Success For Young Adults September 20, 2011 at 18:52

It’s so good to hear that! I agree that our generation won’t be as tight-fisted as our depression era grandparents but we certainly won’t be as financially carefree as the hippie/baby boomers! lol

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JT McGee September 20, 2011 at 19:27

I’m starting to see the boomer perspective: “Make entitlements, not war.” Our chant will probably be “FUND entitlements, not war.”

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Evan September 22, 2011 at 15:17

I am more shocked The Girlfriend lets you get away with sayings like “I was just chillin’ to the max at my girlfriend’s house.”

I find it even more shocking when reasonably intelligent people don’t begin to understand the first thing about personal finances.

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