Ideology Versus Reality

Yesterday I stumbled across a bit of a dilemma that I cannot offer a real solution to. Jonathan Hoenig had a post called Why Bill to Limit 401K Loans is Dangerous. If you are familiar with Jonathan then you probably know that he said the government should not meddle in these sort of personal finance matters, we should be free to govern our own affairs without big brother looming over us.

Other than his failure to mention the tax writeoff for making 401k contributions I can't argue against the ideology he expressed, actually I agree with it. I think people should be free to make all their good and bad decisions about finance matters and then own the consequences good and bad.

The reality of this is far more complicated. It is complicated by the fact that collectively we have no understanding of the decisions we make, we don't understand the consequences, we make poor decisions in terms of not saving enough, raiding our savings for things that are not necessarily emergencies, we buy high, we sell low, we spend wildly beyond our means, we have credit card debt out the wazoo, we take way too much risk, we don't take any risk--this list could be endless.

If the reality is that we collectively hang ourselves with most of our financial decisions then to paraphrase Jim Rogers the solution would not be to give us more rope.

I was exposed to a mentality along these lines yesterday that I simply don't know how to understand. I posted this article from the WSJ and pointed out the "debt is slavery reference." A Facebook friend with very specific ideas on all of this said that everyone in the US is a slave except the "super rich." I countered with not needing to be super rich to buy less house than you can afford, to brown bag your lunch and drive cars longer than five years; I even pointed him to my interview with my 80 year old backhoe driving neighbor (side note, the idea for the interview came from Seeking Alpha and then they chose not to run it, very funny). He shared a couple of opinions about the Fed and IRS and related some of his personal hard luck story.

As I read his comments it seemed to me that he was saying that he is not accountable for any of his circumstance, that people have been taken advantage and that it is not their fault, it is someone else's like the bank or the Fed. I can't relate to this in the least and so I cannot rule out that he is correct but whether he is correct or not there are some truths that still exist. No one will care more about your finances (savings, debt, housing) than you do.

Nassim Taleb was right in saying that we learned everything we need to know about personal finance from our grandmothers; don't borrow too much, don't lend too much and save as much as you can. One some level, everyone knows these things but the reality is that not enough people live their lives this way.

If we assume that my friend is correct, he is still there left to endure his hardship just like everyone else facing similar hardships. The thing missing would appear to be proper education. Education is not supplied (a point we've gone over many times) nor is it sought and so the result is that collectively we are financially illiterate.

Ideally everyone would care enough to learn about what they are doing and understand there will be consequences for their actions but if a lot of people cannot understand accountability and really believe others are to blame then we would appear to be a long way from a solution.

While the education needs to include the nuts and bolts of how things work, I also think the expectation needs to be set that no one but you cares if you lose your house, don't have enough money saved or otherwise get done in financially. While that might read as being very harsh, I think more people would take more suitable risks in their financial lives. If you can't make your house payment you will lose your house. If you lose your job you will probably need to make your house payment out of your savings. Your savings will go much further if you have a $1200 house payment than if you have a $3000 payment.

Is it more complicated than that? It probably is but it doesn't have to be. On a related post a few weeks ago a reader said I was skewed on these matters. In some respects that is true but another nugget from the WSJ post was learn vicariously through the mistakes of others which I did from my parents. As opposed to getting good advice, I learned what not to do and proactively sought out an existence that mitigates my hot buttons; I have multiple streams of income (and could have another if I accepted pay from the fire department) and a low overhead. My friend might make some crack about super rich here but that is utter nonsense, there are no barriers to entry for being cheap and hard working.

These things I did probably don't seem like too big of a deal to you but someone who reads a financial blog is not financially illiterate. We all have things to learn but that is not the same as being illiterate and we know from the housing market mess and lousy 401k results that too many people are financially illiterate.

I really do not know what a realistic solution could be. The gap between what should be and reality is vast.