As fate would have it, the movie Animal House came out a year before I went away to college. Not good. I actually embraced the fictional Deltas as role models, and my first round of college was characterized by far too much debauchery and far too little learning.
But despite its harmful affects on my budding intellectual life, Animal House was not completely devoid of merit. In fact, there was one line from the movie that could be a fitting mantra for all personal finance enthusiasts. Here it is.
“Fat, drunk, and stupid is no way to go through life.”
Yes, the evil Dean Wormer nailed it. In one simple declarative sentence he stated everything you need to know about personal finance. Let me explain.
Dean Wormer Meets Dave Ramsey
Suppose for a moment that we took Dean Wormer’s admonition against self-destruction and gave it a personal finance twist. Here are what fat, drunk, and stupid would be converted to.
Fat = Debt
Drunk = Materialism
Stupid = Unpreparedness
Now, if we take our converted concepts and reconfigure Dean Wormer’s memorable line, we get the following.
“Indebted, materialistic, and unprepared is no way to go through life.”
LOL! Isn’t that beautiful? I’m not ready to include financial Dean Wormer in my pantheon of unlikely financial gurus (see those gurus here, here, and here), but financial Dean Wormer is pretty damn savvy.
Let’s now see how you can avoid the three habits that financial Dean Wormer correctly says will deliver you to the gates of financial hell.
Mind Your Debt
According to Investopedia, lenders are very hesitant to give you a mortgage if the mortgage will push your debt-to-income ratio above 36%. Lenders, in other words, don’t want to give loans to people who are morbidly indebted.
So what’s a healthy amount of debt? My glib answer is zero. But that amount of debt isn’t feasible for most people, especially young people. A more reasonable debt-to-income ratio is 20% or less. Maintain that level of indebtedness and you’ll be in good financial shape.
Keeping your debt-to-income ratio below 20% won’t be easy. If you made $6K a month, your recurring monthly loan payments for housing, transportation, education, and all other debts couldn’t exceed $1,200 combined. That’s a tight budget.
But it can be done—as long as you purchase big-ticket items through the lens of human needs rather than pampered American needs.
To show what I mean by this, take a look at the following table.
|Big-Ticket Item||Human Needs||Examples That Meet Human Needs||Pampered American Needs||Examples That Meet Pampered American Needs|
|Housing||250 sq ft per person.||A tiny home or a studio apartment for one person. A one-bedroom apartment for a couple. A small three-bedroom house for a family of 3 or 4.||1,000 sq ft per person.||A two-bedroom apartment for one person. A 2,000 sq ft house for a couple. A McMansion for a family of 3 or 4.|
|Education||Skills that give you a reasonable shot at making or exceeding the average American's hourly wage, which is currently around $24.||A degree from a community college. A degree from a local state college.||The college experience plus a diploma that reflects your dreams or your desire for prestige.||A degree from a residential state college with resort-like amenities and a monster football team. A degree in graphic design that cost more than $100K. A degree from an Ivy League school.|
|Transportation||A reliable car that gets you safely from point A to point B.||A five-year-old Toyota Corolla or Honda Civic.||A vehicle that has all the bells and whistles of modern technology and tells the world that you're one awesome dude or dudette.||A Tesla. A BMW. A jacked up F-350.|
There’s a difference between what you can afford and what you need. Salespeople naturally prefer that you buy what you can afford. Society too pushes excess. How, after all, are you supposed to get a hot girlfriend if you don’t have a hot car? But if you can condition yourself to ignore all this pressure and default to purchases that meet human needs, you should have no problem keeping your debt-to-income ratio below 20%.
Don’t Be a Congo Dandy
About a month ago, I came across a YouTube documentary on something called the Congo Dandies. Check out the trailer below. What you’ll see is hard to fathom. Picture the worst abject poverty imaginable—no running water, no sewers, no paved roads, no household appliances. And in the midst of this jaw-dropping squalor, picture men who would rather spend a year’s worth of income on a suit than on something that might lift their families out of poverty. It’s freakin’ insanity.
In one sense, it’s hard not to feel contempt for the Congo Dandies. Any man who would sacrifice his family’s well-being for something as trivial as clothes is pretty despicable.
But in another sense, they’re doing something that is all too human. They want to show the community that they’re special, that they matter. And one of the time-honored ways for a person to showcase his or her awesomeness to the world is to buy stuff. Does this, dear inhabitant of the United States, sound familiar at all? Don’t many of us drink heartily from the well of materialism so we can impress others?
Don’t be a Congo Dandy. Don’t buy stuff to reap admiration. If you want admiration, DO SOMETHING THAT IS NOBLE OR HARD TO DO. Any yutz with a credit card can create the illusion of wealth. It is far more honorable to be mindful of your purchases—to buy just what is necessary to get the job done. A smartphone, for instance, is rapidly becoming a necessity. But you don’t need a $650 iPhone 7 to get into the wireless game. A $60 LG from Walmart is more than adequate.
One way to keep your ego in check is to limit your Congo Dandy purchases to no more than 5% of your take-home pay. Here’s how that would work.
Suppose you take home $35K a year. Multiply $35K by 5% and you come up with $1,750. Your annual Congo Dandy budget would thus be limited to $1,750. In other words, you can buy all the high-end products you want as long as the premiums paid for these products don’t add up to more than $1,750 (see table below). Once you reach your Congo Dandy budget limit, your remaining purchases for the year must be entry-level or mid-level products that will do little or nothing to enhance your prestige. “Oh, the humanity.”
|Product||High-End Cost||Entry- or Mid-Level Cost||Premium||Congo Dandy Balance|
|Smartphone||$650 - iPhone 7||$60 - Straight Talk LG Treasure 4G LTE||$590||$1,160|
|Sneakers||$355 - Air Jordan 11 Retro||$48 - Converse Chuck Taylor High Top||$307||$853|
|Men's Suit||$500 - Brooks Brothers||$200 - Macy's||$300||$553|
|Polo Shirt||$180 - 2 Lacoste Classic polo shirts||$12 - 2 Faded Glory polo shirts||$168||$385|
|10 Crossfit Workouts||$150 - Local crossfit gym||Free - In my garage||$150||$235|
|Vodka||$80 - Grey Goose VX||$16 - Three Olives||$64||$171|
Live Like You Don’t Have a Sugar Daddy Government
I don’t care what contemporary politicians have promised you about Social Security and Medicare. Old-age entitlement promises are only as good as the might of the underlying workforce. If future workers have neither the means nor the desire to honor those promises, those promises won’t be fulfilled. This doesn’t mean that Social Security and Medicare will disappear. We just need to be realistic. The federal government is already $20 trillion in debt. Our workforce is slowly being sapped by age, globalization, and robotics. How, then, can we reasonably expect Washington to be our sugar daddy in old age?
Since future old-age entitlements are likely to be less generous than today’s, you need to prepare. At the very least, you need to save the amount necessary to generate an average Social Security benefit. A DIY retirement benefit equal to the average Social Security benefit, plus whatever old-age entitlements the federal government is able to provide, should give you a reasonable shot at a dignified retirement.
The average annual Social Security benefit is currently $16,848. Assuming your future portfolio will generate a five percent return, your future portfolio will need to have $336,960 in it to produce that benefit.
The below chart shows what you need to save monthly in order to have $336,960 by the time you’re 65. If you can save more, by all means do it. And don’t forget to account for inflation. Forty-five years from now, $336K will not have the same purchasing power it has today. So increase your monthly investment every year by the rate of inflation.
Up until I was 40 years old, I was indebted, materialistic, and unprepared. But then, largely because of Mrs. Groovy, I had my come to Dean Wormer moment. It suddenly dawned on me that being indebted, materialistic, and unprepared really was a horrible way to live.
The good news is that once I stopped being “normal,” and once I started using my functioning brain to vanquish debt, askew frivolous purchases, and make retirement savings a priority, my financial prospects quickly turned for the better. Nothing could stop my advance toward financial independence—not the politicians in Washington, not the thieves on Wall Street, not even the evil One Percent.
Okay, groovy freedomists, that’s all I got. What say you? Is financial Dean Wormer right? Does he belong in my pantheon of unlikely financial gurus? Let me know what you think when you get a chance. I’d love to hear your thoughts. Peace.