The Bible’s Book of Revelations and our popular culture speak of the Four Horsemen of the Apocalypse: Pestilence, War, Famine and Death. Gratefully, for most of us, we will encounter only the last of these. Unfortunately, many more of us risk meeting a different Four Horsemen, those of the Personal Finance Apocalypse.
If we know in advance who they are, we can reduce our risk. As Charlie Munger famously said, “All I want to know is where I am going to die, so I won’t go there.”[REITs]
Behold, the Four Horsemen of the Personal Finance Apocalypse:
- The National Credit Card Debt: One Trillion and Growing
This year total US credit card debt exceeded one trillion dollars. The average US household owes $15,482.00 in credit card debt. Credit card debt is the single most widespread addiction in the US, yet it has no diagnosis, prescription, or rehab center.
But like every other addiction it is very big business. The credit card industry earned one hundred and sixty-three billion dollars in 2016. That’s more than sixteen cents for every dollar of debt — more than 16%. It’s earned thanks to the magic of compound interest, fines and penalties for late payments and, of course, tithing the merchant who is grateful for increased volume and prompt and certain payment, even at a considerable discount. But the cleverest stunt the credit card companies pull off is getting their customers to like them and see them as friends and benefactors — through advertising, image promotion, and cash back “bonuses” and “gifts.”
Albert Einstein reputedly said that compound interest is the most powerful force in the Universe. If you understand it, you earn it. If you don’t, you pay it — which is how most Americans wind up paying through the nose to credit card companies.
Like the Power of the Force in Star Wars, compound interest has a light side and a dark side. The light side is compounding money in low-cost index funds in a tax-free retirement account and enjoying the fruit and the shade of the money trees you planted. The dark side is being indebted to and compounded upon by credit card companies — who can keep you poor all your life and teach you to like it.
Don’t get compounded upon! Pay off your credit card bill each month. Never let it mount and compound. Or, don’t use credit cards at all. Wait and save for what you want. Or don’t buy it. Do you really need it? Did advertising and the madding crowd convince you?
What if you can’t control your credit card use? Two words: shred it.
- Addictions Great and Small
A dog that knocks over a box of treats is not going to do tricks before chowing down. Neither will many people you know. If there’s a shortcut to pleasure, we usually take them. — and it’s easier to buy a lottery ticket than invest for retirement.
It is not difficult to get hooked on easy pleasures, whatever they are. No one is immune, though risk increases with positive family history and mental illness, stress and loss. But addiction is always accompanied by denial. I can stop whenever I want to. I just don’t want to, addicts say. It also goes hand in hand with a moral breakdown. The first casualty of war, said Churchill, is truth, and the same can be said of addiction. Addicts lie, often and well, to self and others.
Addictions have a singular ability to consume income, destroy wealth and suck the life out of a family. In my practice I have seen addiction wreak havoc on marriages, savings, health and careers. How do you defend against it? If addiction runs in your family, be aware of your genetic risk. If you find yourself surrendering, stop. If you can’t stop, or you have crossed a moral line, get help. For alcoholism we use the CAGE model, but it can be applied to any addiction:
- Feel the need to CUT down?
- People ANNOY you about it?
- Feel GUILTY about it?
- EYE-OPENER, i.e. do it first thing in the morning?
Check off any of these four and you may have a problem. Checking all four is considered diagnostic. Most addictions have a self-help group. Join one or see a doctor.
- Failure to Insure, Save, Invest and Diversify (FISID)
According to a recent report on CNBC, 69% of Americans have less than $1,000 in savings. This is a national tragedy and a national emergency. The US Census Bureau estimates that the national poverty rate is only 12.3%. Which means many Americans are living paycheck to paycheck, and not saving.
Maybe they can’t afford to save? I don’t think so.
Saving or spending is a choice. The brilliant writer, George Samuel Clason, in his charming book of quasi-Biblical fables, The Richest Man in Babylon, put this tidy critique into the mouth of his title character, who teaches his childhood friends how to grow rich over a lifetime by setting aside just ten percent of their income: “Now I will tell a strange truth, the reason for which I know not. When I ceased to pay out more than nine tenths of my earnings, I managed to get along just as well.”
We know this is true. When workers have automatic savings deductions they never miss them and live much the same. If they receive them as pay, they spend them.
Megan McArdle, writing in The Washington Post, questioned the widespread belief that medical illness is the cause of at least half of all personal bankruptcies. Digging deeper into the question, she found that lost income due to medical illness was five times the financial burden of the medical care itself.
Meaning the true problem was not facing the risk of illness, death and loss of income before disaster struck. The true problem was not living by traditional values of thrift, not purchasing life and disability insurance (pure insurance, as opposed to complex products that benefit the insurer and not the purchaser), and not living well within one’s means, then investing the difference.
None of us anticipates disability or death intuitively. “Not going to happen to me” is just common-sense denial. Better to heed the wisdom in ”Here’s That Rainy Day,” that wistful ballad with lyrics by Johnny Burke and music by James Van Heusen, made unforgettable by Frank Sinatra:
Here’s that rainy day they told me about
And I laughed at the thought
That it might turn out this way.
- Now I Am Become Divorce, the Destroyer of Wealth*
In my practice of psychiatry I have met many well-compensated professionals and entrepreneurs who have no retirement plan and no wealth despite high income. Typically, they have been divorced, often more than once. Divorce is not a problem solver; it is a problem exchanger and wealth destroyer. And remarriage can often prove “the triumph of hope over experience” as Oscar Wilde calls it.
The best prophylaxes come from one of our Founding Fathers, Benjamin Franklin: “Keep your eyes wide open before marriage, and half-shut afterwards.”
So now that you know the Four Horsemen of the Personal Finance Apocalypse– credit cards, addictions, FISID and divorce, take Charlie Munger’s sage and simple advice: Don’t Go There.
(*)With apologies to the Bhagavad Gita.
Mark Tobak, MD, is a general adult psychiatrist in private practice. He is the former chief of inpatient geriatric psychiatry and now an attending physician at St. Vincent’s Hospital in Harrison, NY. He graduated the University at Buffalo School of Medicine and received a pre-medical certificate from the Columbia University School of General Studies. Dr. Tobak also has a law degree from Fordham University School of Law and was admitted to the NY State Bar. His work appears in the American Journal of Psychiatry, Psychiatric Times, and American Journal of Medicine and Pathology. He is the author of Anyone Can Be Rich! A Psychiatrist Provides the Mental Tools to Build Your Wealth, which received high praise from Warren Buffett. To see Mr. Buffett’s congratulatory note, visit www.marktobakmd.org/anyonecanberich