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The Truth: What Obama and McCain won’t tell you about your money

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After watching the debate tonight, I figured I’d translate what both candidates were saying. Sorry I’m not as politically correct as them, but I hope this is informative.

Things will get a lot harder before they get better.
All the predictions about the recovery taking until “at least the end of the year” are horseshit. In truth, nobody knows, but it would be political suicide to admit that a recovery — whatever that means — will take a few more years. The truth is, nobody knows how long it will take. But if there’s one thing Americans love, it’s a leader pretending to know everything. And if there’s another, it’s that Americans love a quick fix…only to later complain about it not being done right.

Your questions about how “quickly” we can get out of this crisis are misguided.
Sometimes a forest needs to be cleaned out with fire before it can grow again. Again, an unpopular position. Since the government has virtually unlimited resources, it can certainly alleviate the pocketbook pain we’re feeling…but it will come back to bite us in the ass later.

Not all homeowners deserve to stay in their houses.
Renting is a perfectly reasonable alternative, but the idea of Americans “losing their houses” is politically untenable. Why? Because America perpetuates a mistaken culture of homeownership. Owning your own home is the kind of BS sacred cow that got us into this mess: Our parents tell us to buy a house. Our friends are impressed if we own a house in our twenties. The government literally encourages us to own a house by offering tax deductions. Homeownership is the American Dream!

The truth is, if you’re making the largest purchase of your life, you need more than a slogan — you need to take the responsibility to do some research. (And note that you can’t advocate for increased homeownership and also argue for Americans to keep their houses. By not reducing the prices, younger people cannot buy houses at these inflated prices.)

Yes, there was an exceptional amount of predatory lending.
For every blogger who argues loudly about personal responsibility, an angel dies and an Ogilvy executive lights a marshmallow in hell and eats a delicious snack. Wall Street and realtors are also to blame for this. But so are average Americans. It’s difficult to have a nuanced discussion about real estate on the campaign trail, so we resort to cartoonishly simplistic caricatures of things like Wall Street’s corruption. True — but also take a look in the mirror.

Homeowners are delusional about how much their houses are actually worth (see this, too).
As a wise commenter said, “I love the fact that it’s “acceptable/normal” for a home to increase its value by 100% during a five-year time frame, but it’s “unreasonable/impossible” for a home to decrease it’s value by 30-40% during a similar time frame.”

Taxes: Pandering to ordinary Americans instead of telling them to stop spending on stupid stuff
The reason Obama and McCain spent so much time talking about taxes is that most Americans are historically horrible at managing their spending. Since they make a fixed amount of money (revenue) and can control only one thing (costs), both politicans use tax breaks to pander to voters. Most people have never seriously thought about how to make more money. Fine. But what’s even more outrageous is Obama and McCain’s complete lack of honesty about what people really need to do to weather the economic crisis. Did you hear either one plainly say, “You’re going to need to buckle down and save more?” Of course not. You might as well walk into a Dave Ramsey seminar and argue that credit cards are a useful tool. It’s a suicidal suggestion. But it’s true.

Shut up about your money worries unless you’ve taken the time to read a book about how money really works
You need to read a couple of good books about money. Not read the screaming headlines of But a real book that explains how money works. If you don’t, do you really have the right to complain about how scared and nervous and worried you are about your money? (Note: If you want to get my favorite book recommendations, sign up for my free newsletter by Friday, 10/10/08. In fact, I’m giving away free personal-finance books in the upcoming weeks.)

Americans don’t know how to be frugal — yet
Things will get more expensive. Taxes will eventually go up. They have to. Costs of ordinary goods will go up. They always do. If you’re expecting it to get easier, you’re wrong. The key is to make more money and cut your costs. Sadly, Americans are poorly versed in being frugal. You think it makes sense to buy a new car every few years? You think it’s normal to eat out 5 times per week (lunch and dinner)? You feel good about yourself for ordering water when you go to a restaurant, but you blew $50,000 because you didn’t take the time to understand your mortgage? You’re not frugal. But a few more years of an economy like this and things just might change.

Sensible investors don’t change strategies very much — even in a market like today’s
With the market cratering hundreds of points every day — then climbing a similar amount the very next day — billions have been pulled out of the market. Yet long-term investors have the discipline to stay steady. Panicked spouses and overconfident investors think they know better by trying to time the market, but they’re wrong. In fact, here’s an excerpt from my upcoming book:

Recently, a group called Dimensional Funds studied the performance of the S&P 500 from January 1970 to December 2006, during which time the annualized return of the market was 11.1%. They also noted something amazing: Of those 36 years from 1970 to 1986, if you missed the 25 days when the stock market performed the best, your return would have dropped from 11.1% to 7.6%, a crippling difference.

Now, if only we could know the best investing days ahead of time.

Of course, we can’t. That’s why I continue to dollar-cost-average money into the market, slowly. Will it go down in the short-term? Almost certainly. But as my funds get cheaper and cheaper, I’ll pick up more and more shares. And eventually — over a 10, 20, or even 50-year time horizon, I’ll make a significant amount.

But encouraging people to continue investing during times like this wouldn’t be received well. More often than not, politicians need to seem to be doing something — ANYTHING!! — in order to keep you happy. Frankly, with a balanced portfolio, there’s really not much to change. But that’s not sexy enough to tell most people. (Plus, they have no idea what a balanced portfolio is.)

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Sorry if I was too harsh. I’m usually not political, but I’m tired of the bullshit around our money. Every single one of us knows co-workers, family, or friends who are worried about their money. It’s time to get honest about what’s going on. (Want to read more? Check out my popular articles, personal-finance links, and my forum.)

More to come in future posts.

* * *

I’m trying something new: If you liked this, please digg this article.

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  1. Glad to see someone telling it like it is, rather than what people want to hear.

  2. […] A rare article from “I Will Teach You To Be Rich”: Things will get a lot harder before they get better. […]

  3. I live in Europe and one thing that always strikes me about Americans is their refreshing openness and optimism. The other side of the medal is a gullibility that is sometimes staggering to us (at least to me). Of course do politicians say the economy will do better soon, but I am surprised to see many Americans actually buying that. When this piece of theatre started last Fall, it reminded me of 2001, with its gradually worsing, but always too rosy, forecasts by politicians and analysts. I am having a déjà-vu ever since.

  4. […] Sethi from the I Will Teach You To Be Rich blog just wrote a post, The Truth: What Obama and McCain wont tell you about your money, talking about some things that neither presidential candidate will tell the American people about […]

  5. It’s a sad state of affairs when truth will kill a political campaign but lies and pandering will boost it. I know that’s the definition of politics but it still bothers me. I just want people to learn to think, but I guess that is too hard for most pepole these days.

    BTW, just recently found your blog, and so far I love it. Finally a straight shooter in a world of half-truths and lies.

  6. Bravo. It’s time for a dose of reality. Pandering baloney is what got us here. Who would have thought that giving a $700,000 mortgage to a gas station attendant was a bad idea?

  7. I agree that is time to tell people what is actually going on rather than trying to back-up what they are seeing in newspapers. That may make them feel smarter, but it won’t help them any.

  8. There is absolutely no reason why every American family should be able to afford to buy their own home. The current financial problems have arisen because the banks purposely created a credit society causing the price of everything to be unjustifiably inflated making it necessary to borrow to purchase most significant items.

    We must never forget that those Americans who make and grow things, no one else, create all the real wealth. It’s ironic that this group of people have to borrow to buy the things they made in the first place.

    A house can be built by a dozen building workers in a month, the cost of materials are roughly the same as the labor cost. So why should it take 30 years for one of the same building workers to pay for it. Moreover, don’t say it’s the cost of the land; this was inflated by the banks ‘credit society’ scheme.

    Forget all the details; the real problem with the financial system is that there are just too many people on the financial sector gravy train. The people who create all the real wealth just can’t support them all anymore.

    By all means sort out the whole sorry mess by bailing out the financial institutions, but be sure to make some radical changes to the system when the dust settles.

  9. This is exactly what I was thinking while I was watching the debate last night! They’re too afraid to tell Americans the truth because they’d lose too many votes. I especially liked it when Obama said that we (average) Americans have done our part cutting our expenses and he understands we’re upset about the bailout. I’m fairly certain the average American hasn’t truly cut their expenses to a prudent level given their particular incomes. But oh well, at least he makes us feel good about ourselves. Right? 😉