I Am Completely Worthless

Posted By CameronDaniels Last updated September 11th, 2012 22 Comments

Worthless at last! Worthless at last! Thank God Almighty, worthless at last!

Bells are ringing! I am finally worthless!

With my paycheck today my net worth has finally passed the literal and psychological $0 barrier. My financial leverage given a net worth of $1 is about 45,000-to-1. Let this be a lesson to everybody: massively over-leveraged financial positions can only end positively. Look at Long-Term Capital Management, MF Global, Bear Stearns and AIG: their executives still managed to escape with millions of dollars! (/sarcasm)

What now?

In all seriousness, my next financial move is to buy a house, even before I pay down my student loan debt. Yeah, that’s right. I am buying a house while I am still worthless. I have many reasons for this decision including, but not limited to: tax considerations, high rent-to-purchase ratio, a hedge against inflation, to further leverage myself (recent college graduate) and many others. I have heard arguments for and against this decision and have weighed it carefully so let this be caution to those who will comment about how much risk I am assuming. As an asset/net worth poor individual with too much cash flow, the need to leverage myself into higher net worth is one of my most pressing personal finance goals.

Why am I buying a house while I still have debt?

The bigger reason I am writing this article is (as I am certain our friends at 6400 Finance, Financial Samurai, Control Your Cash and Iam1%will agree) to claim a strong distinction between personal finance bloggers and debt bloggers. There is a dangerous undercurrent in much of debt blogging and personal finance blogging recently that involves a knee-jerk reaction to any suggestion or embracing of debt. Whether this starts with Dave Ramsey’s assault on any type of debt no matter what or improper usage by a few companies and individuals I am not certain. I do know, however, that many self-proclaimed “personal finance” bloggers revolve 99% of their their writing around their budget and debt countdown. While I do agree this is an important aspect of a holistic personal financial tapestry, it does not weave together many of the intricate strategies for wealth management. To this not-so-humble writer, personal finance entails economics, politics, taxes, estate planning, real estate strategies, career advice, educational opinions, investing, retirement AND debt advice. A personal finance “blog” that does not deal with any of the other aspects of personal finance is false advertising.

Leverage helps grow net worth faster but at higher risk

So, allow me two claims:

Personal finance blogs unite and draw a distinction between, on one hand, an engrossing holistic study of personal finance and, on the other, simple debt blogging about how much you can’t wait until you save enough money to buy a car
Net Worth = Assets – Liabilities

The only reason I point out number 2 is to show how net worth does not only exist when liabilities equal zero. Of similar note is that CASH FLOW IS NOT ASSETS, there is a difference between stocks and flows, and leverage/debt is frequently used by individuals and companies responsibly and to great cause. Especially in an infancy or growth stage. Can you imagine where McDonalds or WalMart would be today if they had not financed a significant portion of their expansion through liabilities and leverage, even in such a low-margin industry! Where would they be if they had to wait to build up retained earnings to even construct ONE more store?

Long story short: cash-flow rich with liabilities does not necessarily dictate a need to pay down liabilities.

Cheers,

Cameron Daniels

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Filed Under: Debt, Investing, Personal Finance, Real Estate Tagged With: conforming mortgages, Debt, debt bloggers, leverage, liabilities, mortgages, net worth, Personal Finance, personal leverage

Darwin’s Money

With interest rates this low and bargains aplenty, it’s not a bad move to buy a home at all, as long as you don’t anticipate having to move in the next several years.
Darwin’s Money

With interest rates this low and bargains aplenty, it’s not a bad move to buy a home at all, as long as you don’t anticipate having to move in the next several years.
http://twitter.com/Yakezie Yakezie

Cameron, I missed your story earlier. If your NW is 0, which is a cool play on words in the title, how do you buy a house? Sam
- CameronDaniels
  
  My down payment that I am saving up (still probably three months away) counts as part of my assets that balances my debts to 0. My income is sufficient that mortgage underwriters will approve most of the mortgage options.
  
  In short, if I bought a house today, my debt outside of the mortgage would equal my equity in the house + the values in my retirement accounts/other savings.
http://www.thebudgetingtool.com/ Mochi & Macarons

I am only against buying a house for 3 (mostly personal) reasons –> 1) I am not really planning on staying in one city.. even country for a long period of time. Am still deciding that, don’t want the complications of being in another country, owning foreign property just yet.

Otherwise, I’d buy a place only to rent it out to people.

2) The houses in North America are badly made. By that, I mean they aren’t made out of real brick and stone, but all I see is basically what IKEA furniture is made out of, being used as the structure of the house.

As a result, you pretty much pay for the house twice, especially with a mortgage not to mention the maintenance. In contrast, houses in Europe are in stone, and last through generations upon generations.

3) I am planning on buying the house where I’ve decided to live in cash, when I finally go to retire. This will be possible, seeing as most of my money will be in retirement funds, investments and in cash, not tied up in a property.
- http://www.dqydj.net/ PK
  
  On #2 – that comes with caveats. It also depends on the builder, and the area. You couldn’t get away with masonry in the Bay Area, for example, and even my house (from the 70s) has hairline cracks in the fireplace from far away quakes.
  
  Second point, energy efficiency. Again, not a huge concern in the Bay Area (I do have central air), but compare even a 2×4 wall at an R-value of ~10 versus masonry, where even a 12″ stone wall still only gives you *maybe* an R-value of 1. You can get 2×6 framed walls in a custom home if you desire, bumping that to probably R 13 or 14. Cameron, being in Texas, probably cares a bit more about that – A/C isn’t an option when it’s 110 for weeks at a time (ha).
  - http://www.thebudgetingtool.com/ Mochi & Macarons
    
    Interesting.
    
    It is definitely based on the area then. I’m used to houses in Canada, (specifically Ontario/Quebec), and it appalls me at how easily they break down and need maintenance after 5-10 years, compared to houses in Portugal, Spain and France.
    
    My sibling’s NEW HOUSE had the whole 2nd floor collapse after 3 weeks.
    - http://www.dqydj.net/ PK
      
      Watching as much Holmes on Homes as I do (I know, he’s not the *best* GC, but he does know a lot) I can’t disagree on Canada. As a general rule of thumb, anything built in the last few years of a housing bubble (or a bubble run up) had corners cut to get it on market. Think drywall leeching sulfurous gasses (so-called ‘Chinese Drywall’, which doesn’t apply to ll imported drywall from China).
      
      I think you’ll be paying for different house different ways. If you custom built a 2×6 framed house today you’d be paying upfront, even with all of the advances in insulation. Masonry based houses can’t stand shifts in the levels of your foundation and will leech heat and cooling. As with all things: tradeoffs, haha.
      
      If you do end up looking in North America, take a look at Building Science first. I learned a ton from them, and even rebuilt a few (interior) walls to their specs.
      - http://www.thebudgetingtool.com/ Mochi & Macarons
        
        My experience with Canadian homes has really soured me on houses in general. The only property I’d consider buying if I wanted to stay, is a condo.
  - http://www.americandebtproject.com/ American Debt Project
    
    PK- I swear we have the same mind. I just wrote my comment above and see you wrote the same basic idea as me but with more explanation.
    - http://www.dqydj.net/ PK
      
      Haha, I defer to your knowledge!
      
      I think you’d like my home though. We looked at 60-70 homes before ending up with this one and I would say 3-5 would be ‘okay’ on the East Coast (I grew up in Rhode Island in a ‘California Style Ranch’, which, as I now know, was anything but: 3k+ SF and a basement.)
      
      We’re 2×4 construction – which I don’t have an issue with, it’s just a less energy efficient than those 2x6s spaced 24″ on center (16″ less room for insulation, more thermal bridging). Still, in an earthquake, I would much rather be in a stick built house than masonry – that doesn’t change. Let’s call 2×4 vs. 2×6 a con.
      
      The pros? Vinyl (not many in our neighborhood), 18″ overhangs, slab in good shape, house-wrap, cement board, and 20″ of fiberglass blown into the attic. This is also the only neighborhood where people had good things to saw about the builder. (Know anything about them? This house was built in the 70s, so just the fact they’re still around is encouraging.)
      
      But yes, I saw so much horrible construction on house tours. There are some nice homes in the Bay Area, but the vast majority of homes are cheaply built ranches. Caveat emptor!
- 101 Centavos
  
  I’ll take a bit of an issue with European houses being made for generations. They also need maintenance, and *expensive* maintenance at that. Real brick and stone need mortar replaced, tile roofs shift and move and need specialized labor to repair, and stuccoed walls need repainting as much as Masonite siding. Throw in the professional fees and permits mandated by local governments, and we go very quickly from DIY realm to paying through the nose. If I sound a little petulant, it’s only because I have a crew starting work this week, and my wallet is hurting. Perhaps the subject of a future post…
  - http://www.thebudgetingtool.com/ Mochi & Macarons
    
    I’d love to read it!
    
    As I mentioned, I’ve been soured on Canadian homes because I’ve seen firsthand what kind of CRAP they put inside as the structure, and seeing my sibling’s NEW house collapse after a few weeks. It’s just appalling.
    
    (And it’s a million dollar home, which made me even more disgusted at its construction)
    
    In contrast, I know many in Europe who have homes out of stone, and they’ve been using them from 2 generations ago. Yes, there’s maintenance involved, like in fixing the tiles on the roof, cracks in the wall, but they said it you’re proactive, it doesn’t get bad. Stitch in 9, and all that.
    
    But maybe it’s a cultural thing. They’re more honest (perhaps) about building a proper home for your money, rather than trying to maximize the profit out of your home by putting in junk, but charging you a million for it.
    - http://www.americandebtproject.com/ American Debt Project
      
      Mochi: I’d say it depends on where you live. Craftsmanship in California is awful. Everything is a hack job and people use 2x4s for wood frame construction. Contrast that with 2x6s up to 2x12s on the east coast, better materials, and people who actually know how to caulk properly. I will never buy in one of these Shea/KB Home/Pardee subdivisions, but if you know builders and can build your own home, I much prefer American to European construction. Also, another East/West thing I don’t understand, why don’t we use vinyl siding on the West coast? It’s durable and looks great versus stucco that cracks and splinters after a year. I’ll have to ask my residential builder friends…
http://twitter.com/familymoneyblog John Preston

I too am talking about net worth today, but instead, I’m discussing all of its lies.

Congrats on getting down to zero. One day I’ll get to zero myself. It should be noted, since you made it a point about frugalistas versus income over-achievers, that the biggest factor working against my massively negative net worth would be my investments in my families’ retirement accounts. It has done far more to boost my net worth than paying down debt. Far, far more.
AverageJoe

Agreed, but having a handle on your debt service ratio and a business-like focus on your leverage strategy is important. Because most people fail to have either, I think it’s better for the average guy to focus on “no debt.”

I used to believe the opposite: people could learn to understand that debt is a tool. Call me jaded, but that’s a message for me to understand and others to ignore.
TimelessFinance

“There is a dangerous undercurrent in much of debt blogging and personal finance blogging recently that involves a knee-jerk reaction to any suggestion or embracing of debt.” True story, good article, and congrats on accomplishing a positive net worth.

If you were a Canadian, I’d call you a straight-up idiot for buying a house right now (we have a massive bubble going on). But you’re buying in America. I shouldn’t generalize, but I don’t know enough about local markets, so I’ll say it’s a great time to buy and, despite your debt, you should. I will say, however, that you should consider a multi-plex so that your house becomes an investment rather than just an asset.

That’s another important distinction come to think of it:

An asset is a store-of-value. Anything can be an asset. Carrots, art, gold, money, etc. An investment is an asset that earns interest, dividends, or rent. Obviously, a personal home earns none of these. You might be able to lower your cost structure but, even still, an investment that also lowers your cost structure is even better.
http://dumbpassiveincome.com/ Matthew Allen

What if you take Robert Kiyosaki’s (Rich Dad, Poor Dad) approach and consider a house a liability rather than an asset? Then, you will not only be worthless when you own a home, but you will also be worth less!
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I Am Completely Worthless

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