Hollowed Out Economy?

How do you hollow out a company or an economy?  By loading it up with debt.

Mitt Romney's Bain Capital, the Mohegan Sun, your Home Equity Loan, and your Parent's reverse mortgage, all have one thing in common - they are ways of hollowing out companies, lives, and our economy, by loading us up with debt.

In the not-too-distant past, we actually owned things in this country - our houses, our cars, our factories, our lives.   When someone got a car loan, it was for 24-36 months.  The 72+ month car loan simply didn't exist, nor did leasing, outside of the commercial arena.

Similarly, when you bought a house, you got a mortgage, and then you paid on it until you sold the house or paid it off.  The idea of refinancing again and again to get a better interest rate simply didn't exist, because rates were stable.  And the idea of taking money out of your home to spend was just not done - you would need that money to make the down payment on your next house.

Similarly, companies were not laden with debt, and often actually owned the land and factories they operated from.  A company was worth money because it made money, and it also had some actual liquidation value, more than pennies on the dollar.  GM's factories were an asset, not a liability, back then.

Today, it is very different.  We live in a debt culture, and during the last two decades, we have hollowed-out our lives, our companies, and our economy, all so we can go on a spending spree.

The antics of Bain Capital are well known.  You buy a company, load it up with debt, and then take the money before the thin shell of the company collapses in your wake.  The secret is to be out of the shell before it collapses.  The Bains of the world are risk-takers, just as those companies that implode buildings are risk-takers.  But strictly speaking, they are not creating wealth, just destroying and making a profit from destruction.

In your personal life, this hollowing-out has been a trend that has accelerated in the last two decades, culminating in our recent economic meltdown.   People like to blame Bush, Obama, the Republicans, the Democrats, or the "Wall Street Fat Cats" - and certainly all of these people have a hand in things.   But the greater conspiracy is what I call the conspiracy of 330 million people - which was the actions by all of us in hollowing out our own lives to satisfy the now while sacrificing the future (or simply not thinking about it).

So, in the 1990's and 2000's, people went on a refinancing orgy, taking out cash or getting lines of credit and buying "stuff".  Why not?  Property values and stock values were climbing - so why not "cash out" some of that money and have a party?

Problem was (and is) that taking out loans is not "cashing out" but merely borrowing.  No one wanted to sell their stocks, as they were locked into 401(k) plans with hefty tax penalties.  And why sell, when the market is doing so well?  Why sell the house when it is going up, up, up in value?

So instead, we borrowed against these inflated assets, and the result was catastrophe, as the value of the inflated assets sank back down to where they should have been (and then kept going down) while the loan balances remained and the payments were still due.  People's lives collapsed, as the thin, hollowed-out shell lacked any real support.  But for a brief time, this hollowed-out shell certainly looked impressive.

Old folks were encouraged to take out "reverse mortgages", which I have written about before.  These served to hollow-out their retirement, as it took their largest remaining asset, and then loaded it up with debt.  Their net worth plummeted, while their immediate cash-flow increased.

 Many others entered retirement with traditional mortgages, car payments, and credit card debt, relying on their pension plan to pay for it all.  A great plan, until Mitt Romney comes to call, and Bain Capital "hollows out" your pension plan, leaving you with 40 cents on the dollar, and a dollar's worth of loan payments to make.

What is worse is that many financial advisers still feel that hollowing out is a good strategy.  They believe you should tie up all your money in stocks and never pay off your mortgage.  So you are heavily invested in the market, but also heavily in debt.  What happens is, well, 2009 happens, and it all goes horribly wrong as the debt remains and the stocks drop in value.   But the financial adviser collects 5% either way.

Have you hollowed out your own life?  What is your net worth?  Do you actually own anything?  If you have loan payments due on everything in your life, chances are, you are hollowing yourself out.  And it never ceases to amaze me how some folks do this.

The other day, I was talking to a fellow with a BMW X5.  He was commiserating that he had to spend $3000 on repairs at the mechanic (my mechanic labor cost to date:  $0 - you can't own decade-old BMWs and not know how to use a wrench).   But what amazed me was that he said, "Well, I only owe $3000 on the loan at this point."

A loan?  On a 12-year-old car?  What's the point of that?  And what was weirder was that he owned four cars, one of them an exotic sports car, and owed money on most of them.  And yes, he complained about being broke all the time.

Just a simple thought:  How about owning ONE car and actually owning it?  The cost savings, in loan interest, collision insurance, registration fees, repair bills, and the like are staggering.  In fact, they are enough to go out and OWN a second car.

But he was hollowing out - borrowing more to have more, when he could own outright for a lot less.

It is tempting to hollow out - you get "more" up front, in terms of shiny cars and jet skiis and vacations to exotic destinations.  But long term, you suffer - and suffer greatly - for it.

Free Furniture

Most folks buy furniture on time.  Really stupid folks rent-to-own furniture.  Really smart people get their furniture for free.  How can this be done?  Buy quality furniture!

The other day, driving through rural Florida, I nearly drove off the road when I saw that stupid Aaron's dog on a billboard, with the caption, "Credit is hard, renting is easy!"

Ouch.

It reflects the mentality that furniture is "expensive" and that the only way to get a chair or a television is to borrow money.  And this is sad.  Because furniture should be free.

Free?  Yea, you bet.  If you look at the overall transaction costs and not just in terms of monthly payment.  Let me explain.

Most of the crap you buy in life is just that - poorly made junk that is worth pennies on the dollar the moment you purchase it.   You use if for a few years, and then throw it away, adding to our landfill problem.  Or, if you are a hoarder, you keep it, on the premise that "you paid good money for it" and thus cannot bear to part with it.

So those old Aeropostal shirts hang in your closet, worn out and hopelessly out of "style" and worth maybe 25 cents at a garage sale, when you paid $29.99 for them new and wore them maybe a year.

It is a huge loss, in terms of depreciation.  And sadly, most folks think this is how every purchase is - and should be.

In the realm of furniture, most Americans buy crappy furniture made of particle board - and many finance it on  consumer loans or credit cards.  The furniture rarely outlasts the payment terms, and eventually, that pink velour sectional sofa ends out at the curb, stained, unloved, and with the padding all coming out, waiting for the trash truck.

And Mr. and Mrs. America go back the loud-advertisement furniture store and buy a house-load more of this crap.  Repeat ad infinitum.

I had neighbors like this, in Connecticut.  They went to the place that advertised on the radio and furnished the whole house on credit.   The wife was so proud of their faux suede leather sectional and chrome ball lamp, as well as the glass coffee table with chrome legs.  It all looked so modern and clean!  And she would make us take off our shoes before we went into her show-room like living room.  It was a status thing (white trash status, but status nevertheless) and every month, they sent off $99 to the finance company.

10 years later, they had none of that furniture.  The faux suede did weird things after about three years, and its particle board and cardboard frame, stapled together, started to come apart after repeated sittings.  And the cushions started to take a set and the cheap chrome on the coffee table started to corrode and peel and the glass scratched.  It all went to the curb or to goodwill, and they went out and bought new crap.  Well, after the divorce, I am sure she did, anyway.

Is that really a good value, in the long run?

But, suppose that you bought a piece of furniture that was well-made, but not flashy.  And you had it for maybe a decade.  Maybe 20 years.  Maybe a lifetime.  And after all that time, the piece of furniture was worth, well, about what you paid for it, maybe more.

The overall transaction cost is zero.  When you decide to sell the furniture, it is worth more than you paid for it.  It is less an expense in life, than an investment.

How can this be done?  Well, for starters, by not buying crap furniture from those loud furniture stores which sell trendy crap that is poorly made.  How do you know what kind of stores these are?  Look for the big ads in the newspaper and loud ads on the radio and TeeVee.  Right there is the police tape marking off these places as raw deals.

Second, don't be in a hurry.   IKEA and many crap furniture stores sell the idea of "having it all now" - furnishing your entire house in one fell swoop.  IKEA is famous for its "This entire room!  $1999!" ad layouts.  The loud furniture stores are famous for their "bedroom suits" and sets - entire "combos" of "matchy-matchy" that you can plop down and start making payments on.  But none of this rarely lasts.

Most of our furniture today is from Stickley.  It is solid quarter-sawn oak which is strong enough to jack up a car on.  Every damn piece of it.  And over time, it holds its value, significantly.  Since it basically can never wear out, you will have such furniture for the rest of your life.

Now of course, that kind of furniture is expensive to buy.  A simple Morris chair can cost a couple of thousand dollars.  But again, since it holds its value, over time, it ends up costing little or nothing in the long run.   Such a chair will easily outlast 5-10 $499 recliners in your lifetime.  Which is really cheaper?

"But," you say, "I have no cash!"

Well, relax.  There is no need to furnish an entire house all at once, and in fact that is one good argument for owning a smaller home.  Many people go into debt trying to furnish these mini-mansions, and end up with room after room of crapola furniture.

You are better off saving up for quality furniture, one piece at a time, than going into debt to have rooms full of crap, now.

And yea, I have had to sleep on the floor while saving up to buy a new bed.  And yea, even fairly recently, too.  But I would rather pay cash for a good bed, than go into debt for crap, just so I can say I "have it all now."

Quality furniture can also be had, secondhand, at some attractive prices.  And over the years, we have had a number of pieces that we bought at "antique" or "junk" shops, which were well-made hardwood pieces that lasted decades.

However, you have to be careful shopping in a "junk" shop, lest you buy junk.  Buying someone's clapped-out particle-board furniture is never a good bargain.   Just walk away from that sort of crap, entirely.

Similarly, never buy an "antique" piece that has wobbly legs, delicate caning, or looks as if it will fall apart with any sort of use.  Fragile antiques are not functional - leave those behind.

And no, you can't "fix" broken antiques.  If you see a chair in a shop with a bad leg, chances are it will always have a bad leg, and if you examine it closely, you will see where some other poor fool tried to "fix" it earlier.

Our dining room "set" is an example of such a find.  The table was free - a family piece that was sitting unused in an attic for many years.  It is 12 feet long, and the top is made of two planks that are 2" thick and 16" wide, each.  You just don't see pieces of lumber like that very often these days.  It has two large carved pineapple bases and is strong enough to support a car.  It is very old and has many scars, but it also has character.  And it is worth some money and has appreciated in value over time.  Even if we had paid for this table, it would still be a positive cash-flow deal - it would always be worth more than we paid for it.   It will never go to the curb as a pile of broken twigs, like the laminated crap that sell at Joe's Discount Furniture Outlet.

Along the back wall, we used an old church pew for seating.  We paid maybe $200 for this pew and paid another $100 for a cushion (at churchpewcushions.com, I kid you not.  Where do you think the church's get their pew cushions?).  On the other sides of the table, we have a set of eight solid-oak chairs that are from the 1940's and appear to have been from a school or office.  These are solid chairs, not rickety or wobbly.  I think we paid $200 for the set.

Someday, we will likely downsize to a small retirement home, and a 12-foot dining room table will be out of the question.  And when that time comes, we will sell the table, the pew, and the chairs, for far more than we paid for them.

Free furniture.  It ain't that hard.

And so on, down the line.  Good quality furniture lasts forever, and you can buy it new or used.   But junk falls apart, and you keep having to buy it, again and again.  The rich buy quality, and keep it forever.   The poor buy junk, over and over again, and remain poor.

It is like the parable about the cardboard soled shoes.  Poor folks, back in the day, would buy pair and pair of cardboard-soled shoes, even though they rarely lasted more than a few months.  A simple pair of leather-soled shoes would last 10 times as long but barely cost twice as much.  But the poor look only at purchase price not the overall transaction cost.

Which is why they are poor.

Now don't get me wrong - you can't consume your way to wealth.  If you read this article and use it as an excuse to go out an buy all-new furniture, you are entirely missing the point.

But it pays to look at overall transaction costs - the back end as well as the front end.  Most people look at purchase price on items, and then fail to think about overall value, in terms of cost of ownership as well as depreciation and eventual resale.  And this is probably because most stuff you buy has no resale value at all even after only a few months.

But some things do hold their value.  And quality furniture made of solid wood, with timeless styling, is a case in point.

Solid wood, solid leather.  This chair will last decades, if not a Century.  But beware, the cheap furniture stores are starting to sell poorly-made knock-offs out of particle board and veneer.

Shit Happens

Accidents happen.   People drive poorly.   Expect this and don't act shocked.  Take steps to minimize your own risk.

If you go through life being perpetually surprised by bad things, life will suck for you.  Expect the worst and plan for it.  If it doesn't happen, then good for you.  If it does, you can at least ameliorate the outcomes.

I was perusing YouTube the other day, and bicyclists like to post videos of themselves being hit by "inconsiderate" drivers, even though, in many of these videos, the bicyclist is running stop signs, red lights, zooming across crowded crosswalks, etc.  And in a couple, at least, it appears the bicyclist intentionally rams into the car in question, without any attempt to slow down or swerve.

And yes, in many cases, the car is "at fault" because they did not see the cyclist.  But the cyclist is also "at fault" for not expecting the car to not see them.  Driving well means to drive defensively.  What does this mean?

It means that at every intersection, you should expect someone to run the red light.  At every driveway, you should expect someone to pull out in front of you.  In a crowded residential neighborhood, you should expect a small child to dart out in front of your car.

And you should slow down and have a "plan B" - an escape route or sufficient stopping distance.  Because if you rely on other drivers being perfect all the time you will get into accident after accident.

If you prepare for these things, you may be able to avert a horrible accident - most of the time.

But many people prefer the other course - when it comes to driving and to life.   They want to blame things on others in a causational model.  "If the other guy had looked out, the accident wouldn't have happened!" they cry.  But then again, if you had seen the other guy and thought, "Gee, I'll bet he just pulls out in front of me, what would I do them?" - and have a contingency plan - you could have avoided the accident.

And in many States, this indeed is the law - the concept of only one person being "at fault" is disregarded for the spurious nonsense that it is.  The person who had the last chance to avoid the accident - and failed to do so - is also partially to blame.

So in these videos, where cyclists zoom through crowded city streets at high rates of speed, is it entirely the car's fault there is a collision?  Or perhaps if they slowed down an anticipated the other fellow doing something stupid, they could have avoided the accident?  Or maybe, just maybe, riding a bicycle in a crowded city is just not a very smart idea - the law of probability will catch up with you over time, and it won't make a rat's ass of difference whose "fault" it is, when you are in a wheelchair.

"But I was in the right!" they scream.  And that is a very immature attitude toward life.  Because, as the saying goes, you can be right - dead right - and it doesn't matter, because you are dead.  And after decades of riding motorcycles and bicycles, I realize that whining about how bad car drivers are is sort of stupid.  You have to expect them to be bad drivers - because let's face it, they give anyone a license these days.  And that means you have to expect that dude to change lanes or make a turn without signalling - and not ride in his blind spot where you will plow into him.

In your financial life, shit will happen also, and I have commented on this before.  Bad things happen, and yea, you can argue it is "someone Else's fault" or you "had a patch of bad luck."  In all these financial sob stories you see on TeeVee, the Clem they are interviewing always has a laundry list of reasons why his financial situation is beyond his control.   But then they pull back and you see that this guy who wants our sympathy has a monster truck and a bass boat parked in his yard - and no savings in the bank.

Driving defensively can keep you out of accidents.  When you approach an intersection, a driveway, or whatever, expect someone to pull out or fail to stop or break the law, or whatever.  If you expect the probable then you are less likely to get into an accident, regardless of the other guy being "at fault".

Similarly, in economics, if you set up your finances so they can survive various random disasters and setbacks, you are more likely to survive financially.

Unfortunately, most people in this country life "paycheck to paycheck" - and are proud of it (at least from the way they love to go on TeeVee and brag about this).  Every penny they earn is spent, and most of it on stuff they don't really need.   When that paycheck goes away (which is someone else's "fault" of course) then the whole carefully balanced machine wipes out.

It is akin to driving the speed limit down a busy street lined with cars and just hoping that everyone obeys the laws, looks both ways, and no one pulls out in front of you or does something stupid.  You are putting your fate in the hands of others, and the outcome is all-too-predictable.

And whose "fault" is that, really?

* * *

Portlandia has a great video spoofing these aggressive bikers.   It also pokes fun of the whole "Fixie" trend, which is idiotic (style over substance).   Riding a bicycle and then acting shocked that there are cars out there is rather foolish.  Expect the expected.

I miss my Kodachrome

Digital Cameras are a technical improvement over film processing.  But from a social and interactive standpoint, they are a disaster.

As I noted in an earlier posting, one thing I realized, over time, was that trying to "record" events for posterity is an utter waste of time.  I realized this years ago after buying an 8mm Camcorder and discovering that I was experiencing my vacations through a viewfinder.  Moreover, no one really wanted to see the resultant videos, and they sat on a shelf.  And thanks to annual format changes, I am not sure I could even view them, without investing in some hardware - if the electronic images are not already lost for good.

What I realized is that it is better and easier to just experience things and thus enjoy real life, rather than try to record them and re-experience them later on.

My Mother left behind a closet full of 35 mm slides, taken all through her life.  During my youth, she would occasionally show the slides on a projector screen, and she and my Dad (and my siblings) would try to remember who was in the picture, what the event was, and why.  And like family photo albums or photos that are not labeled, once the principals in the photos die off, they become meaningless artifacts.  If you are going to keep this crap, at least label it.

Whatever happened to her 35mm slides and our old 8mm home movies, I do not know.   Does anyone watch them?  Probably not.  Does anyone care?  Doubtful.  After so many years, everyone's home movies look alike.

And in my lifetime, I have accumulated photo albums of old-fashioned photos, which document a lot of trivial events in my life.  No one looks at them, and I doubt even I will.  Once you've gotten over the "Gee, you weren't so fat" and "Gee, you had more hair" and "Were we ever that young?" the fun kind of wears off.  And these albums occupy an entire storage tote as large as a child's coffin.

Enter digital cameras.  Initially, these seemed like a great thing - freeing us from the hassle and expense of buying film.  And now we could store these images digitally, which would take up a lot less space.  But instead, other things have happened.

To begin with, since there are no film costs and there is no incremental cost to taking a picture, we end up taking five or six of the same shots, hoping to get "a good one" out of the bunch.  As a result, taking a photo, particularly a group photo, is an ordeal of "hold it" and then pressing the button (and not the wrong button, that turns off the camera) and then waiting for the exposure and hoping no one moves in the interim.

"Wait!  Let me do that again!" is a phrase that is sure to elicit groans from the crowd.

And you don't want to use the flash.  It takes forever to charge, drains the batteries within a few shots, and tends to produce pasty-white, washed out photos that are staggeringly unattractive.

But then you get the camera home and the fun begins.  Uploading the photos is a chore - and many folks have no idea how to do this.  Photos end up being stored in hard-to-find directories with cryptic titles, like ECD465821290 which of course, was your family vacation photos from last July (You didn't know that?  Idiot!).

And of course with Windows, you have to figure out whether they are stored in "Pictures" under your user name or in the "Public" directory.  The net result is you can't find a damn thing and are left with this vague feeling that there are lost photos somewhere on your hard drive.

Many folks, of course, do not make copies onto other hard drives or back up their hard drives, or upload their photos to the Internet (about half of all Americans, make that 70% don't know how to do any of these things - even how to copy a directory from one location to another!).  So when the hard drive fails (and they all fail, eventually) they lose all their photos.

Now you've got your photos on your hard drive.  How do you view and edit them?  Use Windows' poorly thought out and planned photo editor?  Or use some other proprietary program?   Of course, the first thing you have to do is go in and manually rotate all the photos you took in portrait mode, because most digital cameras don't figure this out automatically (geez, you'd think a simple microswitch could deal with that - it works on an iPad!).

Then....what?  Displaying photos on your computer is OK, if you have a good sized monitor.  But suppose you want to show others?  So you go out and buy a digital photo frame, select pictures, upload them, and then create a slideshow.  That's fun, I guess.   Or you can go online to webshots, Picasa, or even facebook, and create albums to share with friends.

What ends up happening, of course, is that 3/4 of the photos you take, you end up throwing out.  And you lose interest in editing,  cropping, and color adjusting the rest of them.  Photography, as a hobby, really has been killed off by the digital camera.  And what kills it, is sheer boredom.

So you want to print out a photo.  Well, the inkjet printer is to the rescue - making photo-quality copies at only 2-3 times the price of photo processing.  But if you are an artist, you can make incredible art with these things.  Problem is, everyone seems to have "done" the "color adjusted" inkjet photo with the weird super-chroma colors.  It is a tired trope at this point - having oranges, reds, greens, and blues "pop out" of a photo like a cartoon.  What ever happened to Black and White?

The old model of film-and-camera, even with Polaroid, was, in some aspects, better.  Why?  Because we didn't have so many choices.    You aimed the camera, pressed the button, and hope you got a good shot.  Even professional photographers had little to do, other than to set aperture and exposure, select film speed, and perhaps do some work on the developing side.

About the only upside of the whole thing is this:  I don't have to add any more physical photos to that tomb in my garage.  They can all go on the hard drive and then evaporate from there.  And perhaps they will continue on, into eternity, on webshots or Picasa, long after I am gone.  Not that anyone will look at them then, either.

Shopping for a Living

Question (a simple question):

If chasing after discounts, coupons, cash-back bonuses, frequent flyer miles and all that other junk was such a good deal, why not quit your job?

Think about it.  If you get 10% off on a purchase, then it would make sense to purchase $100,000 of goods, sell it for $95,000 (a discount off market value) and then pocket $5000.   You'd be rich in no time!  Do this once a week, and you'd make $250,000 a year.

If this were true, we'd all quit our jobs and then shop for a living, living off our bonus coupon discounts and such.

The Answer?

Well, the goods are not worth $100,000.   They were only worth $90,000 - which is their actual market value.  You could not re-sell them for even a 5% profit.

The price you pay, with Bogos, rebates, coupons, and all that other crap is just the market price.  You only think you are saving money by comparing your "discounted" price to some fake "retail price" that no one pays.


However, the psychological inducement of the "bargain" does encourage you to spend more and also make purchases you might not otherwise make - which negates any real savings.

Don't let the carnival distract you.

Pay the lowest possible price, of course.   But don't think for a minute that these gimmicks are anything but gimmicks. 

90% OFF SAVINGS!

When someone tells you that by spending money, you are SAVING!!!! (usually with exclamation points) you should be skeptical.

You can't spend your way to wealth.   You cannot eat your way to slimness.

This article on MSNBC illustrates an extreme example of this concept.

A retailer can show "90% off SAVINGS!!!" on a bottle of ketchup by claiming that the retail price on a bottle of ketchup is over $100.

But it is just using a specious price point as a reference.

Savings - in terms of discounts from fake target prices (that no one ever pays) are not savings.

Just remember:  Savings are something you put in the bank.  Anything else is SPENDING.

Don't be deceived.   You cannot spend your way to wealth

 How you spend is not going to make you wealthy, just as how you invest is not going to make you wealthy.

Saving makes you wealthy.

Predicable Outcomes

When you see a kid riding down the street at 80 mph on one of these, with no helmet and no protection, other than a t-shirt and sandals, you have a pretty good idea of what the predicable outcome is.

Predictable outcomes.  This is, perhaps the difference between youth and old age.  As a youth, we tend to look at events in our lives as a series of causational chains.  "But for" some intervening event, bad things would not happen.

So to a kid riding his crotch rocket at 70 mph in the city, with no protection other than a t-shirt (which is riding up to show that all-so-important lower-back tattoo), the cause of the accident is the lady who turned left in front of them.  In the intensive care ward - or at the funeral - the kid (or his friends) will say, "Gee, didn't that lady SEE the motorcycle!  She is to blame for little Joey's death and/or dismemberment!"

But an older person, having ridden enough motorcycles, fallen off of them, or having been hit by a cop (yes, it happens), realizes that the old-lady-turning-left-in-front-of-the-motorcycle is not some weird unpredictable outcome but rather almost a preordained conclusion.  You ride a motorcycle, someone in a car will hit you, plain and simple.  Maybe today, maybe tomorrow, but eventually and surely.  The law of probability must be obeyed.  The beast must be fed, often with blood.

But youth says, "It's OK, I'll be careful!" as if driving skill were the issue at hand.  And this reflects the mindset that causational chains are what determines outcomes.  But the only causational event that could affect the outcome would be to go back in time to the point where the youth signs the loan papers on the crotch rocket at the Jap Bike Dealership.

True enough, you can try to ameliorate the outcome by wearing full leathers and a helmet and taking other precautions.   This reduces risk, but does not eliminate it.  And the risk of death or injury on a motorcycle remains, alas, very high.  And this is a shame, as riding a motorcycle is a lot of fun, but the cars out there really are a buzz-kill.

One sure way to avoid a predictable outcome is to avoid engaging in that kind of behavior.  For example, if you go into a casino, a predictable outcome is that you will lose money.  If you go to a bar and get drunk, a predictable outcome is that you will get a DUI.

One sure way to avoid such outcomes is to not go into a casino at all - ever.  Or to go to a bar, without a designated driver.  Or to not ride a crotch-rocket motorcycle at 100 mph at age 17 with no protection whatsoever.  If you simply don't do these things the bad outcomes are guaranteed 100% not to happen.

And when the outcomes are particularly nasty, such as being a paraplegic, or spending months in intensive care, or gambling your life's savings away, or getting into a DUI accident and killing an entire family, then maybe just not doing the activity at all is a pretty smart idea.  The risk/reward balance just doesn't make any sense.

No on plans on bad outcomes.  No one buys a crotch-rocket with the idea of spending a year in painful rehabilitation therapy.  No one goes into a casino with the idea of spending their children's college fund.  No one goes into a bar, thinking, "Gee, let's get drunk, drive the car and kill people!"

And no one gets a credit card with the idea, "Hey, let's rack up a lot of high-interest debt and go bankrupt and spend a decade paying it all off!  Wheeee!"

And yet, that is a predicable outcome of having a high-interest rate "rewards" card, and one that happens to a staggeringly large number of Americans.   And the best way to avoid this predicable outcome is to just not play that game.

And yet, many readers write me and say, "Yea, well, but I'll be safe and drive carefully!  Because I made $500 in rewards miles already!"

And like the kid with crotch rocket motorcycle, they think that the credit card thing is a causational chain of events.   That "but for" someone being fiscally irresponsible, the whole deal would be just fine.  Those people who got into trouble just didn't drive their credit cards carefully enough!

But the reality is, life takes unexpected turns, and fiscal responsibility is in being prepared for those turns, and not putting yourself into a situation where you are so leveraged that the slightest unexpected event bankrupts you.

For example, say you have a miles credit card and  a motorcycle.  You get into that motorcycle accident and spend months in the hospital.  Regardless of your "best intentions" to pay off the balance every month, your credit card balance creeps up over time.  Medical bills are the number one cause of bankruptcy in this country, but what is unstated is that amount of credit card debt that accompanies this.

It is like running or rolling stop signs.  You can do this, for years and years, and never get into an accident (but likely have a lot of close calls and have people honk at you).  But because of the A-pillar phenomenon, eventually, you will hit someone.    It is a predictable, and perhaps inevitable outcome.  There is a persistent, yet low probability, which added over time, comes to 1.0.   And yet, there is an easy way to 100% avoid this kind of accident - come to a full and complete stop at every stop sign.  So why not do it?  The benefit (saving 2.5 seconds) certainly does not outweigh the outcome (major accident, insurance increase, etc.).

And that is the whole deal, I think, in personal finances - looking at the probabilistic model or quantum economics, and not at your personal economic situation as a causational chains - a series of individual decision tree actions.    You cannot be perfect all the time, that is a given.  Not all of your investments will pan out, that is a given.  You will waste money on stupid things - that is a given.

What you can do is, look at the statistical model and say to yourself, "What can I do, in general terms, that will prevent bad possible outcomes which are quite predictable, statistically?"

And the answer you get is things like:  Diversify your portfolio.  Statistically, you come out ahead, as some investments do well, and others will tank.  It is the safest and best bet.

What the financial gurus and stock channels say is the opposite.  They follow the causational chain theory and promote stock and investment picking.  If only you make the right individual decisions, over time, you will become wealthy beyond your dreams!  The problem with that model is that one mistake can sink you, just as a moment's inattention at a traffic light puts little Joey in intensive care as his crotch-rocket slams into the side of Martha's Buick.

Most financial books, advice columns, and the like tout this decision-tree theory.  As if individual decision could be held accountable for trends that span decades. 

But a better approach is to not to rely on individual decisions and events to keep your financial house afloat.  Paying off the balance on a credit card every month is a fine idea, provided you do it 12 times a year for 50 years.  Just do that 600 times without fail and you will be just fine, right?  And so far, you've done it, what?  12 times?  Good plan.

Doing things that avoid risk or at least balance risk and reward is a better quantum approach.  And yes, this means just "not doing" a whole host of dumb things which usually lead to financial ruin.

So when I say, "Never Co-Sign A Loan!" I mean NEVER.  Not, "Well, unless it is for a really good reason."   Why?  Simple.  The predicable outcome is financial ruin, and no "really good reason" justified that.

When I say, "Never get a 22% interest credit card" I mean NEVER.  Not, "Well, unless you pay off the balance every month."   Why?  Simple.  The predicable outcome is that you will not pay off the balance one month, and the high interest will make it impossible to do so and very quickly, the interest charges will negate years of cash-back bonuses.  It can take a decade to pay off such credit cards.   Why risk it?

Engaging in any financial behavior which relies on such decision trees is something to be avoided.   Borrowing money presents such decision trees - a continuous stream of debt payments that need to be serviced, which assume you will keep your job and have a steady income (things that people are finding out, are not assured!).  So you have to limit these to where it is really necessary or worth the risk.   A mortgage?  Yes.  A car loan?  Maybe not.   A credit card?  Hell no.