Lessons Lost

by

Our parents (parents of baby boomers and earlier generations) emphasized savings. We were told that credit was a last resort. There were layaway plans in which desired products were set aside by shop keepers until the price was fully paid in installments. There were Christmas Clubs at the local bank or savings & loan so we could sock a little away each month and have the money for Christmas presents in December. Even most cars were purchased largely with cash (until the early 60s when financing became freely available). About the only thing purchased with credit was houses, but you were expected to have at least 20 percent for the down payment. Again, it wasn’t until the 60s, with the acceptance of mortgage insurance, that people started buying houses with as little as five percent down. And, as we all know, by 2005 purchases were being made with zero down.

Prior generations had two frequently expressed rules. First, you should have at least six months of living expenses saved before you used credit or invested in anything. Second, you should pay off your home mortgage before you retire. With the financial meltdown of the last couple of years, many believe we should return to these principles and this view of credit.

Here’s my take. In order to have a financial safety net, access to cash (financial liquidity) is important. Many of us thought having an equity line of credit was enough. Clearly it is not. Financial institutions called them due during the crisis, leaving borrowers with no way to pay them off much less meet other needs. Our parents were right. You need ready cash available for emergencies. Six months worth may be enough but for us baby boomers I think it should be more.

Because I think having cash is so important, I don’t necessarily agree with the second rule. If you want to stay in your home and have cash protection, the best alternative may be getting a long-term, flat rate mortgage while you are working and still can. This requires some figuring out because you will need to be able to pay the mortgage after you retire, and for as long as you want to stay in your current home. Seeing a good financial planner is recommended.

That’s what I did. I got a 30-year mortgage at age 61. I took enough cash out of my home to pay 2+ years of expenses, and put it in safe, short-term investments. I have always slept well and now I am assured I will continue to do so.

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