How Not To Become a Financial Zombie

crownfinancialstewards on 1/16/12 11:22 AM


The word “zombie,” likely of Haitian Creole origin, has become a very popular term in modern culture. It’s become so trendy that even the Centers for Disease Control ran a recent tongue-in-cheek headline warning to prepare for the coming “zombie apocalypse.” It certainly got everyone’s attention.

“Zombie” seems to loosely describe a person void of consciousness and self-awareness, possibly held in a trance-like state ofsuspended reality, yet still stumbling about in a mindless, aimless, hopeless manner. Okay, my definition may not have it perfect, but let’s go with it.

The word has even made its way into the economic lexicon. It’s been used to describe “zombie banks,” which are severely over-extended financial institutions. They remain operational due to external guarantees of subsidies (normally by the government, i.e., taxpayers) although they are actually insolvent—dead but not yet buried. This is the same condition that many ascribe to entire nations like Greece and Italy; they are nations being kept alive artificially in hopes they will be resuscitated by even more debt.

I don’t think it takes a Nobel laureate in economics to see that the U.S. is in danger of succumbing to this same disease. We are being propped up by massive borrowing and debt schemes to keep our sick balance sheet from creating a panic.

But allow me to examine the patient from a more realistic perspective, and we’ll see a sobering prognosis of our financial condition.

The Backbone of American Financial Health

Private home ownership has historically been the greatest source of wealth accumulation for the American household. Since 1950, our collective homeowner equity has soared. This positive net worth provided not only a place for us to live and raise our families, but a stable asset upon which to build financial strength. It became the backbone of our financial health, allowing average families to start businesses, expand their investments and to pass on wealth to the next generation.

The following charts from the Federal Reserve Bank of St. Louis should give us reason to pause and diagnose our illness on a personal level. As you can see from the first chart below, homeowners’ equity plunged in the past 3 years. Since the real estate bubble burst, American homeowner equity has decreased by more than 50%!

This is why so many of us are feeling the pain in spite of the so-called recovery on Wall Street. Main Street, so far as home equity is concerned, has not yet begun to recover.

The gray bars represent periods of recession, and it’s interesting to note that in most cases, home equity actually increased during down economic times. Not so with the latest recession, which was actually brought on by a housing bubble.

A Strange Savings Pattern

In the next chart, gray vertical bars again represent periods of recession. In general, during a recession, the Personal Savings Rate takes a significant spike upwards but trends downward when the recession seems to have passed. When times are tough, we move into savings mode, but when times are seen as good, we move into spending mode.

This behavior is contrary to biblical teaching. Here’s why: God instructed Joseph to do just the opposite. He was to save during the good years in order to have money to spend during the bad years. If we were adhering to God’s wisdom, we would see the most significant spikes in savings during the non-recessionary times or the good years.

Even worse, you can see that since 1970, we’ve fallen from an average savings rate of 10% of income to the present day average of 3.5%.

What Are We Thinking?

These two charts clearly indicate that we have been and continue to manage our personal finances in the mindless state of zombies! Our homeowner equity has taken a dramatic hit downward. Meanwhile, we’ve failed to increase our average savings to offset this loss.

In the past decade, hundreds of thousands of homes were purchased with unconventional (sub-prime) mortgage programs that created false equity based on extremely inflated appraised values. When the bubble burst and property values dropped, this paper equity evaporated.

During much of this time, many American homeowners added significant personal and consumer debt to finance lifestyles they could not afford. Now they are unable to save more because of their existing obligations. A closer analysis indicates we are in a period of increased debt repayment or deleveraging.

But if we, as God’s ambassadors, are going to point the way for others out of personal finance “zombie-land,” we must avoid falling into the same cultural pitfalls. Here is my advice:

• Pay off all consumer debt. This means your cars, credit cards and revolving consumer accounts.

• Increase your personal savings rate. In my new book, The S.A.L.T. Plan, I recommend that you set a goal to save 20% of your income each year until you have achieved an Emergency Savings amount equal to 140% of your annual income. Today’s job market makes this a prudent goal.

• Create real equity if you have purchased a home:

◦ If you have a second mortgage, pay it off as soon as possible. In today’s climate, the only safe position is a 50% Equity to Value ratio. For instance, if your home is worth $150,000, you should only owe $75,000 on your mortgage.

◦ If you don’t qualify for refinancing, pay down the principal of your mortgage until you can qualify and take advantage of very low rates.

◦ Set a long-term goal to be mortgage free.

• Increase the amount of money that you are giving. It is my belief that generosity breaks the grip of greed and materialistic desires enabling us to better live within our means. This important step should be taken by faith as you reallocate where your money is being spent.

• Renew your mind. We are bombarded with the media, advertising and spending opportunities. Immerse yourself in a program to read God’s Word to alter your beliefs to use money for eternal purposes, not temporal ones.

None of this is easy if you have been trapped by the financial problems that plague so many Americans today. My view is that the opposite of a financial zombie is a person who is alive, vibrant, purposeful and wise. I like to think this is the desire of God’s faithful stewards.

If you are in pain or want to be more intentional with the way you manage money, we have many ways to help. Let us know how we can serve you.

As a reminder, your comments and feedback are always welcome below.

Chuck Bentley

P.S. So far, I am keeping my resolutions of not eating sugar and decreasing my lifestyle. Guess what? I’m feeling stronger! I hope you are as well.

You can obtain a copy of my newest book, The S.A.L.T. Plan, How to Prepare for an Economic Event of Biblical Proportions by clicking here.


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