Feb 21, 2011 – Andrew (update March 7, 2011)
Get Rich Slowly is a good financial blog. Usually it espouses good sense about debt and living smart with money. A recent post: Sailing Away from the American Dream, surprised me with a seemingly inspiring story about breaking free of the ‘American Dream’ (traditional home and career) that hid a deadly flaw. If you don’t want to read the whole thing, here’s a quick summary: The article is the story of a man named Michael who is about to embark on a major life change for his family. He, and his wife and two kids, plan to purchase and live on a 40-foot sailboat in Mexico. They are quitting their jobs, he’ll be taking up writing freelance (no mention of what she’ll be doing), and they’ll live their dream of freedom from the ‘rat race’.
Just go ahead and read it, this will all make more sense…Done? Did you spot the problem?
I will be the first to stand and applaud the changing of one’s life path, and the daring to do things differently to achieve radical goals. It’s what our site is all about after all. I admire Michael and his family’s courage and values.
Unfortunately, there is a glaring fly in this ointment: Michael’s “unconventional financial security” is built entirely on debt. It is inherently insecure. From what’s written, all savings have gone to retirement (unavailable for 20+ years) and Michael’s near-term funds will be drawn from a massive and extremely risky loan against his house. And he’s evidently counting on more such loans in the future. Here’s the rub: home equity loans are renewed annually, meaning the bank will cast a hairy eyeball at how you’re doing with that initial $64,000 in 12 months. If they see your income is in the crapper and your credit is heading south (the lot of most freelance-writing sailboat homesteaders), they can call the note. If you can’t pay up, the house gets foreclosed, sold for a pittance, and what’s left of your credit gets trashed.
For someone who goes so boldly and admirably against the grain of the standard American path, Michael has completely drunk the Kool-aid when it comes to debt. Referring to his home equity, Michael says; “Consider that we will start out with five years of living expenses in the bank.” This is just not true. Equity in your home, while part of your net worth, is not savings. Tapping it is inviting risk. A far better plan is to sell the house outright, park the money in an interest bearing account, and live off that money (preferably just the interest). Or rent it out if you’re going to keep it and live on the proceeds. If Michael’s cost of living is “plummeting” (he quotes a cost of living ‘much less’ than the poverty line, so surely under $20,000/year) why does he need $64k to start (just how much is this boat?), with planned loans in the future? Surely the proceeds of a house sale would purchase the boat and cover their needs amply for more than 5 years, without the risk of foreclosure.
Michael’s dream is a good one. This kind of freedom is what the real ‘American Dream’ should be all about. But every dream, no matter how radical, needs a clear vision to come true.
Update – March 7, 2011
I received an email from Michael last week, assuring me that the only loan they were taking was to pay for the boat initially (the $64k). After that, they would indeed be selling the house, the value of which would cover the remaining mortgage (and second) as well as provide the 5 years of expenses at their new lower standard of living. With that (for what it’s worth) he gets my blessing! I have no doubt they’ll love every minute of their new dream. Congratulations Michael, your courage to live with abandon (without abandoning sense) is something we need more of in this country!