Recently I re-read Seth Godin’s book, the dip. In this little book, Godin writes mostly to business people about knowing when to quit a project. When he says, “Winners quit fast, quit often, and quit without guilt” it flies in the face of a lot of what we’ve been taught. Godin advises that winners quit when their path leads to a dead end – but to persevere when they are just in a dip.
This concept of winners quitting, is one that also works in realm of personal finance.
The key of course is knowing when to quit and when to stick.
For some situations, this determination is easy. If your income situation has changed for the worse, whether due to job loss, hours cut or a reduction in bonus, I have some no-fail advice for you: QUIT! Quit your old lifestyle – Today! Do not eat up savings or take on debt to maintain a lifestyle you can no longer afford.
Given the doom and gloom pessimistic economic news, it’s surprising that so many people can be so overly optimistic in their personal life. High earners are particularly susceptible to this problem. I get this and I’m also optimistic; but let’s practice a little planning for the worst. Do not let stuff drag you under; unload it and when you land that great new job you can always buy more.
For other situations, the determination is much harder. Here in Florida in early 2011, 46% of homeowners with mortgages have negative equity. Wow! That needs to be said again. Almost half of the people in Florida who owe money on their home, owe more than they could sell the home for.
If you are one of these families, how long do you stick?
People often need to move when they graduate, retire, marry, divorce, get a new job, have children, children move away, or for a myriad of other reasons. At one time as many as 20% of all Americans moved in any given year. Today, the poor housing and poor job markets have been a factor in greatly reducing that number.
Faced with either a legitimate need to relocate or the inability to realistically make the payments, many people choose to stick in their negative equity home way past the time they should have quit.
While I would not advise anyone to default on their mortgage just because the home value has dropped, I also would not advise someone to indefinitely postpone a needed move just because their home is underwater. (The “How you quit a negative equity home” is very important, but not the subject of this post).
In much the same manner as Godin advises business people to figure out if the path they are on is a dip, a cliff, or a cul-de-sec; if you feel stuck in a financial situation you need to calmly and strategically do the same.
Decide in advance when to quit.
The underwater homeowner who can no longer reasonably pay the mortgage may decide to commit “x” number of dollars of their savings toward keeping the mortgage paid while trying to land a better job or short sale the house. When the money is spent, it’s time to quit. Deciding in advance takes the emotion out of decision day and helps prevent quitting in a panic.
Will quitting now allow you to win later?
If a better job, life or family situation is on the other side of quitting, you may need to quit sooner than later. Carefully weigh the cost of sticking – waiting on the market to recover vs. quitting and starting new in a better place. The unknowns of the marketplace make this calculation very difficult but we do know that while you can make more money you cannot make more time.
Recognize the cliff
Be brutally honest with yourself. Put your what-if analysis on paper. Quantify it. Review it with someone you trust. If the path you are on leads to a financial cliff, its way past time to quit.
Remember, there is no prize for not quitting. People will not cheer your dogged determination if the end result is failure.