Aug 31, 20238 min read

The Three Little Pigs of Personal Finance

A house of straw, a house of sticks, or a house of bricks. Which are you building? The answer may not be as obvious as you think.

As a father of four, reading bedtime stories is a definitive ritual in our house. The Three Little Pigs is a clear favorite of my sons - perhaps because I add to the drama with my voice acting as I exuberantly "huff and puff" each house down. As I read and reread this classic, I can't help but draw parallels between this story and how we live our financial lives in America.

Let's start with the sage advice their mother gives the pigs: "...you must go and build houses of your own. But beware of the Big Bad Wolf - make sure your houses are safe and strong." She starts with a few assumptions that the first two pigs don't seem to pick up on. First, the Wolf is out there. Second, whether you ignore it or not, she is telling her sons to be prepared for when something goes wrong, not if. Third, "safe" and "strong" have meaning together and separately and both are important. Fourth, all of the above imply that there is a way to plan and build the house; there are structural, technical, and philosophical implications. To ignore them could be disastrous.

So, which of the little pigs represent your financial picture?

1. The Straw House

The house was built quickly so that Horace could run out and play. Upon entering the workforce, whether straight out of high school or after college, many young professionals feel a sense of urgency. There is urgency to upgrade the car. There is urgency to purchase a home. There is urgency to travel before it's too late. There is urgency to impress peers. There is urgency to...run out and play. And often, if we build a foundation of YOLO, those habits will follow us into the later years of our careers and lives.

We stack up hay as fast as we can. But what is actually supporting that house of straw? Student loans linger from the college degree. Credit cards kept up our lifestyle during those college days and now that we have better paying jobs, our debt limits increase dramatically as does the number of cards in our wallet. It's easy to purchase cars especially when they are delivered right to our doors (did we increase our auto coverage from the bear minimum to something more moderate?). While things look great from the outside, inside the straw begins to deteriorate rapidly under the weight of this debt and the unexpected.

Enter the big bad wolf: let's call him life. Layoffs happen. Unexpected tragedy happens. Appliances die. Hospitalizations occur. The car breaks down. All of it costs money. But if our credit cards are maxed for the sake of points, miles, and ego and we live paycheck-to-paycheck (61% of Americans do[1]), these unexpected events become a real problem. That's part of the reason why we feel so much stress around our finances (77% of us are stressed, in fact[2]). When life happens and we need to get our hands on some cash fast, only 6 in 10 of us have $1,000 in the bank for that purpose[3].

We've built a straw house without realizing it. He huffs and puffs and it all blows down. Surprisingly, it didn't take much.

I want to point out that this doesn't happen simply because we are greedy or naïve (although that can certainly be a contributing factor). We have been sold a line from society, from marketers trying to sell us something, for decades. There is a narrative out there in the "American Dream" that says the only way to live is with the biggest house you can buy, brand new cars, and new clothes purchased at least once a month. But those things always leave you wanting more. And their supposed to, otherwise why would you go back to the same retailer to give them more money?

Let's examine this "American Dream" for a minute. What classic picture comes to mind with that expression? Probably the "house with the white picket fence." Let's examine that further. A simple Google search will reveal that the average house size in the 1950s was 983 square feet[4]. Drive around the neighborhoods built in the 50s and 60s and this will prove to be true. 2 or 3 bedroom ranches with 1 or 2 bathrooms for something around 1,000 square feet. Split levels and bi-levels with the same specs in tight packed, midwestern neighborhoods by the thousands. Two stories and cape cods with the same statistics, just stacked higher and tighter.

Fast forward to data from 2022 which shows that the average home size for new builds in America is right around 2,561 square feet[5]. That's nearly three times BIGGER and yet, the average family size has DECREASED by about 1 person in the same time frame[6].

But to have the big house, new cars, and everything else that society demands of us, we prop it up under massive heaps of debt (credit card debt topped $1 trillion for the first time in US history[7]). Everything looks good from the outside, but with closer examination we can see a lot of rot setting in to our straw house.

2. The Stick House

This house was also constructed with expediency in mind, though Boris thought he was doing better since wood is clearly stronger than straw. What does this look like in terms of finance?

Well, the individual with the stick house has a greater illusion of safety than that with the straw house. This could look like a pile of cash in the bank. Perhaps we've paid down some high interest debt. But we still have high piles of other debt that are slowing us down in different ways. A quick way to take a look at this is to add up all of the assets you own (house, cars, bank accounts, retirement savings, etc.) and then subtract all of the liabilities (mortgage, car loans, student loans, credit card debt, etc.). If you are living in a straw house, this number is undoubtedly in the negatives perhaps by hundreds of thousands of dollars. In the stick house, it may be right around zero despite all of your hard work.

Think about it. A little cash in the bank or maybe a lot gives the illusion of security even though we still have $30k in student loans, $40k in a car loan for the new truck, a $50k HELOC that went towards upgrading the kitchen and bath, and $10k in credit card debt from last year's family vacation, plus a $280k mortgage on a home that you bought for $300k. In this scenario, even if you have $50k in a savings account and $50k in a 401k, you are in the hole by negative $290,000. In the stick house, you don't own anything. The bank owns it. But because of the cash you have been able to stack in the bank, it feels like you are ahead and can live almost anyway you want (but remember, 6 in 10 adults don't have $1,000 in the bank and 61% live paycheck-to-paycheck).

But, if the Big Bad Wolf comes after Christmas, the weight of the many monthly payments will deplete any savings in a heart beat. Imagine your household income is cut in half. Could you keep up with your payments without the fear of a repossession or foreclosure? Odds are that at least half of your income is going to monthly debt payments. This means there isn't anything left to eat. Do you still feel like your financial house is safe and strong?

Don't think it would happen to you? 136 million patients visit the emergency room each year (roughly 40% of America)[8]. There are nearly 20,000 car crashes each day which equates to 14 wrecks every minute[9]. 2 million people were injured in car accidents in 2020[10]. 17.6 million Americans were laid off in 2022[11]. We could keep digging from depressing stats, but most people who have been around the block will tell you to not be so naïve to think that the big bad wolf won't show up at your door. Despite this, we still see research that shows that 7 out of 10 Americans couldn't cover their living expenses for a month if they lost their job[12].

The stick house gives the illusion of safety and strength.

3. The Brick House

Percy put in a lot of sweat into his little brick house. He put off play time with his brothers in order to build it right. He kept safety and security in mind. When his brother's houses fell, not only did his stay standing, but he was able to give his brothers shelter. The brick house gives no illusion of safety; it is safety. The foundation, walls, and roof were all constructed diligently, with a plan, and with an end goal in mind.

It takes time and hard work to build something of quality. This is true of our health, our careers, our relationships, and certainly of our financial lives. People who build a financial house of brick often have piles of cash in savings accounts. They prioritize saving for retirement over momentary pleasure. They pay off debt and refrain from acquiring new debt. They work towards paying off their mortgage. They have long-term thinking which is usually based in a vision of a future that is bigger than themselves. As a result of such diligence, their net worth tends to be in the positive...by a lot. Let's revisit the numbers given for the stick house but this time, purchased with prudence and diligence:

Assets: $300,000 home

$40,000 car

$50,000 cash

$50,000 401k

Debt: None

Net Worth: $440,000

Is it easy to build the brick house where purchases are saved for and bought with cash? Absolutely not. But remember what Percy had to do to get that house of safety and strength. He worked hard. He sweat. He couldn't do everything that his brothers were doing. He had to be content with what he had in the moment. He had to remind himself of the long-term vision that was bigger than himself because it certainly didn't build itself overnight. Patience was truly his greatest virtue.

But when life happens in this scenario, what do you do? The water heater goes out. Oh well, let's buy a new one. The car just died. Oh well, I wanted to upgrade anyway. Or how about, life happened to your neighbor - do you want to buy him a used car to get to and from work? Your cousin had a major medical event without disability insurance - do you want to cover her utility payments (what about rent?) for the next 6 months? You see, the brick house definitely isn't about keeping up with the Joneses and it's more than just keeping the Big Bad Wolf at bay. The brick house also allows you to shelter others. You can't give what you don't have and it couldn't be any more tangible a reality than in our financial lives.

What are you building?

The first step is just to know. Do you know how much credit card debt you have? It wouldn't be unusual if you don't. Do you know what your student loan balance is and how much your monthly payments are? Do you know what your net worth is and which direction it's heading? Do you know if and how much you are contributing to retirement each paycheck?

Start by answering those questions. Make a list of all of your debts, amounts owed, interest rates, and minimum payments. Get informed. Then, figure out what you are spending every month on both fixed and variable expenses. This will tell you where your money is going. If you want to get real serious about it, take the plunge and make a monthly budget.

The second step is to know what you are aiming for. Don't have a vague notion of something. Get specific. Make a detailed list of what you want your future to look like in 3, 5, 10, or even 30 years. As the saying goes, "If you aim at nothing, you will hit it every time." By getting specific, you will uncover why it matters to you in the first place. Let this motivate you when the journey gets hard.

The third step is to execute with consistency. With slow, steady progress, make and stick to your plan. Include internal and/or external accountability like a friend, a debt reduction calendar, or any other tool that can look you in the eyes with pure honesty.

Ready to start building your house of bricks?

Check out the Resources page for tools to get you going. If you want to jump in feet first and start making significant progress, schedule your Complimentary Consultation with a financial coach today.

Sources

The Three Little Pigs of Personal Finance

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