Monday, June 25, 2012

We Are Poorer Than We Think

We tend to think we are wealthier than we are - until we run out of money.

The last five years have been a wake-up call for many Americans.  Unfortunately, most Americans have chosen to hit the "snooze" button several times so far.

What we have learned, among other things is that we are not as wealthy as we thought we were.  And this has been like waking up from a long national bender, to the mother of all hangovers.

During the go-go 1990's and 2000's, a lot of middle-class people spend money like it was water - putting it all on credit cards and then refinancing their homes to pay it all off.  And I know this because all my friends did it - and I did it myself, on at least one occasion.

What did we spend it on?  Crap.  Utter crap.

We bought electronic gadgets, because they were "only a few hundred bucks" and the subscription service that came with them was a convenient $19.95 a month.  And over time, these subscription services added up, and of course we charged them on our credit card, to get those oh-so-important frequent-flyer-miles.

And we went to Starbucks and stood in line for a half-hour, for the privilege of handing over ten bucks to be sneered at by some pierced teenager, so we could drink a 1,000 calorie "coffee drink."  But no worries, we'll just stop by the gym (monthly membership, $100) to work it all off, right?

We were all so busy-busy, that we didn't have time to think about saving money.  After all, we were making so much!  You need a reliable car, right?   Might as well lease a new one!

And so on, and so on, and so on.

And of course, at the end of the month, when the bills came due, money was tight.  So we robbed from savings and put off that 401(k) so we could pay the bills for today.  Or refinance the house, one more time to pay off the accumulated debt.   We'd "catch up" later on, with savings and retirement, right?  Because that's a long way off, and we'll just work until we're 70!  Right?

Then the painful reality.   Jobs become scarcer and all that debt is now coming due.  And suddenly, we realize that we didn't save enough and we spent more than we were making.  Surely this has to be the government's fault, right?  Blame Bush.  Blame Obama.  Blame the Wall Street Fat Cats.  Blame Bank of America.  Blame the 1%ers.  Blame someone, anyone, but never ourselves!

What we realize today is that we weren't as wealthy as we thought we were - and this is a staggeringly painful lesson.   Let's face it - spending money in the 1990's was fun, wasn't it?  We never looked at prices of things, we just bought them.  More is better!  Spend!  So long as your credit card bill is "paid" (the minimum payment, towards the end) everything was OK, right?

But reality has other ideas.  And when you have to live on your income, you realize how little that is - and how much you squandered as a youth.

This is not a good thing or a bad thing - it is value-neutral.  Reality is like that - it just IS, and has no agenda for good or evil, better or worse.   Denying it, however, is a bad idea.  Embracing it, in contrast, is the path to success.

So, today, we realize that a lot of stuff we thought we could "afford" really was not affordable.  Your average middle-class person really cannot "afford" a smart-phone.  No, really, they can't.  Not if they are not fully funding their 401(k) plan.  And by that, I mean contributing at least 10% of their income (if not 15%) annually, to the plan.

And at first, this seems harsh and unfair.  We had it so good, we don't want to go back to spending less and not just throwing money around like drunken sailors!

But, living in reality has its own rewards.  Security for starters.  Let's face it.  The 1990's and early 2000's were a lot of fun - like the roaring 20's was a blast.  But every month, we worried about bills and the fact our debt-load was increasing (and our savings depleting or not even starting).  It was a stressful lifestyle, a level of stress we alleviated with an endless party.

Living on less may seem harsh, but a credit card balance of $0 has its own rewards.  Not owing anyone any money and not having to worry about "losing your job" or "how will I ever retire" are more comforting than a fleet of jet skis or 500 channels of cable TV.

What I have realized is that I am well off - but not as wealthy as I thought I was.  It is all-too-easy to take on the trappings of wealth by buying things and convince yourself you are "doing well".   But often having these things means having debt which means two things.  First, you don't really own these things - you are renting the money to own them.  Second, you really can't afford these things - you are sacrificing your future for the now - and a whole industry, the debt industry, will more than gladly help you in this regard.

We Are Poorer Than We Think - all of us.   We all want to live large and push our lifestyle to its very limits, in terms of debt and spending.   But it is not a rational or healthy way to live.

Spend less and live better.   Spend more and be miserable.   It is a choice and I have no sympathy for those who spend it all, and then complain that somehow life is unfair.

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