Be Careful Out There

Are you trying to live a middle class lifestyle on a budget that may not support that vision? I recently read an article in the Wall Street Journal about families drowning in debt to stay middle class. It’s a sobering look at today’s bourgeoisie! Maybe it’s time to rethink the standing of the middle class, or at least reconsider its cost…

From the article:

Median household income in the U.S. was $61,372 at the end of 2017, according to the Census Bureau… When inflation is taken into account, that is just above the 1999 level…. Average housing prices, however, swelled 290% over those three decades... Average tuition at public four-year colleges went up 311%… And average per capita personal health-care expenditures rose about 51% in real terms over a slightly shorter period, 1990 to 2017.

The article goes on to account for the $4 Trillion of consumer debt Americans currently carry, and that is not counting mortgages. Essentially, the middle class is going into debt for everything – cars, clothes, vacations, educations, even Christmas presents. “Can I afford it?” has become “can I afford the payments?“. What were once assets have become liabilities.

We have easy access to cheap consumer debt by way of a vicious credit cycle that begins with the Federal Reserve lowering interest rates to rock bottom. It ends in the middle class getting walloped in debt. Wealth inequality is steadily separating the asset owners from the asset renters. Is the middle class catching on? No.

Pile it on…

Student debt now totals over $1.5 trillion, exceeding all forms of consumer debt except mortgages! This is for debt that in some cases equates to a $15/hour job. Does anyone tabulate ROI before signing the student loan papers? Do we let kids walk into college offices and sign off on adult paperwork without fully realizing the weight of these decisions? It’s become normal…

Auto debt sits at $1.3 trillion, with the average loan for new cars running $32,187. This is for debt on one of the fastest depreciating assets on the planet. And someone please explain how the median income is $61,000 with the average car loan 50% of that. My gosh! Furthermore, 1/3 of car loans run 6 to 7 years and 1/3 of car loans have debt from previous loans rolled into them. This is criminally insane, yet normal…

U.S. households with credit-card debt owe an average of $8,390. Nowadays you can get a Victoria’s Secret “Angel” credit card specifically designed to finance underwear, I kid you not. An extra plus are the geniuses who think credit card rewards and airline miles are going to put them ahead of the game. Sorry, but a 400-billion-dollar company like Visa has your spending figured out even before you do. If you try to play poker against them, best of luck. The game is rigged, but normal…

The Machine

The Federal Reserve engineered low borrowing costs after the 2008-2009 market crisis to stimulate the economy. Quoting the article; “It has reshaped both borrowers and lenders. Consumers increasingly need it, companies increasingly can’t sell their goods without it, and the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit.”

It works until it doesn’t…

Using credit pulls the purchase of goods forward, from the future to the present. Economists call it a “smoothing of expenditures”. This is based on the assumption of steady and increasing income going forward to sustain the debt and provide for its repayment down the road.

Many families pile on debt to the point where each and every paycheck is fully leveraged on a razor’s edge. Daily necessities plus debt payments consume every dollar of every paycheck. This leaves no room for savings and no margin for error. It all works until there’s a layoff, a medical emergency, a family need, a job change, career burnout, a pay cut, divorce, or budget miscalculation.

A Weapon of Mass Destruction…

Social media amplifies the warped image of today’s middle class. This is where we see the glitz, the glamor, the fancy meals, exotic vacations, new cars, and everyone’s version of “the good life”. It’s all viewed without the pain, struggle, sleepless nights, and money fights. The FOMO-driven life completely skews the definition of normal. It skews financial decisions as well. It’s a creditor’s dream!

Be careful out there. There’s a lot of illusion and there’s a lot of false belief. There’s a lot of false security as well. Normal has been warped to unrecognizable. I still contend, however, that living as a slave to a lender under a crushing burden of debt with oppressive payments, interest rates, and obligations is NOT normal, and NOT a way to live your best life.

How it looks in real life…

How often have I seen someone get a raise of $500/month and equate that to affording a new car because they can now afford the payment? Instead of the extra $6,000/year going into the bank (or better yet, investments), they choose to be saddled with a $30,000 debt on a depreciating asset that absorbs any financial advantage they may have just gained by job performance. Why? It’s not because they can afford the car – they can’t. They want the car. All they can afford, however, is the $500 monthly payments. What they end up owning is the depreciation – this while the banker eats prime rib and the auto dealer soaks up rays at his beach house.

The guy driving the car? He shakes his fist as NPR broadcasts story after story on his new car radio of the rich getting richer. He’s seemingly oblivious as to why. The poor guy…

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