DON’T BE a money fool

The average consumer is a financial fool. Why would you say something like that? Because it’s true….financially. BTW Mr. T’s classic 1980s quote is “I pity the fool”. Well society does not so better get to it! Here is why below.

Mr. T: ” I pity the fool”

The data we have is mostly averages but it’s not a pretty picture. Sure there are plenty of people who live frugally and save tons. There are also plenty of people living beyond their means. Keep in mind Bill Gates, Warren Buffet and Mark Zuckerberg skew these numbers just a bit. Those guys are far from average.

  • The median household savings rate is around 4.1%. This includes IRA retirement contributions apparently.
  • Average credit card balance is $9333 USD
  • The average 401K balance is $106,000. Balance by age group.
    • Americans in their 20s: $16,000
      Americans in their 30s: $45,000
      Americans in their 40s: $63,000
      Americans in their 50s: $117,000
      Americans in their 60s: $172,000
  • 30% have saved less than $5000 for retirement. 15% have no savings.
  • It is said that most people could not cover an unexpected $500 repair or emergency in their budget
  • The average new car purchase price is $38K
  • Average household income is $60,212 per year. With that income after tax you get $45K per year.

So what is so bad about these numbers Mr. Cash Hoarder?

No savings = high risk!

a 5% saving rate is way too low. It should be 20% at minimum when counting retirement funds and ideally closer to 40% when retirement is added in. If it is not at those levels better cut back or make more money.

The fact that they can’t cover cover a $500 repair when an emergency comes up says they have no savings to speak of. A $500 repair is nothing! What if you get laid off and can’t find a job for six months to a year!???

What if you can’t pay rent or mortgage? Where do you plan to live? Do you think banks and landlords are “nice guys”? Nope! They want to get PAID and if you can’t pay they will replace YOU with someone that will! You need to have an emergency fund to protect yourself.

Do you want to live here?

No real retirement savings balance = living in the housing projects, ie council houses, public housing, subsidized housing

Is this your new retirement community?

$106K in 401K retirement fund balance won’t take you very far. If you live for 20 years that will be $441.67 per month. That’s some high living!

if you live 30 years that is $294 per month.

Social security pension will pay 30% less than now in 2035 when the trust fund runs out unless taxes are raised. So yes that will help you but not a ton.

If your house is not paid for then say $700 per month won’t let you rent much of a house. Maybe you can rent a room in someone’s house or live in public housing. I don’t think those are places you wanna live. The Projects are calling you! Council houses! Or maybe a trailer park.

You need to save for retirement and not just depend on the government

Taking on way too much debt causes all sort of problems

$9333 in credit card debt is no laughing matter given credit cards have high interest rates of around 19.8%. That means $1847 in interest every year making it hard to pay that balance off. Usury! Pay them off ASAP.

Buying cars and trucks that are too expensive creates problems

$38K average vehicle transaction prices are driven by expensive SUVs and pickups

These are depreciating assets, meaning they lose value sitting in you parking spot even if you never drive them!

Car loans of 6 to 8 year duration are common, meaning buyers will be paying for maintenance and repairs while making payments. That’s bad. Such high car loans will result in lots of interest being paid over time. See my example on picking up payments and car loan trouble.

This $38K vehicle if financed over 7 years at 5% would incur interest of $7115 over the term of the loan. What if you had invested that money?

Are others countries financial fools like the USA too?

Some are fools too but some are more wise. Look at the chart below. Anything above 10% is good. And many other countries have a much more generous social safety net than America so technically they need to save less.

Savings rate by country per OECD data in 2015

  • Canada 2.4%
  • Spain 4%
  • USA 4.1%
  • France 4.4%
  • Mexico 5.1%
  • Austria 7.8%
  • Ireland 8.6%
  • Germany 10.6%= good
  • Netherlands 12%= good
  • Sweden 12.1% = good
  • Switzerland 13.7% = good
  • Korea 16.1% = good
  • China 47% = good

So what causes this lack of savings?

  1. Stagnant incomes. Incomes have not risen in real dollar terms
  2. Inability to control spending/instant gratification mentality
  3. Lack of financial discipline
  4. Lack of understanding about money and loan interest
  5. Inflation of 2-4% per year.
  6. Poor government policy and social benefits structure. More tax cuts for the rich anyone?
  7. Unrealistic expectations based on watching TV, keeping up with the Joneses, falling for marketing like a chump
  8. Rapidly rising costs for college education, health care, housing and child care
  9. A shrinking middle class

So what can YOU do?

You can’t change macroeconomics but you can change your own behavior! Don’t be a victim and think like that. Thoughts and prayers is all you will get when living under that bridge in that tent from the nearest politician. You know that’s true.

  1. Make a budget
  2. Plan to save 10%/year at least for retirement from you pre-tax income
  3. Plan to save at least another 10% of after tax income in addition to retirement savings
  4. Cut back! Do you really need all the junk you are buying? No.
  5. Cut your cable TV
  6. Don’t eat out as much
  7. Make your own coffee instead of buying $5 cups
  8. Bring your own lunch to work
  9. Drink at home or with friends
  10. Read these pages to learn how to be frugal and invest. Only you can save the future you!

Mr. T: “Don’t be a fool!”

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