By Ryan Lau | @agorisms
Last year, CareerBuilder.com released a study with shocking results. Of the several thousand American workers polled, an alarming 78% of them live paycheck to paycheck. In the same study, more than half of workers believed they would always be in debt. More than a quarter (26%) did not save a penny every month, and another 31% saved an average of $100 or less.
In a Bankrate.com study, though, Americans stated that the ideal age of retirement is a mere 61. Yet, by their own financial practices, life in retirement at this age would be a near impossibility. Why is it that Americans are broke, and unable to meet their own guidelines of success?
Worse than Broke
In many cases, this is simply due to the fact that Americans are worse than broke. In fact, 71% of them carry some form of debt. This largely plays into the fact that so many are unable to begin saving their money. But what are some of the causes of the country’s largely-unknown financial disaster?
How much Down, How much per Month?
Through the 1920s, companies in the U.S. began to offer systems of credit to use for their individual products. By 1950, Diner’s Club issued the very first universal credit card. Not long after, use of the card became widespread, and thus begun the country’s downward financial spiral.
While it is true that income levels are up dramatically from those time periods, credit has considerably dampened the gains America has made. A prime example of this is the car buying industry. Allstate.com has a program that can calculate the difference in paying with cash compared to financing. Using average values for the price of a new car, length and rate of financing, and down payment, paying cash saves $5,830.
In other words, a $36,000 new car, when financed at the average rate, really costs $41,830, an addition of one-tenth of the average American income. That’s more than a full month’s salary for the average American worker. And, when paying with cash, there is always a chance to bring the price down. Some dealers may offer a choice between zero percent APR for a time, or a rebate. In this case, paying cash for the rebate allows for a deeper discount off of an already lower price.
A Credit Card Catastrophe
As of 2018, the average American household is broke. In fact, they are actually far below it, owing a whopping $16,883 in credit card debt. Though most homes take in far more than this, the debt is perpetual. Why? Because with each passing year, that debt only continues to accumulate, with those same American households paying an additional thousand dollars in interest alone.
Ultimately, credit purchases are ways for people to buy what they otherwise could not afford. By putting off payments, these same people end up paying a lot more in interest payments, and a lot more up front, too. This is because cash is psychologically much harder to hand over. Several studies, including this 2008 paper, explain that the average person is willing to spend considerably more money on a given item when swiping plastic. After all, they can just write it off and actually pay for it later. Thus, the debt cycle continues.
Budgets: Broken Leads to Broke
As mentioned before, a majority of Americans either save nothing at all, or save very little. In many cases, this is because it is simply not a written priority. In fact, only 32% of Americans have a budget at all. Of those, a portion do not factor savings into their budgets.
A lack of a budget breeds a ‘saving last’ mentality. But when doing this, there is no guarantee that there will be any money to save at the end of the month. Instead, adopting a ‘saving first’ mentality allows people to guarantee a portion of their income will go towards savings. With this new state of mind and a properly funded budget, families can ensure that every dollar that flows in, has a clear path to flow out, whether they spend or save it.
Will the Next Generation Improve?
This lack of financial knowledge, in varying forms, is not surprising, considering most high school students do not have a personal finance requirement at all. Throughout the country, only 16.4% of students are required to take a personal finance class to graduate. And outside of the five states where it is a statewide requirement? The portion drops to a pitiful 8.6%. America’s most states, Texas, California, and Florida all have rates of an abysmal 0%.
Meanwhile, student loans are forever increasing. Since 2010, they have risen 79%. The credit industry is tightening its hold, and financial literacy is only decreasing. But this is not an unsolvable problem. America must embrace its roots and recognize that, as the saying goes, cash is king. Incomes are increasing, and it is time that the people get to see the benefits of this, rather than paying them off, month by month by month.
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