Written by Trent Hamm, The Simple Dollar is a popular personal finance blog that chronicle's one man's road back from overwhelming debt to financial security. Hamm declared the contents of the blog to be in the Public Domain in 2008 and available for sharing when attributed properly. We will share a couple of posts a week.
A few days ago, I put an hour aside to watch this amazing presentation from Elizabeth Warren. Entitled “The Coming Collapse of the Middle Class,” Warren’s presentation makes the case that many, many factors are working against the ability of the middle class to maintain their standard of living. She delivered this presentation at the University of California at Berkeley in 2007 when she was a professor at Harvard Law School. If you have an hour, this is something that’s really worth watching.
Here are six specific points I pulled from the presentation. (If you watched the video and pulled out five points, you’d probably find some different ones.)
It is easier than ever before to “borrow from tomorrow,” with “revolving” debt going from 1.4% to 15% between 1970 and 2005. Credit cards barely existed in 1970. Today, many people have two or three cards in their wallets and many people carry balances on those cards. It’s so easy to do it, too.
The average American is saving less than ever before, dropping from 11% in 1970 to below 0% in 2006. The rate actually went up above zero shortly after the financial crisis of 2008, but the rate appears to be declining to near zero again. A 0% rate means that the average American isn’t saving anything, which is right in line with the fact that 76% of Americans currently live paycheck to paycheck.
Most Americans are unsure as to how they’re actually spending their money. If you ask Americans where their money goes by percentage, they’re typically far away from reality, overvaluing some categories and undervaluing other ones.
The median family has moved from owning one car to owning two or more cars. The truth is that even if you own a used car, that car is literally costing you thousands a year. My 2004 Honda Pilot is actually costing us about $6,000 a year, assuming we drive it a normal amount. Adding a car to your household is expensive, more than we often think.
Child care is almost entirely a new expense compared to a generation or two generations ago. In a typical two-parent household (and in virtually all one-parent households), all of the adults are employed full time (or a significant fraction of full time). If there’s a child in the home, that means that child care becomes a significant expense – after all, someone has to care for that child when no one is at home. In previous generations, there was often a parent who stayed at home or a grandparent easily available – when I was a child, my mother stayed at home, for example. Today, those options exist much less frequently.
Fixed costs for the average American family today take up a significantly larger percentage of their income than the average American family in 1970. When you add up all of the monthly fixed costs for an average American family – housing, food, clothing, energy, and so on – and compare it between 1970 and today, today’s family has much less breathing room left over.
We can get into endless political discussions about the overall problem and many of the specifics, too. Is there really a problem here that new laws can address? What policy changes can fix these problems? At our best, these discussions can bring together both conservatives and liberals to figure out a path forward that works well for everyone.
However, I’m not talking about politics here. I’m much more interested in what this means for you and for me. What individual actions can we take to protect ourselves against the many things described in this presentation? Regardless of how you feel about some of the specifics of what she’s talking about here, Warren is unquestionably addressing some real issues.
A big part of the solution involves individual people stepping up to the plate and making changes. You can never, ever expect the government to swoop in and solve all of the problems. That has never been true. It has always, in the end, been up to individuals to come up with solutions for their problems.
What steps, though? Here are five huge steps that everyone should strongly consider to overcome those issues above.
First, be absolutely sure that you want children before having them. Sit down with your partner and carefully examine all of the costs and changes that having a child are going to bring into your life. Are you going to have the money for child care, or are you considering the huge income drop that will come from a stay-at-home parent? What about the costs for formula, diapers, and baby clothing? If you are struggling to make ends meet right now, how will you make ends meet then? If you are not absolutely sure youboth want a child and you can’t easily answer that question, be very, very, very wary of having a child.
Second, if you are carrying a balance on a credit card, cut back on your non-essential purchases until that balance is gone. A balance on a credit card means that you’re buying more than you can pay for, period. You are spending more than you earn. Even more than that, a credit card payment means you actually have less to spend each month. Get rid of that high interest debt. This is a much higher priority than some alcohol for the party this weekend or for a twelve pack of soda or for another gadget. Get rid of that credit card debt and never let it back into your life.
Third, save for the future. The easiest way for most people to do this is to just set up their retirement plan at work. Do it now. If your employer offers any sort of retirement savings plan – and especially if that employer offers any sort of matching money – you should sign up for that plan and contribute some percentage of your income. Yes, your paycheck will get a little bit smaller for the moment, but you move from making money for today to also making a little bit of money for yourself when you’re old and you can’t earn that money. There will never, ever be a better moment to start than right now because the further you are from retirement, the more time your retirement savings has to build up interest and dividends.
Fourth, build an authentic budget. A budget that tells you how to spend all of your money is useful, but that’s not exactly what I mean here. It’s more important that you sit down and make a master list of every single dime you spent for the last month. List it all out. If you can’t do it, then just spend the next month holding onto every receipt that you can get. When you can actually write this all out for thirty days, sit down and go through those purchases. How many of those purchases were wasteful and forgettable? It will probably shock you and encourage you to rethink how you’re actually spending your money.
Finally, see if it’s possible to live with one fewer car in your household. Don’t sell off your car quite yet, but just try living as though that car didn’t exist. Could one (or both) of you take mass transit to and from work? Could one (or both) of you carpool, alternating the days when you use your car? You might find that the thousands of dollars you dump into your car each year earns you only a little bit of convenience that you can really survive without.
The key to maintaining and improving your financial situation is awareness. You don’t need to make radical changes. Instead, you just need to understand exactly what you’re spending your money on. Don’t rely on what you think you spend your money on. Get the facts by keeping track of your spending for a month. Sit down with those numbers and really look at them. The changes you should make will be obvious.
Beyond that, don’t hold anything sacred. Almost all of us have things in our life that we don’t even consider cutting back on when, in reality, it wouldn’t hurt that much to cut back in that area. What about cars? What about your cable bill? What about your rent?
We can hope for a reversal of fortune. We can get involved in the political discussion. In the end, though, it takes action to bring about change, and the best way to change your life is to do something different. If you just follow the same path as everyone else, you’re going to fall into all of the traps in Warren’s video. Do something different.