Are We Gaining Ground or Going Broke?
George Boelcke FCI
August 22, 2009
In a recent survey, 71% of respondents felt that their standard of living would be lower coming out of the current recession.
What? I was shocked when I read that. But what is the definition of a lower standard of living? Is it less income? Is it less cash (or room on the credit card) to buy all kinds of stuff? I would bet, for the majority of people, those two make up the vast majority of the responses.
But does our standard of living decrease when we cannot buy the latest iPod every year? Are we somehow deprived when we cannot afford to go out for dinner twice a week, or when we live in something smaller than the average 2,300 square foot house?
Since there are more vehicles on the road than there are people with driver´s licenses, are we somehow reducing our standard of living without a new vehicle every three or four years? Or more accurately: when we cannot buy a new vehicle every three years that´s financed for six or seven, and just roll our over-financed balance into the next purchase? Is that about a lower standard of living, or about being financially dumb?
Is our standard of living somehow affected when we DON´T drive a new car? I would bet for most people that may be their thinking. But isn´t it exactly backwards? If we drive a new car, we now have a big payment going out the door, and our standard of living decreases exactly BECAUSE we have this new car to finance! So is someone better or worse off when they are able to bank a ton of money by NOT having car payments?
How many of us are confusing consumer spending with wealth building? How many would take a cut in pay, if we were assured we would have more savings, a growing investment account, and at least an emergency savings account? All of those build wealth, whereas our spending is a wealth robber!
At a recent seminar, a 20-something man really wanted some help in getting his monthly expenses under control. When I asked him how much a month he wanted to save, he didn´t have a number in mind at all. Isn´t that kind of like getting into the car and starting to drive, with no idea where you want to go? In order to save money, you need a number – a firm goal of where you want to go, and what you want to accomplish! After that, it´ll become a whole lot easier, exactly because you have a goal and a fixed plan.
But while I was talking to him, he couldn´t get his iPhone out of his hands. When I asked what the monthly bill was for the iPhone, he confessed that it was around $120 a month. Yikes! Mine is around $25 a month, and it makes phone calls, too. Yet, he proceeded to attempt to "sell me" on the cool features and gadgets. Nice try.
There is something economists refer to as our marginal propensity to consume. It´s a fancy term for saying: when we make more income, we spend more money right along with it. A $500 raise, and pretty soon, we´re spending to our new and higher income level. It works for us average people just as much as the rich. It´s how Michael Jackson earned around a billion dollars, yet died with a reported $500 million debt!
We need to be careful with the yardstick we use to measure our standard of living and not confuse "stuff" with wealth. For many people, their thinking is backwards: It is their stuff which reduces their wealth, and not the other way around. Financial freedom and our net worth is measured by what we save, not by what we purchase. Our financial success cannot be measured by what we have in the garage, or our closets!
What? I was shocked when I read that. But what is the definition of a lower standard of living? Is it less income? Is it less cash (or room on the credit card) to buy all kinds of stuff? I would bet, for the majority of people, those two make up the vast majority of the responses.
But does our standard of living decrease when we cannot buy the latest iPod every year? Are we somehow deprived when we cannot afford to go out for dinner twice a week, or when we live in something smaller than the average 2,300 square foot house?
Since there are more vehicles on the road than there are people with driver´s licenses, are we somehow reducing our standard of living without a new vehicle every three or four years? Or more accurately: when we cannot buy a new vehicle every three years that´s financed for six or seven, and just roll our over-financed balance into the next purchase? Is that about a lower standard of living, or about being financially dumb?
Is our standard of living somehow affected when we DON´T drive a new car? I would bet for most people that may be their thinking. But isn´t it exactly backwards? If we drive a new car, we now have a big payment going out the door, and our standard of living decreases exactly BECAUSE we have this new car to finance! So is someone better or worse off when they are able to bank a ton of money by NOT having car payments?
How many of us are confusing consumer spending with wealth building? How many would take a cut in pay, if we were assured we would have more savings, a growing investment account, and at least an emergency savings account? All of those build wealth, whereas our spending is a wealth robber!
At a recent seminar, a 20-something man really wanted some help in getting his monthly expenses under control. When I asked him how much a month he wanted to save, he didn´t have a number in mind at all. Isn´t that kind of like getting into the car and starting to drive, with no idea where you want to go? In order to save money, you need a number – a firm goal of where you want to go, and what you want to accomplish! After that, it´ll become a whole lot easier, exactly because you have a goal and a fixed plan.
But while I was talking to him, he couldn´t get his iPhone out of his hands. When I asked what the monthly bill was for the iPhone, he confessed that it was around $120 a month. Yikes! Mine is around $25 a month, and it makes phone calls, too. Yet, he proceeded to attempt to "sell me" on the cool features and gadgets. Nice try.
There is something economists refer to as our marginal propensity to consume. It´s a fancy term for saying: when we make more income, we spend more money right along with it. A $500 raise, and pretty soon, we´re spending to our new and higher income level. It works for us average people just as much as the rich. It´s how Michael Jackson earned around a billion dollars, yet died with a reported $500 million debt!
We need to be careful with the yardstick we use to measure our standard of living and not confuse "stuff" with wealth. For many people, their thinking is backwards: It is their stuff which reduces their wealth, and not the other way around. Financial freedom and our net worth is measured by what we save, not by what we purchase. Our financial success cannot be measured by what we have in the garage, or our closets!
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