Well, there's nothing like putting up a statistic on how bad Americans are doing financially to generate a lot of comments. In my post titled Over One-Quarter of the Population on the Brink of Financial Disaster, Need Discipline I noted that 28% of workers say they are one setback away from financial disaster. I also highlighted an article on a single guy who "invests $16,000 a year, about one-third of what he earns as a producer for a public-TV station" as an example that people could save a lot -- if they wanted to -- no matter their income. It generated a lot of discussion, to say the least.
The first comment I want to highlight is from someone who discounted the saving example a bit:
Bob P. is at an advantage because he's single. Much easier to invest a third of your pretax dollars when you've got no family to support. In addition, he must live very frugally, if he can live on only $15,000 a yr. That, or he's found some really cool way around taxes. Maybe he can pass that info on to the rest of us.
I agree though, eliminating all credit card debt, especially that with an interest rate of over 7% or so, is vital to your financial health. You can take advantage of debt as well. Use it to your advantage by leveraging your assets to create wealth, such as in real estate. Leverage and frugality will lead to financial independence.
Yes, you can certainly save more if you're single and have no kids. However, the math's a bit wrong on this comment. If Bob invests one-third of what he makes and that third is worth $16,000, then Bob makes $48,000 a year. Somehow, the commenter seems to think Bob invests $16,000 of that, pays $17,000 in taxes and lives on $15,000. Last I checked, taxes weren't this high -- even at the highest income levels, which Bob is not at. Needless to say, Bob does live on more than $15,000 per year.
In the end, I think we're in agreement about needing to minimize debt, though I'm not in the "borrow a bunch to leverage your assets" crowd. I'm more in the pay off your debt, then save to invest cash crowd. ;-)
The next commenter thinks the problem is understated:
I am surprised at the 28% number because I would think it's too low. In fact since the way it is phrased above it sounds like its a self reported number I suspect the real number is higher because at least some of the people who are clueless about their finances are in fact clueless that they are clueless about their finances. They are living paycheck to paycheck and don't consider that to be financially dangerous. Why should they, they have always gotten by before and besides, you can just get more credit cards and pay $20/month.
I would not be surprised to see the number climb up towards 40-50% and given how many people have taken out interest only and 3-5 year ARMS in the last 2-3 years there are likely a number of people who are more debt extended than they realize and that will also come home to roost in the next couple years.
The reason I think 28% is low is I have a friend who does mortgages and when I did a refi over a year ago he told me that nobody who he does refi's for is in my situation financially. Namely that they have plenty of assets outside of their house and no other debt. The norm is they have no other assets outside their home and they have multiple credit card balances and multiple car loans in addition to student loans, furniture loans, etc. He said most of the people are what he would term 90 days from bankruptcy. The loss of income will result in bankruptcy in 90 days.
I think 28% is probably low. If we ever saw 12-15% unemployment, I can't imagine how things would crumble.
Yeah, I'd guess that the 28% is low as well. People always seem to think they are in a better financial position than they actually are.
Next, we have a commenter who disagreed with my suggestion to pay off credit card debt first, then establish an emergency fund:
Actually, instead of paying down the credit card debt first, I'd squirrel away some savings at the same time. If a person is truly one check away from financial ruin, they can change that outlook by saving up one paycheck's worth of cash. Suddenly they're looking at two pay cycles before disaster, instead of 1. Save up the recommended 3 months' worth, and you're looking at the more typical job search duration before financial ruin begins.
I recommend paying off the debt first because: 1. it's costing you money (a lot) that's digging you deeper into debt and 2. if you pay it off, it's not like that money's gone. You can charge again if you HAVE to (if you get into trouble financially) This has the same effect as saving money for future expenses. However, if you save first, you're paying interest on the debt the entire time you're saving. Doesn't seem like a smart move to me.
Finally, here's a comment I just had to include because I think it offers some solid advice:
Creating a written budget is critical for individuals and families who have never taken a look at their finances. Before you can save or spend less you must put your financial life on paper. That simple step will empower you to control your finances. Then you can take those other very important steps towards putting your financial life into order.
Good comment. This is why I recommend You Need A Budget. It's simple, but effective, and can help anyone manage their money much better.
It's not impossible to live on $15,000 a year. I make $2,014 a month pre-tax (I'm 22 and a grad student on a stipend) and I save $714 of that off the top--and I'm usually able to live on less than what's left. I don't live in a particularly cheap city, either, although it certainly helps that I split rent and don't have kids or a car. Beyond that, I don't even think I'm that frugal. (But still awesome, yes? :))
Posted by: Katie | May 22, 2006 at 08:03 PM
Katie --
I wasn't thinking of students -- just people in the "normal" workforce.
But you're right -- students can live on a lot less. I remember doing so while at grad school too. Ahhhhhhh, the days of cheap dorm food -- and to be young enough not to gain weight from it. ;-)
Posted by: FMF | May 23, 2006 at 12:44 PM