Why So Many Americans Are Broke

10 dollar bills

So many Americans are broke because . . .

we want expensive things and we want them right this instant!


Two Things We Love to Buy

Coffee and cable (TV that is).

Following are a few scenarios (ignoring inflation for simplicity).

You spend $5 each morning on a Starbucks latte. That’s $25 per week (excluding weekends), $100 per month, $1,200 per year, $12,000 over 10 years, and $48,000 over 40 years.

It’s excusable, of course. People need to enjoy life. So enjoy.

How about cable? The average cable bill is probably more than $50 per month, but let’s underestimate the waste.

$50 per month for a year is $600 per year, $6,000 over 10 years and $24,000 over 40 years.

I say cut the cable and say “no” to Starbucks and throw the savings in a bank account, and in one year you’d save $1,800, plus interest.


More Things We Like to Buy

It wouldn’t be realistic to say the average American only blows cash on cable and Starbucks.

dinner is expensive

How about going out to dinner? $50 per month seems quite the low estimate (that’s about one dinner at Red Robin for a family of four) but again, let’s underestimate. $50 per month for one year would equal $600 per year, $6,000 for 10 years and $24,000 over 40 years.

Let’s talk about car payments. The typical American car payment is over $400 per month but let’s just say it’s only $300. That would be $300 per month for maybe 6 years. Let’s just ignore (for simplicity) the interest. Over one year you’d spend $3,600 and after six years you’d be minus $21,600 (plus the down payment).

So quit eating out, consume more fresh vegetables, be healthier and save a bunch of money. Sell your car, buy something used and save that $300 per month (and earn interest in the process). In just one year you’d save $4,200 if you quit eating out and abolished your car payment.

If you said “no” to Starbucks, cable, dinners and your car payment, you’d save $6,000 in just one year.


Managing Your Money Effectively

So how can we manage our money effectively? Here are some tips that have worked well for us.

avoid debt

Avoid Debt At All Costs

In over 15 years of marriage, we’ve paid no interest on anything but our mortgage. We live within our means. We use credit cards, sure, but we manage them; they don’t manage us. We pay them off in full each month. So we reap the rewards of utilizing a credit card (convenience, monetary rewards, airline miles, etc.) but we don’t pay the price for using them–and that price is interest.

It’s fine to have some short-term credit card debt, but live within your means and pay off your bill each month before you have to start paying interest.

The problem most people have is that they spend more than they have. Then, when the bill comes, they don’t have the cash to fully pay the debt. Now the credit card company is making profit, and they (the borrower) are throwing away their earnings.

Let’s illustrate.

You want to buy a car. My advice? Pay cash and avoid the hefty car payment and associated interest fees.

But I don’t have the funds to purchase a car with cash!

Neither did we. So here’s what we did. When we got married, we bought a very cheap car for about $2,000. Most people can afford that because that’s about five car payments. Cheap.

We drove that clunker for a few years while putting our “car payments” in an interest-bearing checking (or savings) account.

We upgraded a couple years later and bought a Ford Escort with about 20,000 miles on it. Almost new! An Escort is by no means a luxury car, but we paid cash for it. It was ours. And we kept faithfully putting our “car payment” in an interest-bearing account.

A few years later, we bought a brand-new Pontiac Vibe for about $17,000. A Vibe is still no Rolls Royce, but it’s a reliable car with good gas mileage. We’re still driving that car. And we’re still putting our “car payments” in an account that we don’t touch. When the time comes, we’ll have money to buy our next car with cash.

This method takes something a lot of Americans don’t have. It’s called patience. You can’t get the car you want right now because you simply don’t have the cash for it. Sure, you can get an expensive loan and put a financial burden on yourself and your family so you can roll in a luxury sedan, but is your financial freedom really worth it?

Avoid debt at all costs.

Be Organized, Planful and Patient

Being organized, planful and patient is how you avoid debt. It keeps you ahead of the game. Here are some ideas.

We’re credit union members. We can append numbers to our main account number to create multiple sub-accounts. So, we have a -1 account, a -2 account, a -3 account, etc. Each account has a specific purpose.

For each bill we have, we have a separate account. For example, we have a car insurance account. We put money into that account as soon as my paycheck comes as if we’re paying a bill. Once it’s in the account, we can’t touch it. It is gone. It is spent. When the quarterly bill comes due, all the necessary money is already in the account. We pay the bill and it doesn’t hurt at all.

We have a car account, a car insurance account, a Christmas account, a vacation account, an Eric spending money account . . . you get the idea. As I said before, as soon as the paycheck comes in the mail, we put the necessary money into the necessary accounts and it’s gone. It doesn’t exist for us anymore. It’s already spent.

The benefits are substantial.

If the car breaks down and we receive a $600 repair bill, it doesn’t hurt. We pay the bill and take the money from the car account. Our bottom line doesn’t suffer. That money was already there, just waiting to be spent on such a circumstance.

When Christmas rolls around, we go out and we buy our Christmas gifts. It doesn’t hurt and our bottom line isn’t affected. The money was already there, just waiting to be spent on Christmas gifts.

When Eric (me) wants a new tripod that costs $500, he goes out and buys it. The wife doesn’t say a word about it. Why? It’s my money. I can use it for whatever I want. And, importantly, it doesn’t affect our finances in any way.

This is a dramatic shift in thinking from the typical American mindset which is, buy now, pay later.

My mindset is, save now, buy later.

Let’s look at my car account. I’m paying $300 per month, every month, into an interest-bearing savings account. In five years, that account will have $18,000 (plus some interest, minus any unforeseen car repairs). At that time, I can simply buy a new car for cash. Obviously I can’t buy a brand new Toyota Landcruiser or a Dodge Ram 3500, but I can buy a nice car like the 2007 Pontiac Vibe that I bought brand new a few years back (for cash).

Did I have to wait a while for my new car? Yes. Did I have to drive a beater around for a few years because I couldn’t afford anything better at the time? Yes. So does my system take a bit of patience? Yes!

So if you’re not able to see past “the now,” my system won’t work for you. If you want a $50,000 vehicle right now and you don’t have the cash, well, you’re going to have to get a loan and then you’ll always be in debt, never getting ahead. And that’s exactly where most Americans are. In debt. Always trying to catch up but never getting there. But at least they’re driving around that Lexus and putting up a nice front.

Patience is key. If you want to build wealth and don’t have a lot of income rolling in (like me), you must be patient. Even now, I’m not driving the vehicle I want to drive. I have an old beat-up Nissan pickup I’ve been driving since 1998 and I have a 2007 Pontiac Vibe. I don’t exactly feel like a high roller when I park my rusty old pickup next to a brand new Tundra at work.

But it’s OK. I have something most people don’t have. Peace of mind. And plenty of cash reserves on hand. For a family of four with only one income (and a teacher income at that), our financial outlook is bright. We bought a brand new car for cash. We had a house built on a quarter acre. We buy (and have bought) everything we own for cash. We’re completely debt-free (minus the mortgage).

Save now. Buy later.


Recap! Why Are Americans Broke?

  1. We buy things we don’t need.
  2. We live in a constant state of debt.
  3. We buy now and pay later.
  4. We pay interest instead of earning interest.
  5. We spend freely and aren’t organized.
  6. We don’t plan our spending.
  7. We aren’t patient. We want something so we buy it now.

Keys to Breaking the Debt Cycle and Building Wealth

  1. Don’t buy things you don’t need.
  2. Avoid debt (especially credit card debt) at all costs.
  3. Save now, buy later.
  4. Earn interest, don’t pay it!
  5. Be organized.
  6. Plan your spending carefully.
  7. Have patience!

How to Get Started Immediately

  1. Make a plan now. Tonight (or this morning–whatever it is). Don’t wait.
  2. Believe that you can get out of debt. You can.
  3. Sell your fancy vehicle and buy something cheap.
  4. Buy a vehicle that gets good gas mileage.
  5. Stop buying needless luxury items (do you really need that new TV?)
  6. Eat at home more often (it’s healthier too).
  7. Cut your cell phone bill (there are almost always cheaper options than what you have–shop around a bit).
  8. Say goodbye to cable TV (it’s especially easy if you live in an urban area; rabbit ears on your roof will give you an uncompressed signal–a better signal than that provided by your cable company).
  9. Stop buying Starbucks every day. Make coffee at home for just a few cents per cup.
  10. Evaluate all your monthly bills and try to minimize them.
  11. Shop at second-hand stores (we just did that today).
  12. Buy in bulk.
  13. Pay off those credit cards!
  14. Cut up those credit cards!
  15. Have a garage sale and simplify your life a bit.
  16. Open a savings account today.
  17. Create relevant sub-accounts today.
  18. Set goals. Decide what you want to buy and start saving.
  19. Donate unneeded items. Track your giving and reduce your taxable income.

Any other ideas? Post them in the comments!


Final Thoughts–The Most Important Thing

If you don’t remember anything else I’ve said, remember this:

Avoid debt at all costs.

That is the single most important piece of advice I can offer. It’s not the American way, but it’s the smart way. It’s difficult to get started, but once you’ve built up cash reserves, you will be well on your way to peace of mind and financial freedom.


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4 Comments


  1. Thats a very brave, cool post. Well done Eric, I have also been credit card free for quite a while. The only thought I would have on that would be, when it comes time to purchase a new car, leave all your savings in your account. Go to Toyota and buy a new hybrid I got the Auris sport tourer on 0% finance on a PCP plan and leave your money in your account gathering interest. You win situation! Hope your and your family are keeping really well.
    Seamus

    Reply
    1. gplus-profile-picture

      Well, I do have to put things off sometimes in order to truly enjoy them. But I think things are more enjoyable when you don’t have them as often. For example, when I do go out and get a Starbucks, it’s a special occasion because I don’t do it all the time. So I enjoy it immensely.

      As far as having expensive, luxury items like brand new luxury cars, I guess it’s a trade-off. I’m willing to drive something cheaper and less fun for the peace of mind I have knowing that my finances are intact. I grew up in a home in which money was always a problem. We were always in debt. Always had big bills to pay. The financial stress was heavy. I prefer to avoid that now. I don’t make a lot, yet I don’t have any financial stress because I’m careful with my money.

      Reply

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