It was not until later in life that I accumulated any money, when I was raising my children, If I had to pay $500 for a car , I had to borrow the money. I remember paying 16% interest on the money to buy a new car in 1981. I borrowed it from my auto insurance company because 16% was cheaper than I could get at any bank.
However, the fed has been artificially suppressing interest rates for a lot of years now so when I didn’t have money, I had to borrow high and now that I have money I am only getting 2% on it.
The biggest reason so many pension funds are in trouble now is that the feds held rates low and drove pension funds into the stock market to get decent return which then crashed badly twice, scaring trustees back into safer investments so they didn’t participate in the recoveries.
The point is that subsidized interest rates to buy something cost something so just be aware of what it costs and then make an informed decision.
The wealthiest people in the world are the savviest borrowers; Liddle Donnie bragged about being the king of debt. Borrowing to invest so as to profit enough to be better off even after paying interest is financially savvy. I don’t: I paid cash for my house and my car (and everything else), but that’s because I’m poor and don’t have a way to profit from borrowing.
Don’t kid yourself. Pension funds have always been heavily invested in stocks. The mix between stocks, bonds, and other investments may change over time, but stocks are always a very large part of the portfolio. Also, remember that if low risk bonds like treasury bonds are paying high interest rates, inflation rates are at nearly the same level. That means the real return is low.
Yes, they are because they borrow to produce larger profits than the cost of money. Corporations do this as well. Paying 5% interest while tuning a 20% profit is a great way to net 15%. But there is risk involved.
Great way to build keep your self out of the debt spiral so I’d say you are not poor. The flip side of that is that your house is leverage your home to make money in the exact same way the wealthy do. Borrow against your home for 4%, invest in the stock market to return 10% and net 6% off that investment while still netting the 1,4 or 6% on the increased value of your home. But that path is not simple nor is it without risk.
I don’t disagree with you about interest rates. I’d be happy if they were a little higher, but I’m not going to pass up any and every chance I get to take advantage of it. If the furniture store wants to finance me for 3 years for free, you bet I’m going to do it. Car loan for 1%? Of course! I think you and I agree that there are many people for whom the interest rate/financing alone is the deciding factor on what to buy, and that’s not good.
I was a 12 year old at that time but I remember it well. I think I’ve told this story before…I remember my oldest cousin coming over to talk to my dad. He was out of college, recently married, and wanted to start a family. I remember his words: “We’ve found a house to buy and the mortgage broker says he can lock us in at 12% if we sign papers tomorrow. But we’re still $1000 short on the down payment. Uncle, can you help us out?” 12% on a mortgage? The first mortgage I had was 6.5 I think, and it’s just been going down ever since.
I see that as an impossibility for just about everyone. You would either have to already have substantial financial resources when you reached adulthood, live with mom and dad rent free until you were 30 years old, or live so frugally that you have no family, hobbies, or do much of anything other than work, eat, and sleep.
I’m also not sure I would do that even if I could. You can’t save yourself into being wealthy. You need to have your money work and grow for you.
60% of Americans live pay check to pay check for any number of reasons and they are often the victims of all manner of legal robbery especially when buying a car.
That comment prompted a quick internet search about that. I had no idea but was curious because I, too, have no mortgage. The number is higher than you think - 19.9% 538 goes on to parse the language and the survey methodology but the number seems close enough for discussion.
When I read figures like that, I’m inclined to research just exactly what the source’s definition of “living paycheck to paycheck” is, and to investigate whether or not the source itself has some kind of ax to grind.
I would make a distinction between having paid off your mortgage and paying cash for your house. That’s a big difference. I don’t know how old you are, but I think you’re probably at the “paying off your mortgage” state of life.
Paying cash for a house is a pipe dream for most working class families until they’re middle aged and have owned and made some money on a house or two. My wife and I were 24 when we bought our first house, and no way could we have paid cash for it. Even if you find yourself with a very well paying job at 22 years old, you still need to pay the rent and heat, have a car, feed and clothe yourself, and have a little fun while you’re young and active. Being able to pay cash for a house just doesn’t fit in to that. Either have a mortgage, or live with your parents until you’re 28.
I’m now 48, and just took out a mortgage last year. Why? Because the money is so cheap. We bought a car last year and financed it, same reason.
I’m not so sure there is a distinction. Actually, I paid cash for my home when I moved to another state. The house I sold had a mortgage I paid off with the proceeds of the sale. Technically I did pay off the mortgage but not in the make-the-last-payment way.
A home is generally an appreciating asset so it is a low risk investment. And we bought way less house than the bank, and “conventional” wisdom would dictate with a very small down payment. While the house was bigger than the one I grew up in, it’s price was a lower multiple of my yearly income than the first one my fiscally responsible parents bought and 30 years later, paid off.
Cars, as others have posted, are depreciating assets whose value often drops faster than the loans taken out for them. And that is a real problem.
Regarding the paycheck to paycheck financial situation, I blame that on a common weakness to enjoy immediate gratification regardless of income level. And that’s a situation that the automakers/dealers have learned to take full advantage of. They have recently been able to offer the public ALL THE LUXURY-POWER-STATUS, etc., that they DESERVE(?).
Factual comment for sure. Lots of nuance here though.
Are they so financially illiterate that they are ripe to fall prey to “all manner of legal robbery”? I suspect many are in that paycheck-to-paycheck mode because they don’t understand finance and spend all they make the instant it arrives. I personally know of some very high income families that have virtually no net worth that fall into that category as well as more modest income folks who do as well.
The category, I believe most think of when they read this, are those working poor that are barely hanging on. They blame poor wages, limited upward mobility, racial discrimination and a litany of other reasons why this is the case. I’ll make no judgement here as most have widely divergent opinions on this topic.
When I think of “living paycheck to paycheck”, I think of the working poor who literally can’t pay the electric bill or buy groceries until the paycheck arrives, not of people who make 100K/year who won’t live within their means.
Note the use of the word “won’t” instead of “can’t”.
Sinks can still be used to wash dishes. Clotheslines still work as well today as the did in the 1950’s. You can still get TV reception for free with an antenna or rabbit ears if you live in a major metropolitan area close to TV stations. Actually, you don’t even need a TV for that matter. It used to be a luxury. When we go on vacation, we take a vacation from TV as well, it’s amazing how different the world looks and how less stressful life is when you aren’t getting a daily dose of gloom and doom from network news outlets vying to out-sensationalize their competitors.
I remember collecting 10% interest on my savings account in 1981.
You assume a debt spiral. I wasn’t poor in money but poor in spirit, the spirit that others had to borrow money to start and build businesses that made them wealthy.
I had no car, TV, stereo, records…; I bought my clothes at the thrift store, borrowed books from the library, cooked my own meals, had only free fun. I had no heat, either, but that was because I lived in SoCal and didn’t need it. I saved money on minimum wage. By the time I was 50 I had saved enough to buy a house.
My parents, in contrast, married 70 years ago, had children, bought houses only because they could mortgage them, why I got to live in houses all my childhood: a wealthy thing for them to do.
I think that is what articles on this subject want you to think because that is the folks that get interviewed for these articles. The survey, seems blind to that distinction and must include those folks that earn 100K+ (or more, MUCH more) that are in the very same situation. I’d like to know what the split is. The article says 10%. I’m not so sure that captures the extent.
Both groups are facing the stark reality of retirement on Social Security alone since they have no savings and likely no pensions. I see that approaching wall for many of my friends, both high and low earners.
The distinction for me depends on what stage of life you’re in. Not too long ago I was having a similar conversation with someone who was bemoaning the fact that everyone borrows money to buy a house and car. This man stated he paid cash for his house at age 25. In this day and age that’s a virtual impossibility, unless you meet the conditions I described in my previous post. Buying a house outright at age 60 is far different.
Many folks live (or attempt to live) in a life-style that they have no business in. I see people (some are friends or acquaintances). I guess they feel they deserve the best in life whether they can comfortably afford it or not.
Personally, I wouldn’t enjoy something I can’t afford. Having a house or car that is financed is not ownership in my opinion and certainly not a joy.
I (and my wife, too… that’s one reason we hit it off) were raised to save and then purchase, not purchase and then try and pay. We are not wealthy people, but pay cash for everything. We live in a comfortable home on a lake, all paid. I can afford to pay cash for new cars, but buy used cars. I bought 2 new ones in my life and they were no better than used.
I am dependent on myself, not on others. I usually never pay for anything that I can possibly do myself. People say “You’re lucky, you know how to do all that stuff.” I’m not lucky, I just try and teach myself through trial and error and invest in tools to make things happen.
I will not depend on living on Social Security. I am waiting until fall when I turn 70 to draw S.S. It will be “extra money.”
Instant gratification takes a toll on people with little will-power. Where this idea comes from that it is normal to take out a loan to buy a house or car comes from I don’t know. It’s backwards! Save first and then buy, not buy and then try and save. CSA
In southern California, many aren’t even able to save, because the cost of living is so high . . . and many of these are people that are living quite frugally
So how the heck are they ever going to be in a position to actually get into a house someday, let alone pay cash for it?
I suppose that’s why the Los Angeles times is constantly reporting on people leaving the state, because they’ll have a better standard of living elsewhere
I can see your point on car ownership, but comparing a house mortgage and a car loan is apples and oranges.
I don’t know where you live but a great deal of the country has housing prices such that saving to pay cash for a house is just not real. Let’s say a young family in their 20’s with a couple of young kids wants to buy a house. They’re already paying rent on a 2bd apartment or a small house, say $1500/month. They drive paid-for used cars but still have to feed, clothe, utilities, medical, etc. themselves and their kids. How long will it take these working-class folks to save/invest to the point that they have $350,000 in cash to pay for a house? The kids could very well be in high school ready to leave by then.
I’m no spendthrift either. But I do believe in enjoying life along the way. I figure I’ll work until I’m 70 and then have a few years to enjoy myself. I also plan on having a good time on the journey there.