This is a guest article by Jason Larkins. Jason is the Director of Financial Education at Wise Wealth, LLC in Lee’s Summit, Missouri and the author of the website WorkSaveLive.
For years I had my personal struggles with money: spending more than I made, following the status quo, and living life like I’d die tomorrow. Debt piled more quickly than I could have imagined and after years of digging a hole I eventually found myself buried under $110,000 of debt.
Those struggles — calls from collectors, thoughts of bankruptcy, sleepless nights — eventually would be overcome and my life’s transformation would result in me changing my career, taking a pay cut of $70,000 and pursuing a job which involved becoming a Dave Ramsey-trained counselor and a financial adviser.
What I’ve learned from my own struggles, and from coaching hundreds of people over the last three years, is that my problems (as with most peoples’) stemmed from a lack of knowledge, a lack of common sense about how money should be handled and viewed.
Common sense and money
Whether you were raised by financially savvy parents, or had to learn by way of life’s teachable, often unforgivable moments, the fact that you’re readers of a highly popular finance blog would suggest that you have some common sense when it comes to handling money.
Some of this knowledge may include understanding:
- Living within your means
- Investing for your retirement
- Keeping cash to serve as an emergency fund
- Saving for your children’s college education
- Managing debt wisely, including getting a 15- or 20-year mortgage
Despite once believing that most people (the status quo) understood these principles, I learned the hard way that one should never make assumptions.
After becoming a financial adviser I began to do research on the average American’s struggle with finances. I wondered why so many people struggled saving for retirement, living within their means, saving for rainy days, and managing their debt levels.
Through a series of events, I found myself researching the savings rate (specifically the percentage of disposable income) and overall consumer debt over the last 40 years. The trends were quite shocking:
The blue line shows the total consumer debt (credit cards, personal loans, and mortgages, excluding student loan debt) in trillions of dollars. The red line shows the average percentage of disposable income that a person saves in a given year.
The major increase in debt from the early 1990s to 2008 is due to the ballooning of the housing bubble. It’s no wonder that so many experts predicted that it would eventually burst. While it looks like people started to pay off debt post 2008 (when the graph starts to go down), it’s most likely that the decline in debt levels was from foreclosures and bankruptcies.
While the consumer debt illustration is terrifying, the savings rate doesn’t make me feel any better. From 1983 on, there was a steady decline year-after-year in the amount that Americans were stashing away. While there was a spike in savings after the 2008 recession, primarily from the fear that swept the nation during that time, the statistics show that we’re trending back down and falling into our poor behavior.
What’s the explanation?
If common sense suggests we’re not supposed to go into debt and we’re supposed to save, why has the exact opposite been the status quo for the last 25 years?
Some will suggest it’s solely because of the increase in housing prices; others believe it’s because wages haven’t outpaced inflation over that time period.
While these realities have added to the cause, I believe a lot has to do with our lifestyle changes over the years:
- Introduction of technology: cell phones and bills, cable TV, computers, internet, etc.
- Traveling and vacations: sure, these have been around for ages but it’s almost taboo not to go on a yearly vacation these days.
- Our desire for the “bigger, better, nicer, newer” as I call it: houses, cars, TVs, clothes, colleges, you name it.
Maybe it’s simpler than that
While my experience tells me that the materialistic shift in our culture over the last 30 years has a lot to do with our recent struggles, there is a fact that I can’t ignore: interest rates.
Some people believe that when rates are low you should take advantage of leveraging money. Borrowing money is cheap now, right? Why not go buy a $300,000 house (a little more than you can afford) when the rates are only 2.85% on a 15-year fixed mortgage? What about that nice car you’ve been looking at? If you sport a good credit score it’s pretty easy for you to get under 2% financing.
Furthermore, a decline in interest rates appears to discourage savings. The trend lines between the savings and interest rates are remarkably similar! Why save money when you can only get 1% in a good CD or money market account? The stock market isn’t yielding anything, so why bother with it?
Declining interest rates, declining common sense
Now more than ever it seems that families across the country are struggling with money. While it could be for a number of reasons, the charts above suggest that as interest rates decline, we forget the basic financial principles that were common back in the mid 1900s.
Gone are the days of living on less than you make, avoiding debt, and saving for retirement and rainy days. It appears that we may only regain our financial wisdom when interest rates start to go back up.
Have you noticed a shift in your financial mindset as interest rates have declined over the years? Have you saved less and leveraged money more than you would have otherwise?
Published or updated October 5, 2012.