Everyone likes to think they’re unique — a precious little snowflake in the snowstorm of humanity. Yet, when it comes to finances and debt, people make surprisingly similar mistakes. There are many who are trying to climb out of a well of debt, but can’t quite ever seem to make it over the top. They’ll get off to a good start, make some progress, and then slide back into the comfortable habits that are responsible for a lifetime of living in debt.
The first step to breaking out of the debt trap is understanding why this remains an elusive goal for so many well-meaning people. In my experience, here are the big four that tend to hold people back the most.
A Stylized View of Life
For many, their view of what their life should look like comes from a lifelong diet of television and commercials. Their friends and family conform to that stylized view of what middle class life should look like, and that puts pressure on society to live up to standards that are, for most people, completely artificial. As a thought experiment, I looked up homes on Zillow that are similar to those shown in some of the Lifetime movies my wife watches. The majority were two-story homes on quarter-acre lots in fictional suburban California neighborhoods. The average cost of the six homes I surveyed was over $800,000, with one over $2 million. That’s what Hollywood thinks is middle class. Even in an expensive county, that would be a non-conforming mortgage, which is fantastically difficult to obtain. Even if a theoretical buyer had $300,000 to put down, the payments on the $500,000 balance would be roughly $3,600 a month, depending on taxes and insurance rates. The $43,000 a year in house payments is only slightly less than the average salary in the US.
Too many people are drowning in debt, trying to live up to a lifestyle that is total fiction — and are taking on unsupportable debt to try and buy houses they can’t afford.
Comfort with a Lifestyle of Debt
It’s not unusual to meet people with a fantastic array of debt. There’s a mortgage payment, car payments, credit card payments, and sometimes student loans on top of all that. When considering purchases of durable goods, large appliances, or major home repairs, there’s very little discussion of the top end price, but whether they can afford the additional payment. For many one mortgage isn’t enough; when they need cash they start shopping for a home equity loan. It’s absolute financial insanity.
I have to hand it to Wall Street for being able to make borrowing so easy that it’s become a routine part of our everyday lives. It’s hard to believe that my grandfather would have sawed his arm off before borrowing a dime from anyone, and that mindset was shared by many of his generation. The concept of saving money for anything, other than the down payment on a house, seems as old fashioned these days as traveling by horse and buggy.
Living Paycheck to Paycheck
The comfort with debt, and people stretching to buy homes they really can’t afford, sets up a vicious cycle of structural debt that stretches finances to the point today that 76% of Americans are living paycheck to paycheck, and nearly a third have no savings at all. That’s right, one in three people in the US have zip, zero, nada in their savings account to cover emergencies like medical bills, major vehicle repairs, or a major appliance failure. Even sadder is that attitudes toward savings have barely budged, even in the wake of one of the worst financial meltdowns in the history of our country.
Every single plan to get out of debt starts with saving money to cover emergencies. Dave Ramsey says start by building a $1,000 emergency fund, but in my opinion that won’t buy you much security. The $1,000 will cover your co-pay for an emergency room visit, if you have good insurance, but it won’t buy a new central A/C unit. My opinion is that $3,000 is far more realistic these days. That will cover most major car repairs, a 2½ ton central A/C unit, and maybe leave enough left over for that ER co-pay.
Lack of Sufficient Income
Too many people are working dead-end jobs trying to stitch together a decent living. Instead of taking on a second or third equally dead-end job, think about building your own business on the side. A sideline business that deals primarily in cash not only puts extra money in the budget to pay off bills, but it’s also a safety net in case you lose your primary job. For too many, a job loss is the first step in accumulating a massive backlog of debt that drags down their finances for years. The only way to be layoff proof in the current job market is to own the company.
Right down the street from where I live is a man with a dream of owning a restaurant. Instead of trying to raise the money to build it from scratch, he built a food truck with $40,000 of his own money, and worked the lunch rush on vacant lots in industrial areas while working as a janitor at night. Today he works the food truck full-time, managed to quit the night job, bought the land, and has started construction on a real sit-down restaurant and he hasn’t borrowed one dime. I admire that kind of determination and relentless dedication. A sideline business that you can start on a shoestring budget is the best favor you can do yourself in life.
Those are really the keys to getting out of the debt hole. Recognize you don’t have to live up to society’s standard of living, learn to save religiously, and live by the philosophy that there is no such thing as good debt.
