Monday, June 27, 2011

Do We Earn Things Anymore?

After stealing, errr.. borrowing, my husband's Men's Health, I came across this very interesting article about the fiscally fit man. The author had 5 areas for "debt weakness", but the one that struck me the most was perverting the American Dream.

Decades ago, the American Dream was pretty simple. If you could afford to buy expensive things, like a car or a house with a white picket fence, you were doing pretty well. Most of the time, you had to buy with cash or a large downpayment. People saved for years and years to buy big ticket items. They tightened their belts and budgeted down to every last penny. With the explosion of buying things on credit and having long-term loans, it seems most people have lost the concept of earning nice things. People max out their credit cards or take out multiple loans in order to get something they feel they deserve. Do you know the average American household has nearly $11,000 in credit card debt? I understand that times are still tough for a lot of folks, and credit cards are a necessity just to get by when you're in between jobs. But I would make a guess that not all people who carry a large balance on their cards are people who are out of work and trying to support a family.

I will acknowledge I'm part of this perversion. While my husband and I saved for 2 years for a house downpayment, it wasn't a traditional 20%. True, to save 20% to buy a house in the Seattle metro area likely means you would be saving for at least 10 years, and I know that's the case in many other parts of the country. And while we have paired down to be a one car family, we still have a loan for our car. We put down a chunk of money and got the shortest loan term we could, but we don't own either of our big ticket purchases free and clear.

On the bright side, we have ZERO credit card debt and have had it that way for nearly 3 years. And now we save for mostly everything else. Taking a vacation? We have a vacation fund...if we can't afford it, we wait until we can. How about a shiny, new appliance, like an energy efficient washing machine that I've been lusting after? We're saving up to hopefully buy one in the fall. We have a 6-9 month emergency fund that we spent a year to build in case something drastic happens. We don't have the desire (or ability, after becoming a one income family) to go out and spend a ton of money on non-essential items.

I understood the concept of earning better when I was 12 than I do now. If there wasn't enough money in my wallet, I couldn't get it. I could do more household chores or babysit more neighbors, but I didn't have the option of buying it now and paying for it later like so many of us do today.

The question still nags me - do we earn things anymore? Often, people feel they deserve luxury or expensive things because they work hard, or they're a good person, or insert other reasons here. And while I'm all for celebrating success and rewarding ourselves, does it come at too high a price? Keeping up with the Joneses is costing us big time.

What do you think? Do we earn things anymore? What was the last big ticket item you purchased? Did you charge it and pay it off little by little, or did you save for awhile and pay for it all up front? How did it feel?


  1. I think we (the modern American public) do earn many of the things we get, and in fact we earn more than that because we pay so much extra interest! If we paid in cash, we'd have more nice things, though we'd have them later. Our short-sightedness and lack of understanding of compound interest actually makes us much poorer than we'd otherwise be. It's probably going to mean that many people will not be able to retire until they're quite old.

    On the other hand, there are advantages to this - economists call it "consumption smoothing". Basically, people prefer to be moderately well off throughout their lives rather than poor when young and rich when old, so they borrow against the future to keep their effective income level. The only problem is that they don't do a good job of this - they undervalue both the cost of interest charges and the risk of not getting enough raises to pay off the debt.

    One interesting factor is that home prices are higher than in the past partly because most people are buying on high leverage (<20% down), which means that there's greater demand for houses, which drives prices up. In some ways, the Joneses force us all to keep up!

    My own life situation is nice but somewhat odd because I have a very stable and good job and my wife has a stable job with a pension. So we have high predictability of future income along with enough current cash flow that we don't need to borrow. So I can play interest-rate games, borrowing when the effective rate of the loan is less than the expected return - typically this means I leverage tax-exempt or -deferred investments like 401k, where the expected return is always very high due to the avoided taxes. So we have a mortgage, one car loan, and student loans, but also a ton of money in our retirement accounts (with moderate inflation and return assumptions, we could stop saving today and still retire at 65 - which feels great!).

  2. I love this post! I think there are fewer people who feel the sense of accomplishment when they actually save up for something in order to get it because 'things' are so easy to get without having the money. DH and are in a great spot financially only having a mortgage as debt, but we worked hard to get to where we are. I may not eat out for lunch everyday or constantly buy new clothes, but we are saving my paychecks in full to pay for a remodel for our home, which to us, is more important than smaller things that will fade quickly over time.

  3. Oh man, if my husband read this post he would surely blame this cultural shift to not "earning things" on the Dems/Left and the social safety net -- giving out handouts and bailouts for people who don't take personal responsibility for their lives. You can just hear him can't you? :)

    I agree -- that's why I'm such a Dave Ramsey follower -- he's all about saving up for big purchases and never going into debt over toys and buying homes that you can afford.

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  5. We accept Zero acclaim agenda debt and accept had it that way for about 3 years. And now we save for mostly aggregate else