The Real Reason You're Broke

There is an excellent personal finance article  by Liz Pulliam Weston on MSN.  The article discusses the excessive amount of money that many Americans spend on their cars. 

According to the article, the average American devotes 15-20% of take-home pay (approximately $8,000 per year) on car payments, with additional money spent for gas, maintenance, parking, and insurance. 

Surely, we all have seen examples of people buying automobiles above their income level, e.g., purchasing a full-size truck or SUV instead of a compact or mid-size car, or a luxury or sports car instead of a generic model.
To afford more expensive cars, the article explains, more and more Americans are using long-term financing (more than 4 years), which means they are spending more on interest and building equity more slowly.  Furthermore, 25 percent of car loans include debt rolled over from a previous vehicle.  As Ms. Weston states:  "Rolling debt from one car to another is . . . a terrible idea."

So why do we do this?  Ms. Weston points to three main reasons:  First, we view cars as status symbols, rather than as a means of transportation.  Related to this, I would add that we treat cars as "toys" and a means of entertainment.  Second, we fail to consider -- and budget for -- the actual costs of the vehicle, simply because the car company will "approve" us for the loan.  (Sound familiar?)  Third, Ms. Weston criticizes car dealers for convincing consumers "to pay too much for cars or financing."  Of course, I am loathe to criticize car dealers (or mortgage brokers) for acting in their economic self-interest, provided they obey the law.

In my opinion, the real problem is that too many Americans do not act in their economic self-interest.  If they did, they would spend less; they would consider the purchases they do make more carefully; and they would save more of their income.  This is what successful, financially secure people do.   Indeed, one of the chief characteristics of the "millionaire next door" is they they live below their means, save their money, and invest for the long-run.

So why don't more Americans act in a financially responsible manner?  Certainly the consumerist ethos promoted by corporate America, coupled with the hedonist ethos promoted by the media and entertainment industries, play an important role here. 

But we should not ignore the effect that government economic guarantees of all types have in discouraging ("disincentivizing") citizens from taking a more prudent, long-term approach to personal finance.  After all, why bother saving for retirement and end-of-life medical care when the government says it will provide you with Social Security and Medicare?  Or why bother planning for the proverbial "rainy day" when the government says it will provide you with unemployment and disability benefits?  Or why bother saving for college, when the government says it will provide you with "subsidized" tuition and "affordable" student loans?  And so on.        

This is not just about personal financial responsibility, in other words.  It's also about the future of conservatism in this country.  For what defines conservatism above all else is the idea that the individual, not the government, is ultimately responsible for his or her well being.  Irresponsible, financially insecure people are much more likely to vote for a political party that promises them "the government" will take care of them.  Such promises, in turn, promote further irresponsible behavior, leading to ever greater dependency on government.  It's a vicious cycle.  One that got started in this country in the 1930s.

How to break this cycle?  I think teaching people about responsible personal finance would be a great goal to focus on.  The values, beliefs, and habits developed in budgeting, saving, and investing one's own money will translate into a more conservative approach in the larger political arena.  Not for everyone, of course.  But perhaps for enough people that the national constituency in favor of self-reliance and limited government begins to grow again. 

Contact Steven M. Warshawsky 
There is an excellent personal finance article  by Liz Pulliam Weston on MSN.  The article discusses the excessive amount of money that many Americans spend on their cars. 

According to the article, the average American devotes 15-20% of take-home pay (approximately $8,000 per year) on car payments, with additional money spent for gas, maintenance, parking, and insurance. 

Surely, we all have seen examples of people buying automobiles above their income level, e.g., purchasing a full-size truck or SUV instead of a compact or mid-size car, or a luxury or sports car instead of a generic model.
To afford more expensive cars, the article explains, more and more Americans are using long-term financing (more than 4 years), which means they are spending more on interest and building equity more slowly.  Furthermore, 25 percent of car loans include debt rolled over from a previous vehicle.  As Ms. Weston states:  "Rolling debt from one car to another is . . . a terrible idea."

So why do we do this?  Ms. Weston points to three main reasons:  First, we view cars as status symbols, rather than as a means of transportation.  Related to this, I would add that we treat cars as "toys" and a means of entertainment.  Second, we fail to consider -- and budget for -- the actual costs of the vehicle, simply because the car company will "approve" us for the loan.  (Sound familiar?)  Third, Ms. Weston criticizes car dealers for convincing consumers "to pay too much for cars or financing."  Of course, I am loathe to criticize car dealers (or mortgage brokers) for acting in their economic self-interest, provided they obey the law.

In my opinion, the real problem is that too many Americans do not act in their economic self-interest.  If they did, they would spend less; they would consider the purchases they do make more carefully; and they would save more of their income.  This is what successful, financially secure people do.   Indeed, one of the chief characteristics of the "millionaire next door" is they they live below their means, save their money, and invest for the long-run.

So why don't more Americans act in a financially responsible manner?  Certainly the consumerist ethos promoted by corporate America, coupled with the hedonist ethos promoted by the media and entertainment industries, play an important role here. 

But we should not ignore the effect that government economic guarantees of all types have in discouraging ("disincentivizing") citizens from taking a more prudent, long-term approach to personal finance.  After all, why bother saving for retirement and end-of-life medical care when the government says it will provide you with Social Security and Medicare?  Or why bother planning for the proverbial "rainy day" when the government says it will provide you with unemployment and disability benefits?  Or why bother saving for college, when the government says it will provide you with "subsidized" tuition and "affordable" student loans?  And so on.        

This is not just about personal financial responsibility, in other words.  It's also about the future of conservatism in this country.  For what defines conservatism above all else is the idea that the individual, not the government, is ultimately responsible for his or her well being.  Irresponsible, financially insecure people are much more likely to vote for a political party that promises them "the government" will take care of them.  Such promises, in turn, promote further irresponsible behavior, leading to ever greater dependency on government.  It's a vicious cycle.  One that got started in this country in the 1930s.

How to break this cycle?  I think teaching people about responsible personal finance would be a great goal to focus on.  The values, beliefs, and habits developed in budgeting, saving, and investing one's own money will translate into a more conservative approach in the larger political arena.  Not for everyone, of course.  But perhaps for enough people that the national constituency in favor of self-reliance and limited government begins to grow again. 

Contact Steven M. Warshawsky