The Payment Trap

It seems that the average American's hunger for goods and services can only be satiated by the aquisition of more stuff. With the continual bombardment of images telling us that we can only be happy if we purchase the newest hot ticket item, it's no wonder that many of us are falling victim to our presumed desires. We've bought into the message that we need that newest techno gadget. As compulsive desire overides reason, we can't be satisfied until we obtain the item. But shortly after making the purchase, in the span of just a few days or weeks, the novelty begins to wear off, and we find ourselves on yet another quest to buy something. We are caught in a vicious cycle.



In addition to the dazzling array of gadgets and services comes a fairly recent phenomenon, the credit card. I'm not talking about having a credit card in the sense that it's used for convenience and then paid off at the end of each month, what I'm troubled by is the ever increasing balances on these cards by folks who just can't seem to pay them off.



To understand what's happening, let's look back just a few short decades. During the late 1960's and early 1970's, America's space program created a technological revolution, unprecidented in our history. With this revolution came an array of goods and services that had never existed prior to this period. Cable TV, Microwaves, and Tephlon coated pans, just to name a few. And, that was just the beginning. Added to this list during the 1980's was the personal computer and home gaming systems. It's now 2008 and the list of stuff that we "need" to be happy includes, cell phones, LCD flat screen TV's, a GPS, IPOD's, etc. Today, we're adding add goods and services at an accelerating rate, with no end in sight. In addition to our mortgages and utility costs, our basic expenses include cable, internet, and cell phone plans etc. And, with forced obsolescence, much of the stuff on our growing list of "needs" has to be replaced every couple of years.

Unlike the ever increasing list of gotta have stuff however, our incomes are finite.
It's no wonder that most of us can't afford to fund our increasing lifestyles with our current incomes. In efforts to subsidize our lifestyles, we borrow money. As most of us have little to nothing saved, the focus has shifted from "What is the cost of the item?", to "How much is the payment?". But, as we continue to accumulate debt in the form of additional payments, we threaten the very foundation of our family's financial well-being.

The Nation's Debt Problem

Take a look at our nation’s ever increasing deficit at http://www.brillig.com/debt_clock/ and you’ll get a great visual on how our own Government is failing in the area of fiscal responsibility. With our leadership unable to manage its finances, it stands to reason that those for whom it serves would also be struggling in this endeavor. And, as the American consumer provides the horsepower for our economic engine, it comes as no surprise that we are encouraged to keep on spending.


Now I’m not saying that all borrowing is bad. Without a mortgage, many of us would be unable to own the homes that we live in. What I’m talking about here is the unbribled spending that has led to an ever increasing "Anchor of Debt" that so many of us are dragging behind us. We have become so mired in payments that we struggle from paycheck to paycheck.

One answer to our dilemma, on the surface, is that we simply need to make more money. But, recession or not, most of us are making more money today than we were two or three years ago. Now one could argue that things just cost more today than they did a few short years ago, and maybe that's part of the problem. But, perhaps a deeper issue is that we keep accumulating more and more stuff. As our incomes have increased, so too have our lifestyles.

Caveat Emptor

“Caveat Emptor” is Latin for the phrase “Let the buyer beware”. What this implies is that the buyer is responsible for examining the condition of an item prior to buying it. Unless specifically stated, as in the case of a guarantee or warranty, once you’ve taken possession of the item, it is yours for better or worse. A similar principal applies when entering into a contract, and partially explains why we often experience "Buyers Remorse" after we’ve signed our John Hancock. Questions arise like, “Did I miss something in the fine print?", or, "Did the salesman disclose everything about the item?" Perhaps this explains why we have misgivings when it comes to dealing with sales people. Unfortunately, when it comes to financial issues, such as saving for retirement, we often have no choice but to turn to a sales professional for guidance. Or do we?

Ask even the best intentioned Broker, Advisor, or whatever the Financial Professional's title, "How much should I be saving for retirement?", and you’ll hear some thing like “As much as you can and as often as you can.” Why is that? Well, the rule of thumb is that, in retirement, you will need sufficient resources to produce 60% to 80% of your annual pre-retirement income. Let’s suppose that you and your spouse currently earn $100,000. That means that if you were to retire tomorrow, you would need an annual income of $60,000 to $80,000. So, where did these percentages come from? Suggesting 60% to 80% assumes that you’ve been diligently saving 10% to 15 % of your paycheck toward retirement. Since you will now be retired, you’ll no longer need to save for retirement. Additionally, part of your income will be replaced by Social Security and, if you’re one of the lucky few, a pension. So far so good, right?

Not so fast! Judging by the average American’s negative savings rate and growing consumer debt, I would argue that many of us spend far more than we earn. Further, as our incomes have risen, we continue to add to our personal debt figuring that if we can “afford” to make the minimum required payments, we’re doing just fine. Meanwhile, many folks are finding themselves on the cusp of retirement, with little or no assets and a pile of debt. Now I don’t know about you, but I don’t think it’s advisable to quit your job and enter into your "Golden Years" with a bunch of payments in tow. Late in the game, many folks are turning to Financial Advisors and other sales professionals, looking for assurances that everything is going to be all right. Fortunately, there is a better way. This blog is dedicated to folks like you who are seeking an alternative solution to the debt and retirement problem.