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A beautiful home in a wonderful suburb, a big yard, a nice car in the garage. Add a secure job to pay for it all and it looks like the American Dream, right?
Perhaps, but it is your dream?
I know a couple who have all that and more, but they feel trapped by a large mortgage payment, big property tax bill, high utility costs, two car payments, and credit card debt. They’re desperate to escape their situation, and I suspect they’re not the only ones.
In fact, according to a recent survey, most Americans have financial regrets. And there’s more to the story when you read between the lines, so here’s…
A Look at the Numbers
“Not saving money for retirement early enough” is the most common regret in the survey, shared by 18% of respondents. Only 9% regret their credit card debt or student loan debt, and just 3% regret buying more house than they can afford.
But wait a minute! Doesn’t a big expensive house and big debts make it tough to save for retirement, and tough to live on a retirement income? Consider the following statistics:
- $27,857 – Average student debt
- $16,425 – Average credit card debt for households with balances
- $29,058 – Average auto loan debt for those who borrow to buy a car
- $309,200 – Average new mortgage loan
- $190,000 – Average first-time buyer mortgage loan
- $1,494 – Average total monthly housing costs (not including maintenance)
- 1,660 Square Feet – Average new house size in 1973
- 2,687 Square Feet – Average new house size in 2015
- $57,790 – Median household income in 2000
- $56, 516 – Median household income in 2015 (most recent available)
- $28,634 – Per capita personal consumption expenditures in 2000
- $36,205 – Per capita personal consumption expenditures in 2017
Do you see a pattern here? Our homes are getting larger that ever, we’re spending more every year even when incomes are dropping, and we’re taking on debt of every sort at record levels.
Americans are living the dream, and racking up a pile of dream debt!
It’s tough to retire if you consume instead of saving, and even tougher if your retirement income has to cover a large home and large debts. That’s why more retirees are going back to work.
Do you want to be flipping burgers at seventy-five just to survive?
This isn’t just about retirement. Do you want that stress right now? You know, the stress that comes with “living the dream” and working and scrambling to find a way to pay for it?
And who wants to gets stuck in someone else’s dream anyhow? Here are some possible consequences of falling into this trap:
- You give up your happiness to impress others.
- You give up freedom for a job you hate, just to pay the bills.
- You stop enjoying what you have just to chase after more stuff.
- You’re just months away from serious financial trouble if you lose your job.
- You pay extra for everything thanks to interest charges.
- Your think about your debt more than your important goals.
If you suspect the American Dream might be the American Nightmare, here are some things you can do to avoid it…
- Recognize the Trap
- Discover Your Values
- Learn to Calculate True Costs
- Get Out and Stay Out of Debt
- Find Better Alternatives
Let’s look at these steps in more detail.
1. Recognize the Trap
It’s easy to go along with what everyone else does. Borrow for school, get a good job, a big house, and so on. This cultural momentum alone can put you deep into debt for a lifestyle that doesn’t satisfy you.
Then there is the urge, often unconscious, to impress others. Recent research shows that “Individuals conspicuously consume to signal their wealth.” In other words, we buy things to impress people. Of course that means buying what is valued by others.
Temptation plays a role too. If it’s easy we tend to go after anything shiny and new, and credit makes it easy.
When you see these elements of the trap you can start to avoid them.
2. Discover Your Values
So what actually makes you happy? Learning that is how you avoid the trap. After all, your happiness probably doesn’t come from working overtime to pay debt incurred for things that impress your friends and neighbors.
Even new experiences don’t satisfy when done for the wrong reasons. Research shows that “Spending money on activities and events, such as concert tickets or exotic vacations, won’t make you happier if you’re doing it to impress others…”
On the other hand, your happiness isn’t likely to come from spending almost nothing. Frugality is a tool, not a goal. I stay out of debt and keep expenses low so my wife and I can work fewer hours, travel, and go out to eat frequently.
When you know what you want it’s a lot easier to avoid what you don’t want. Start paying attention to what actually makes you happy.
3. Learn How to Calculate True Costs
My wife and I don’t value big homes, so ours is 675 square feet. It’s easy to clean and care for, and it also saves us a lot of money. We paid cash, so we have no mortgage payment.
That’s a nice start, but when you go small you also save on taxes, insurance, utilities, and maintenance. Conversely, when you opt for a larger, more expensive home, it’s not a one-time extra cost. Every month you live there you pay more for several key expenses.
That’s okay if a big house is what’s most important to you. But if, like my wife and I, you would rather be out enjoying the world, you have to understand what things really cost.
Consider the recreational vehicle, that symbol of American Dreaminess. RV sales are at record levels. But what’s the real real cost if you camp in it three weeks annually for ten years (210 days total), and then sell it? Is it $50 per day, $100, or more? Let’s do some math…
Class C motorhomes start at $50,000 to $80,000 according to CostHelper. We’ll say you pay $65,000 and finance $55,000 of that. In 10 years it will depreciate about 52% according to CamperReport.com. Unless otherwise noted, other expenses are calculated using CostHelper, and assume 2,000 miles of travel, and no storage fee.
Here are ten years of expenses:
$33,800 – Depreciation (bought for $65,000, sold for $31,200)
$12,000 – Maintenance ($1,200/year)
$5,000 – Gasoline – 20,000 miles, 10 mpg, $2.50 per gallon)
$7,350 – RV park space (210 nights times $35)
$11,100 – Insurance ($1,108/year in low-cost Oregon per Trusted Choice)
$2,400 – Licensing and registration ($200/year)
$13,100 – Interest (55k, 8 year, 5.5% interest, per Good Sam)
$84,750 – Total: Divided by 210 days equals $404 per day of use.
I’d take luxury hotels over that, and for a lot less. But even if you love RV camping, seeing the real cost might lead to wiser decisions. For example, you might buy a cheap used RV for cash and get your total cost down to $100 per night.
Learn to calculate the true cost, but not just in monetary terms. After all, you have to spend time to earn that money. When you understand that a motorhome can mean months or years of extra time at work, you might find a new dream that’s a better fit for your values.
4. Get Out and Stay Out of Debt
I have friends who have better cars and homes, and maybe that’s important to them. But they also have big debts and long hours at work. With no debts I get by just fine working 20 hours weekly, and I mostly avoid getting jobs. That’s my preference.
You might think of debt payments as a monetary expense, and that’s true, but money costs time, and that’s the ultimate expense. The time you spend working to pay interest charges is time you could spend doing… well, whatever you want.
Here are some of the advantages of the debt-free life:
- Less stress
- Fewer bills to deal with
- More financial security (debt payments are tough to stop when income drops)
- More money for important goals (money that would otherwise go to interest payments)
- You pay less for everything (no interest charges added)
- Less work (because you spend less you can earn less)
A mortgage loan is about the only personal debt that makes sense, because if done wisely (right home, right loan) you save money versus renting. But what about other forms of debt?
I have 25 of them, because there are so many ways to make or save money with credit cards. But I pay them off every month and never pay interest. Try to do the same, and if you can’t handle the temptations credit cards present, cut them up.
When you borrow for a car you pay interest, and probably pay a higher price too, because cash buyers get the best deals. Avoid car loans. If you can afford a $500 payment you can probably afford to drive a junker while you save $500 per month to eventually pay cash for a nicer car.
It might make sense to borrow for education, but why not first apply to one of the many free colleges. If that doesn’t work, cut your class schedule and work more so you can pay for most of your school expenses as you incur them.
Payday loans typically cost 400% annual interest, so borrow from mom if you have to. Financed furniture is typically overpriced, so live with what you have or buy used until you save to pay cash. Consumer debt of any sort rarely makes financial sense.
Borrowing means you get more now, but that’s a temporary effect. In the long run, when you pay more for everything due to interest charges, your money buys a lot less.
What if you’re already deep in debt? Here are some tips to paying it off quickly:
- Reduce expenses and devote the savings to debt repayment
- Work extra hours and devote all of that income to debt repayment
- Pay the highest-interest debt first
- As soon as one balance is paid off, devote all the money that was going to that one to paying off the next highest-interest debt.
- Sell anything you’re not using and use the proceeds to reduce your debt
If you work at it you might be surprised by how quickly you can pay down your debt. Consider the woman who paid off $25,000 in student debt in two years, while earning $40,000 per year.
5. Find Better Alternatives
If the American Dream, however it’s defined, is your dream, go for it. But if you want to avoid it, or at least make it affordable and less stressful, look for alternatives to the cultural norms. Here are some examples to consider:
- Join the tiny house movement.
- Try one of dozens of other cheap housing options.
- Move to one of the cheapest cities and take a pay cut to have a job you love.
- Get rid of the car and get a job within walking distance.
- Simplify life by becoming a minimalist.
- Become a vagabond as a lifestyle, or to scout for a future home.
- Go to a trade school instead of college.
- Become an apprentice instead of going to college.
- Develop multiple sources of income so you don’t need a job.
- Cash in everything and move to one of the countries where you can live on less than $1,000 per month.
Maybe the people who say the American Dream is for suckers go too far, but in any case, it’s good to know there are always alternatives.
Tell us how you feel about the American Dream… and keep on frugaling!