Americans are absolutely terrible with money. Even the ones that do well for themselves are dumbfounded when they check their balance on the ATM. What is frightening about this is that they actually have to check their balances to find out how much money they have. This is detrimental to society.
How much money a person has should be something that can be recalled right from the top of their head. The dollar amount in a person’s bank account should have even more importance than a phone or Social Security number. Yet most Americans don’t have any idea how much money they currently hold and have no idea where their money went.
Americans will even spend their money before they get it. With how easy it is to get a credit card these days, people are very quick to whip out that little piece of plastic when they find themselves a little short on cash. People are also tempted to pull out their magic money card for large purchases that they didn’t save up for - in today’s society instant gratification is often the social norm. Balances can rack up very quickly, and carrying a balance on a credit card is devastating to one’s disposable income. When someone makes a large purchase on a credit and only pays the minimum payments each month, they wind up paying for their purchase over and over again.
This habit that Americans have reflects on their credit scores. Right now (2010) in the United States the average credit scores by state range from 651 – 710 with Texas having the lowest credit score and South Dakota having the highest.[1] With Americans freely spending along with their impulses, it’s no wonder that many cannot afford to pay all of their bills on time.
The single most important way to get a good handle on one’s personal finances is to simply keep track. Keeping a written record of one’s finances is not the social norm. People who follow this practice are looked down on and are considered by society to be “anal”, “tight-wads”, “cheap”, or even “OCD”. The very notion that people would equate keeping accurate money records to a mental disorder should be an instant indicator of the general attitude of Americans when it comes to money; they take their wealth for granted. In fact, this philosophy is downright absurd. Contrary to this popular belief that the wisdom of keeping track of money (personal responsibility) is a mental disorder, it should be the exact opposite and considered necessary and an everyday practice for each household. After all, it just makes good sense.
The inability to balance their checkbook is not where this bad habit ends. Accounting concepts are usually not even offered to the general public until their college years. Since only about one-third of Americans attain a college degree,[2] even the simplest of accounting concepts are unknown to the general population. The evidence of these terrible record keeping habits can be seen just by making small cash purchases in today’s society. Most of the time you will not even be given a receipt by the register clerk unless you ask for one. This is an indicator that the general population does not care to know where they have been spending their money, or what they have been spending it on.
Accounting tasks are made simple today by a lot of great pieces of software. Most people do not even consider taking advantage of these money tracking tools that are offered to them. There are many financial programs which are free[3] or inexpensive[4], and all are easily available to all people that own a computer. For the people that do not own a computer, the time tested pencil and paper method is still available. Keeping records is not a huge time consuming task. It is very simple and only takes minutes a day. There is no excuse for skipping this simple chore, as it is probably the most important one of all.
Budgeting and setting limits for one’s self is also something completely unknown to the general public. In a normal office environment, one can see many of their coworkers sipping on donut shop coffee every morning; some even go out to buy their second cup during their lunch break. While this may seem like a small expenditure, the numbers really do add up quickly. For example if a cup of coffee costs a conservative $1.50, multiply that by 5 days a week for 52 weeks in one year (not taking into consideration holidays, vacation, and sick days) the true cost of this daily treat is actually $390 per year for just one person. For many households, this is more than the cost of an entire month’s groceries.
Setting a budget that covers all of life’s necessities and needs as well as setting aside savings is critical in modern day America. With the dollar at an all time low and the rise in unemployment, now is a more crucial time than ever to make sure that the dollar goes further. This means that the individual needs to set a budget and follow it, as well as making regular deposits into savings and various retirement accounts. As a general rule, 10% of a paycheck should always go into savings. For home owners it would be wise to make sure that there is always $10,000 set aside for house repair emergencies at all times. It would also be prudent to try to contribute the maximum amount allowed into retirement accounts, which are usually capped somewhere between $3,000 and $5,000 per year per person. And of course, do not carry a balance on any credit card. Make sure that whatever is charged to credit accounts is paid in full at the end of each billing cycle.
The rules of money are actually simple, so why are Americans so inept at handling their finances? The obvious answer is that they were never taught to keep accurate records or solve money problems. But why aren’t they? Surely the lessons of the Great Depression that this country experienced between 1929 and 1933 should have taught everyone to be more careful with their money. However, it didn’t and this was largely due to the New Deal as well as the prosperity that was experienced after World War II.
Franklin D. Roosevelt’s economic plan was called the “New Deal”. It was a combination of many government programs that were heavily influenced by Socialism. Using the Keynesian Theory of economics, Roosevelt’s administration thought that the Federal Government could repair the economy with the programs that were put into place and bring the country out of the Great Depression. The Gold Standard was done away with and many welfare programs, including Social Security, were created. The Keynesian Theory of economics focuses only on short term fixes, and since the New Deal did have positive short term effects, Franklin D. Roosevelt and the Keynesian Theory of economics have been accredited with pulling the country out of the worst depression ever seen. The negative effects such as a massive power-hungry Federal Government, loss of financial independence of the people, and hyperinflation due to the new fiat money system were not and to this day are still not taken into consideration.
Shortly after the Second World War, President John F. Kennedy passed some of the largest tax cuts this nation has ever seen in 1964. Economic growth was on the rise, individual consumption was up, and young Americans were experiencing prosperity and wealth like never before. Prices were low and with a new surge in the money supply, inflation had not yet set in. There was no longer a need to carefully monitor their finances. To Americans, the worst was over and the “safety net” of social programs put into place by Franklin D. Roosevelt’s New Deal put everyone’s mind at ease.
Since the Baby Boomer generation experienced abundant wealth during their youth, in their short-sightedness they have lost whatever accounting practices their parents may have passed onto them. They believed that the wealth they enjoyed in their youth would always be around for them so there was no need to set up savings for their retirement once they reached that age. During the 1960s and 1970s labor unions were strong in numbers and managed to negotiate pension plans for many of their blue-collar members. There was also a wide spread belief that their pensions would be supplemented through the Social Security program.
Due to the belief that wealth would always be easily available, the Baby Boomers for the most part, did not set aside college savings for their children. Since they were not trained to allocate their monetary resources or set up sinking funds (most are not familiar with the term sinking fund), they found it unnecessary to set aside money for their kid’s schooling. For those who could not afford to pay for their kid’s college education were already condemning their children to suffer and choose one of three situations later in life. The first one is to work throughout school. The cost of education has risen dramatically in recent decades which would require more work in order to be able to pay high tuitions. This makes life very difficult for the working student since untrained labor pays very little and the dedication to simultaneous schooling is very taxing. The second option is to go into debt in order to pay for a higher education. This dooms the student to a life of repaying large loans with a high interest rate. The third common scenario is to not go to college. It is still possible to become rich and prosper without an education in America, but it is getting more difficult every year. Without a college education in modern day society, one has a much higher chance of being trapped into a life of mediocrity. After all, it is not as easy to find work that pays a livable wage as it was prior to 1980.
With the attitude of society today it is expected that there would be a public outcry for a government mandated solution to the high cost of education. There is a common belief, especially within the Democratic Party of the United States, that colleges that are funded through taxes should be created and made easily available to the public. However, it should actually be the practice of every new parent to set up a college savings fund for their children instead. There should be no dependence on government mandated public colleges that are paid for through taxes as this will only increase the already heavy tax burden on the American Tax Payer, and no doubt decrease the value of the education that would be provided by one of these facilities. The assembly-line approach to education would be extended from the high schools to the colleges, and federal regulations of these publically funded schools would diminish the content of the education as we have seen with the unsuccessful No Child Left Behind program that was put into place during the administration of George W. Bush in 2002.
The children of the Baby Boomers, Generation X and Generation Y have even less of an idea on how to handle their money yet somehow have retained the massive sense of entitlement for wealth and material possessions that their parents have. This is a recipe for disaster for the United States. It is all too common for members of these two generations to go to their Baby Boomer parents for help, provided that their parents can afford it. Simply put, a very large number of them are not able to stand on their own two feet. Many of them routinely receive extravagant gifts from their parents in the form of houses, cars, furniture, and cash. This gets them very used to living far above their own means. Should something happen to their parent’s wealth, the members of Generation X and Y must turn to the same “safety net” that the children of non-wealthy parents must go to: the government, or by a less friendly name, the American tax payer.
With members of Generation X and Y often living above their means, they do not set any money aside for savings. There is absolutely no planning for emergencies such as house repairs, car repairs, medical emergencies, job loss, etc… Instead they turn to their parents or politicians when hard times hit. For the members of Generation X and Y who do manage to do well in their youth, much like many of their parents they do not plan for their own retirement; instead they depend on the Great Government Retirement Pyramid Scheme, also known as Social Security. Ironically, many believe that Social Security will not be around for them when they reach their retirement age, yet they still plan to depend on it. Evidence of this can be seen by the fact that the age where people can claim Social Security benefits keeps periodically rising and by the low percentage of Generation X and Y who have personal retirement accounts.
In order for Social Security to work, there would always have to be more of the younger generation than the old. This is purely speculation and can be wrong. The disappointing fact is that it is wrong. The tax payers, Generation X and Y combined number only in approximately 122.6 million. That number may sound like a lot, but when all of the Baby Boomers retire and start collecting Social Security their numbers along with those that are in generations above still collecting social security will be approximately 198.2 million. The post-millennium generation numbers in a mere 43.8 million. When they become old enough to shoulder some of the heavy tax burden, the number of tax payers will be approximately 166.4 million. [5] The generations that are supposed to carry the bill for Social Security are still going to be outnumbered by the older generation who benefit from it. It is estimated that by 2018 Generation Y will make up half of the working population.[6]
The best way to avoid the tragedies of the failing government Social Security program would be for the individual to assume the responsibility of a personal retirement account. The most common of these come in the form of a 401k, IRA, and Roth IRA. These are tools that are easily available to anyone with a bank account and would seriously reduce the number of people who would otherwise declare bankruptcy late into their own lives. They also have various tax benefits which can be taken advantage of either earlier or later in life depending on which type of account is opened. While it is possible to withdraw from the Social Security program by revoking one’s Social Security Number, it would make the people who chose to do this ineligible for employment in almost all companies and it was also result in the loss of any money that the individual has already paid into the Social Security program. For these reasons many people who are opposed to Social Security choose to stay in it, in a sense most who are opposed to Social Security feel completely trapped by it.
Even though the American People may experience good times of economic growth and, it is still important to be savvy with money. Becoming careless only makes one more vulnerable to times of economic recession. It is imperative to plan for hard economic times even when things are going well as it is foolish to believe that the economy will always be experiencing growth. The pendulum swings in both directions in a society that uses the Keynesian Theory of economics, which is the current model in the United States. When the Keynesian practices are employed the economy is always moving between growth and a recession. It becomes imperative for the individual citizen to make wise decisions and investments with money. Being responsible with one’s money may be difficult, but it is overall better for the economy and future growth of the nation. Being irresponsible with one’s money can make it far too easy to fall into the belief that it is the responsibility of the state to distribute the wealth among the citizens.
[1] http://www.creditreport.com/creditscores/creditratings/average-credit-scores.aspx
[2] http://www.census.gov/hhes/socdemo/education/data/cps/2009/tables.html
[3] http://www.gnucash.org
[4] http://www.microsoft.com/Money/default.mspx
[5] http://www.nasrecruitment.com/docs/white_papers/Getting-to-Know-Generation-X.pdf
[6] http://biz.loudoun.gov/Portals/0/BEC%20Information%20Sheet.pdf
