Debt, Personal Finance Blog

Keeping up with the Joneses? No thanks…

Don't Buy Things
Credit to Dave Ramsey for Image

I don’t know about you, but retiring right around the time I will be going BACK into diapers is not my idea of how I’d like to spend mine.  Let’s take a quick look at “the Joneses” and you can decide whether or not that’s the route you want to go in your retirement.

Here’s Where Trying to Keep Up With the Joneses Will Take You:

The average American has less than $10,000 saved for retirement and does not even have at least $500 in savings.*  Let me say that again… 

The average American has less than $10,000 saved for retirement and does not even have at least $500 in savings!

“Wow BSM, that’s pretty terrible…that’s probably because not many people can ‘afford’ to save money in these tough economic times, right?”  Well, not exactly… when you buy crap you can’t afford, with money you don’t even have, to impress people you don’t really like, what do you expect?  Let’s see what kinds of debt most Americans are spending their money on:

  • Average American Mortgage: $1,567/month with a $309,200 balance
    • 30 year payoff with $254,801.55 interest paid – over 45% of your payments going to interest

This is not necessarily a ‘bad’ investment if your household income is at least $85-95K/yr. But, I recommend a 15 year mortgage, which will 1) cut the time it takes for you to become mortgage-free in half, and 2) reduce your interest paid on the life of the loan tremendously.  In the example below, switching to a 15 year mortgage would save you $177,519 in interest payments.

That said, you will probably need to reduce your budget on a home to be able to afford a 15 year mortgage instead of a 30 year.  A good rule of thumb is to keep your mortgage payment at 25% or less of your take-home/net pay.

 

 

  • Average Car Payment: $364/month if you have a used car payment and a whopping $506/mo for new cars (figure out how to punch yourself in the taint and do it immediately!)
    • 5 year payoff with ~$3,000 interest paid (at 4.75%)

If you can afford a $506/mo car payment, then you must be a multi-millionaire… but if you are, then you need to punch yourself in the taint again for not paying cash!  If you can’t afford to pay cash for your car, then you can’t afford it. Read about the recent purchase of our new ride here.

  • Average Credit Card Payment: $250/month with an average balance of $8,377 –
    • 14.5 YEAR pay-off with $5,639.71 interest paid (minimum payments of 3% of the balance, at 15% APR) – and that is assuming you don’t make anymore credit card purchases along the way!

Other than title loans, payday loans, or debt to loan sharks, revolving credit card debt is the worst.  In the example above, these sheeple have financed yesterday for the next ~15 years.  To make matters worse, many of them pay more than 15% APR, so the numbers are even more concerning.

  • Average Student Loan Payment: $382/mo on a $37,172 balance –
    • 10 year pay-off with $8,668 interest paid (at 4.29%)

Student loans are similar to mortgages, they are not necessarily ‘bad’, but much of the debt can and should be avoided.  This point also deserves its own article… I paid for college as I went, with absolutely no debt at graduation, so I know first-hand that it can be done.

Let’s leave the mortgage out and see what it would look like if you paid off the rest of these debts and invested it:

$364 (Used Car Payment) + $250 (Credit Cards) + $382 (Student Loans) = $996/mo

If you invested that for 20 years with a modest 6% investment return, you would end up with close to $500K (see chart below):

In other words, if you borrow/finance everything, you are essentially giving up the opportunity to retire earlier, or at all!  Maybe Gen X and Millennials will have Social Security benefits, but I’m not counting on it.  And, if we do, it’ll probably be just enough to cover our diapers and TV dinners.

Do the Joneses Have any Hope?

With all of these statistics, it’s no wonder that HALF of the American population is still living paycheck to paycheck.  Somehow, we are still stuck in the ‘old ways’ of our previous generations: accumulating mountains of debt, living a life of consumerism, and the hope that we can suckle the tit of the government all through our retirement years.  Until we wake up and get serious about our financial futures, that’s what our society has to look forward to.

The numbers above can be pretty grim, and it might sound like I’m being too hard on the Joneses… but, the good news is that we can 1) decide not to live that way any longer and 2) come up with a plan to change our financial outlook.

That’s what The Black Sheep Millionaire blog is all about… helping people avoid financial mistakes that end up costing them more than they should in the long run.  Stick with me and we’ll talk about how to come up with a plan for change next.

See also: Set Yourself on FIRE and Climbing the Corporate Ladder: A Slave to the Top?

 

*For those that are interested in the source data, I’ve provided hyperlinks within the text

** Question for you: Is it fair to say that there is “bad debt” and “good debt?” Let me know your thoughts in the comments section.

 

 

 

6 thoughts on “Keeping up with the Joneses? No thanks…

  1. The current state of affair for debt is quite sad…I always wonder how we got here. How did we give up the things that matter to buy “Consumer $h$T”. Really. It makes no sense and yet we have tv shows, commercials, sporting events, and all of these other things just driving us to do more and more buying and get into more and more debt. Very sad situation for sure.

  2. Good and bad debt need to be well defined. To me, bad debt is debt you should simply never have. The only exception is a true emergency, like being homeless or needing your appendix removed. Good debt is debt that enables you to achieve a better financial position in the future, like buying a house or an education. Good debt still needs to be repaid, so you should only take on what you can realistically pay off.

    Too often, good debt is considered to be sugar free ice cream. It has no side effects, so take as much as you want. Bad debt is only really bad if you admit you have it. Everyone does it, so it is not that bad. These poor definitions have to go.

    1. Totally agree about the amount of poor advice on that point from most. Debt is debt… but, that being said, some types are worse than others. Most people cannot afford to pay cash for their first house, so as long as you are not overbuying, are on a 15 yr. fixed rate mortgage, and the payment is 25% or less as a percentage of take-home pay… then you are being responsible with the decision.

      Debt for emergencies, can be avoided when you budget for them (and/or have an emergency fund). Student loan debt should be minimized as much as possible, and avoided whenever possible. Thanks for sharing your thoughts and keep them coming, Acastus!

  3. Those are some crazy numbers, indeed! I can’t get over the average new car payment amount. Nuts!

    We’ve managed to resist the urge to keep up with the (broke) Joneses and have done pretty well within the categories you mention. Our current monkey wrench though, is my student loan. If only I knew then what I know now!

  4. From my observations, most people are their own worst enemy when it comes to money. They cry broke, but its mostly their fault through excessive wasteful spending and “keeping up with the Jonses” like you say.

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