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!
“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.
*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.