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Here’s How Poor Americans Really Are
-By Caleb Jones
It’s true that America used to be the richest country in the world. During the 50s and 60s we Americans were far beyond any other country on the planet, by orders of magnitude, using just about every economic measurement you can think of.
Today, it looks as if America has a lot of money, but what we really have is debt. The debt of the government and of the populace is historic and staggering, regardless of the number of nice cars, houses, or Starbucks customers you see all over the place.
If you want some real numbers that demonstrate how “rich” we Americans are, 38% of Americans who make more than $100,000 a year would have trouble coming up with just $1000 to deal with an emergency. Just 1000 bucks!
Read that again. Everyone thinks $100,000 a year is a lot of money. When I was in high school back in the 1980s, it was. But then came Bush-Obamaisim and the massive money printing of the Federal Reserve. Now $100,000 is simply a higher level of poverty which looks and feels a little nicer.
What about people making less than $100,000 annually? Here’s some more data:
- 75% of people making under $50,000 annually would have trouble coming up with $1000.
- 67% of people making between $50K-$100K annually would have trouble coming up with $1000.
Everyone thinks Americans are rich, yet most of them, even the “rich” ones, don’t even have $1000 to access in case of an emergency.
Do you have $1000 cash socked away somewhere you can use for an emergency? Man, if you don’t, you have very severe life problems. You seriously need to look at yourself in the mirror and ask yourself some tough questions about what the hell you’re doing with your life.
As I teach in my membership program, having $1000 set aside for emergencies is the very first financial goal you should have, before any other goal.
The order goes like this:
1. Save $1000 cash somewhere if you don’t already have it.
2. Start paying down all of your debts, in order of loan balance, starting with the smallest one. (It makes more mathematical sense to pay them off in order of interest rate, but when dealing with emotional, irrational human beings, your odds of success are much higher if you pay down off starting with your smallest one and working your way upwards.) If you encounter any emergencies, use your $1000 emergency savings instead of going into more debt. If/when you use it, stop paying off your debts until you rebuild that $1000 again.
3. Once all your debts are paid (except your home mortgage if you have one) work to turn that $1000 emergency fund into a savings account that is equivalent to 6-12 months of living expenses. Do not use a bank for this account (ask Cyprus and Greece all about that). Use an investment firm or cash instead.
4. Once you’ve got 6-12 months of living expenses saved (I think 12 is better than 6, but that's just an opinion), start investing for the long-term.
Most Americans, even “rich” ones, can’t even do step one.
This is appalling. Even when I was young and disorganized in my early 20s, I still always had about $800 set aside for just-in-case money.
Americans are not rich; they’re in debt. Americans are cash poor.
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Stevie 2016-07-21 07:33:37
Is this just a case of a shitload of people not living within their means properly then, or is the cost of living really that high now due to all this money printing? I remember you saying $75,000 is a great baseline amount for anyone to lead a happy and fulfilling life (assuming they're not in an expensive place like NYC, London, Tokyo or whatever), so I'm thinking it's gotta be the former... or are we already starting to see a situation where even $75,000/year just doesn't cut it anymore?
Fraser Orr 2016-07-21 09:53:51
You are right of course. If anyone doubts this, or that it is a new problem check out this graph. It is a graph that plots the federal debt divided by the GDP (the total goods and services produced by the country) since the founding of the nation. It is a really interesting graph -- it tells the story of the country. You will notice * a peak at the start -- where the feds assumed the revolutionary debts of the states, * then another small peak during the war of 1812, * then a big peak during the civil war (when, BTW, Lincoln instituted the first ever income tax), * then a peak during the short American contribution the the first world war, * then a ramp up as FDR spent the nation's fortune on his alphabet soup * then a massive peak during the second world war * drifting down in the 60s and 70s, * till Reagan started his Star Wars spending, * leveling out with Clinton, * then dipping for Contract with America. * then it goes up slowly for Bushism, * then it goes absolutely stratospheric under Obama. Through history those peaks came during times of gigantic wars. Currently Obama's economy has the ratio close to what it was during the largest conflagration in history. If you understand this graph you should be terrified, and you should also be extremely angry at Obama. How is it possible that as a Keynsian that he spent AT THE SAME RATE AS THE SECOND WORLD WAR and our economy is still languishing in some cesspool of anemia. How is it possible that the American people are so stupid that he would be re-elected in a landslide were he eligible? http://www.usgovernmentspending.com/spending_chart_1792_2016USp_17s1li0181110_967cs_H0f_US_Federal_Debt_Since_The_Founding
E.S. 2016-07-21 10:21:25
Thank you for this post. I recently bought your book and love it. So many times I've heard from family, "are you saving?" But the great value here is the step by step, specific goals. Cheers
Caleb Jones 2016-07-21 10:57:55
Is this just a case of a shitload of people not living within their means properly then, or is the cost of living really that high now due to all this money printing?Both, and more. It's a result of: - A consumer culture societally programmed to spend and consume instead of save. - The US having among the highest tax rates in the world. - Reduced spending power of the US dollar because of massive over-printing of the currency by the Federal Reserve. - Welfare state. ("So what if I blow all my money? I don't need to save. I'll get welfare / food stamps / subsidized housing / free health care / etc from the government.")
I remember you saying $75,000 is a great baseline amount for anyone to lead a happy and fulfilling life (assuming they’re not in an expensive place like NYC, London, Tokyo or whatever), so I’m thinking it’s gotta be the former… or are we already starting to see a situation where even $75,000/year just doesn’t cut it anymore?According to the surveys, $75K per year does cut it for most normal people. However! If happiness is your goal, that $75K per year means you have very low or zero debt and pay a reasonably low tax rate. Someone making $75K per year with $80K in college loans, $20K in credit card debt, and a $400 per month car payment who pays 40% total tax at his job is very different than the guy making $75K with just $5K in debt who pays 18% in taxes because he's self-employed.
RT 2016-07-21 11:38:16
Are you familiar with investment credit economics? FDR in USA, Shimomura in Japan, China recently as well as other Asian nations. This is pretty interesting http://londonprogressivejournal.com/article/view/1514/the-origin-and-spread-of-investment-credit-economics
Felix 2016-07-21 12:28:24
So let's assume my living expenses are equivalent to $1,500/month. Should I really keep $9,000-$18,000 in cash?
Caleb Jones 2016-07-21 14:14:02
Are you familiar with investment credit economics?Yep. It's just another form of corporatism.
So let’s assume my living expenses are equivalent to $1,500/month. Should I really keep $9,000-$18,000 in cash?Yes. What if you lose your job and can't find a new one in 3-4 months? What if the economy collapses and jobs are hard to find? What if you physically injure yourself badly and can't work for 3 months? What if your car explodes and you suddenly need to buy a new one to get to and from work? What if one of your loved ones (child, mother, etc) experiences a catastrophe and needs help? Etc, etc, I could go on for pages. If your answer to these questions are either "I can just borrow more money" or "the government will take care of me," then A) you're part of the problem and exactly what I'm talking about and B) you'll never be able to live a life of long-term, consistent happiness.
Andrew 2016-07-21 16:53:24
Yikes! That's really depressing for those people. Just curious what would your solution to the problem of all those illegal kids be?
Caleb Jones 2016-07-21 17:53:15
Just curious what would your solution to the problem of all those illegal kids be?The solution is have Mexico and Central American countries to stop embracing crime and corruption at the governmental level, and to adopt rule of law and free markets. Mexico (as just one example) has enough natural resources to be one of the wealthiest countries in the world.
Andrew 2016-07-21 19:05:45
I agree with your take on what caused the mass migration of kids but I was wondering what you would do with the kids who come here. I get that there is no easy answer on this but I'm just curious as to what your solutions would be.
Felix 2016-07-21 19:32:27
Got it. Where do you usually keep this emergency cash? In a safe? Under the mattress?
Paul Murray 2016-07-21 20:06:58
Have $1000 put away which you can get at immediately. Have 6-12 months living expenses put away which you can get at on 10 working day's notice.
Caleb Jones 2016-07-21 20:07:15
I agree with your take on what caused the mass migration of kids but I was wondering what you would do with the kids who come here. I get that there is no easy answer on this but I’m just curious as to what your solutions would be.Solutions aren't relevant because it's not America's job to solve Mexico's problems. I would contact the Mexican goverment and have them come pick them up. Worst case, I would like the kids in but turn them over to private orphanages or private adoption agencies (rather than taxpayer funded agencies), but that would be a worst case scenario.
Where do you usually keep this emergency cash? In a safe? Under the mattress?Oh, I like to keep a big mountain of cash out on my front lawn. Seriously dude, what a dumb question. Plus I never said you need real cash. Putting it into a money market fund is fine too, just as long as you use an investment firm and not a regular bank.
Felix 2016-07-21 21:43:55
Actually, you did state on #3 to use either an investment firm or cash, just not a bank (sorry, don't know how to quote). Anyway, thanks for the answer.
Ken 2016-07-21 22:05:52
Boy, what dumb advice. Use a bank for sure. An investment firm, no matter how seemingly sound, can at least in principle go bankrupt, in which case you'll be standing in line with all the other creditors in hopes of getting $$cents back on your $$. An FDIC insured bank account, on the other hand, is backed by the full faith and credit of the US Government, which, as Caleb **never** gets tired of pointing out, can *legally print money*. So cannot go "bankrupt" and can always make you whole (at least up to the legal max of 250K), no matter what happens to the bank. Now, saying that, keeping a cash reserve is a very good and prudent idea, and if you use a private money market firm, you're not likely facing a *whole* lot of risk .... but still, an FDIC insured bank account is safer than that, despite the bullshit to the contrary flying around here.
Caleb Jones 2016-07-21 22:29:15
Boy, what dumb advice.It's dumb advice to put some savings in a money market account or in cash?
Now, saying that, keeping a cash reserve is a very good and prudent idea, and if you use a private money market firm, you’re not likely facing a *whole* lot of risk …. but still, an FDIC insured bank account is safer than that, despite the bullshit to the contrary flying around here.The odds of a either a savings account at a mainstream bank or a money market account at a mainstream investment house (like Fidelity, Vanguard, etc) going belly up and taking your money away are both really low, so we're discussing semantics at this point, but the reason an investment house is slightly better is A) slightly better interest rates (though admittedly not much, since the Fed has murdered our interest rates, further dissuading people from saving), B) recent history demonstrates the investment house is a little less likely to play shenanigans with your cash like the banks will, and C) there are less government tentacles in an investment house than your typical Big Bank, for issues such as privacy and confiscation. The differences are minor, but I would pick an investment house over a bank ANY DAY.
full faith and credit of the US Government"Faith and credit?" You mean "faith" in that same goverment that just put Hillary Clinton away for her obvious crimes? (Oh wait...) You mean "credit" of a government that's almost $20 trillion in debt plus $127 trillion in unfunded liabilities plus near-zero percent interest rates? Yeaaaaah. If you want to trust your savings with that, you go right ahead. I'll pass.
dev 2016-07-21 22:33:57
I am divorced and bought a house i really didn't want and paid more than i wanted to spend so i could remain in the same school district in support of the 50/50 time arrangement i have with my kids. This mortgage is the only debt i have and i would be curious on what your advice would be regarding paying it off early ( i hate being in debt) or investing that money instead. I have a job that pays well but i could be replaced by a couple of offshore or h1b visa guys at any point in time. Because of this i have a years worth expenses saved up and i'm not likely to find a job that pays what i make now in this area and i can't move because of my kids. I also will need a newer car soon as mine is 20 years old. I guess what i'm wondering is what would you do in my situation? i want to be debt free and making additional payments on the house would get me there faster but i don't know if that is the right move for my situation.
Fraser Orr 2016-07-22 06:16:47
You know something I have been thinking about lately is where to store money. Nearly all my finances are stored in short term instruments line savings accounts or in other equity claims like stocks and bonds held in investment houses. Caleb has prompted me to start listening to Simon Black and he is not a fan of leaving your money in claims like this, since they are at serious risk from the government. In fact denominating your savings in dollars is a risk since the dollar is entirely at the mercy of the caprice of the fed. And there are plenty of good reasons to fear the government stealing your claim and your dollars. If you think that is a crazy conspiracy then you are mistaken. Brarak Obama already did this to you. When he (encouraged the fed to) print $2 trillion new dollars it sucked about 20% of your dollar denominated wealth away from you already. This was partly ameliorated by his new regulations that made it impossible to borrow money or invest in new businesses, which is why the M3/M1 ratio went through the floor, meaning that the amount your money was devalued was reduced by destroying your future. Again, look at the graph I posted above, under Obama the government has been ramping the debt pretty much at the same rate as they did during World War II. It is utterly insane what he has done, how he has hidden it, and how the press has been so utterly derelict in their duty in reporting it to the public. Anyway, Black suggests your put your money in other assets not denominated in dollars or controlled by the government. Overseas real estate, hard assets etc. Real estate is where I am thinking of going, though YMMV, and you might consider other asset classes. BTW, real estate has a bad rap because of the housing crash. But real estate was only a bad investment back then if you over leveraged your investment. If you hadn't got in bed with the banks when you bought, and just continued to earn rental, with a long term vision, the housing crash would not have been devastating, and you'd be in good shape today. BTW, I think real estate is an interesting investment because you can mathematically tune between your risk and your reward. Increase your equity and you decrease your reward and decrease your risk, decrease it and you increase both. Not that I am saying the real estate is for everyone. But it is something to consider in a diversified portfolio. Either way, you definitely need at least $1000 in liquid assets (meaning cash or demand deposits.) If you don't, you are doing something very wrong. And I agree with Caleb, it is absolutely shocking that so few people do. $1,000 is really not very much at all compared to the stuff that comes up in life.
Ken 2016-07-22 08:01:23
It’s dumb advice to put some savings in a money market account or in cash?No, as I said in my comment, that is not dumb advice. What's dumb is warning people away from the bank.
If you want to trust your savings with that, you go right ahead.I do, actually. But thanks for granting permission!
Caleb Jones 2016-07-22 10:00:33
If you think that is a crazy conspiracy then you are mistaken. Brarak Obama already did this to you. When he (encouraged the fed to) print $2 trillion new dollars it sucked about 20% of your dollar denominated wealth away from you already.Not sure if I agree with that exact 20% figure but you are correct. Every time the Fed prints more money, it literally steals money out of your personal savings because of reduced buying power of the money you've saved. It's theft.
If you hadn’t got in bed with the banks when you bought, and just continued to earn rental, with a long term vision, the housing crash would not have been devastating, and you’d be in good shape today.Correct. Real estate, if done from a cash position and a lot of research, is a fantastic investment. The problem is most people aren't interested in doing that kind of work.
What’s dumb is warning people away from the bank.To be clear, I'm not "warning people away from banks." Of course you can do business with a bank for day-to-day operations. I have checking accounts in several banks and it's perfectly fine. But keeping long-term cash in an investment firm a still slightly better than keeping it in a bank, for all kinds of reasons, some of which I stated above. Funds in a bank are far more easily garnished by state and federal governments than those in an investment firm (ask me how I know), and over the next few decades the odds are overwhelmingly high the government is going to run into major financial trouble. If you put those two things together, I like my odds more at an investment house for my long-term savings. (To be clear, investment firms are problematic too, just not as bad.)
Fraser Orr 2016-07-22 12:40:00
@Caleb Jones > Not sure if I agree with that exact 20% figure FWIW, 20% is a rough guess, but is based on the drop in value of the dollar compared to other currencies, such as the Swiss Franc, which were less affected by the great recession. FWIW, Bush did a number on the dollar too with all his borrowing. The dollar fell from 1.75 CHF to 0.7 CHF from the beginning of Bush to the depths of Obama. That is a 60% drop in your savings. Money which the government secretly taxed out of you and spent on blowing up mostly innocent people in the middle east, or bailing out sclerotic, nightmarishly badly run big businesses instead of letting them die, and selling the assets to people who knew what the hell they were doing. The dollar is a bit higher now, primarily because Obama has destroyed the lending market through Dodd Frank and other such things (just as Bush destroyed the IPO market with Sarbanes Oxley before him) so since the demand for M3, which is to say future growth, is so weak, the demand for M1 is higher, making the dollar look artificially stronger. Which is all fancy economics talk, but which boils down to spending your retirement nest egg on a new car or fancy vacation. It makes you feel better right now, but there will be hell to pay later.
Maldek 2016-10-28 19:23:34
Great article here BD! "– 67% of people making between $50K-$100K annually would have trouble coming up with $1000." This is the crux of the matter. With 75K/year you are in a position of choice. On a crossroad so to speak. You could a) live a modest lifestyle and spend way below your means - it IS possible to get by as a single person with $2000/month. This would allow you to save considerably each and every month. You would have a car but an old one. You would have your own place but it would be a small one. You could eat quality food but you might have to prepare it yourself. All in all it is way UNCOOL and so not hip that you wouldnt be able to keep up with your parents/friends/gf expectations. But. If you keep to the simple rule: "At the end of every month I want to have at least xyz $ more than at the end of last month" and a few years pass..you would end up with money. More and more money. You will end up with peace of mind and strength. From this place of power you can then decide where YOU want your life to go. Be it with a job or without one. Be it with a wife and children or as a player. Be in the US (or EU) or elsewhere in the world. You will be "rich dad". YOU HAVE CHOICE! but alas 67%, at least 2 out of 3 people given this choice, decide for option B. b) The easy way. You spend what you have and some more. You DESERVE IT! A nice car - must have NOW! A cool place in the best area of town. Rocks! A girlfriend what at least a masters and career! And the best of all, you can get all this BEFORE you even did earn some of it. The costs are paid in a far and distant future you have little interest in anyways. You live your life TODAY in the here and now. You want to enjoy everything in this very moment because who knows? Tomorrow may never come so you say. And guess what - tomorrow indeed never comes - for you. Because your situation never improves. It gets worse each passing year. As you get older everything gets more and more dull. You have nothing to look forward to other than the amazing view of these mountains of debt you yourself created. You are a slave. Welcome to the matix. This is not about money. These people are poor in their mind. No amount of money thrown at them will ever change this. We can thank public education for this pandemic of idiocracy. They wouldnt want it any other way. Good we are not one of them.