According to a study done by Bankrate.com, barely 6 in 10 Americans can afford to write a check for $500 and barely 56% of people have more than $1000 in their checking and savings account combined [1] Another survey found that 1/4 retirees has zero savings and only 20% have more than $300,000, a figure still far below what experts recommend. [2] As a result, a majority of Americans will see their standard of living fall in retirement and most will have to continue working far longer than expected. Though America is said to be one of the wealthiest countries in the world, the majority of the elderly lead lives of quiet desperation and, logically, most of the young and middle-aged are heading there as well.
How did this happen? Part of the reason is that far too many in this country simply do not know how to keep money in their wallets. Another is that we as a society tolerate those who abuse the poor through predatory practices. While a financially sound country is an ideal to shoot for, it will be impossible unless we change this situation.
Ban Pay Day Lenders
The first thing we should do is ban payday lenders. These are lenders of last resort that people turn to in order to pay for expenses when they don’t have enough money. In exchange for giving them a loan worth their next pay check, say $200, they will charge $25 up front on top of a high interest rate if the borrower does not pay the lender back. If someone were to do this for every paycheck, they could pay 1,900% a year in interest fees on the original amount.
Payday lenders and their victims will tell you that they only supplement income in times of emergency, but the fact of the matter is that the practice becomes a habit and a majority of borrowers soon take out a 2nd loan and more as the practice encourages poor budgeting. Borrowers may start saying that they would only use the loans in case of emergency, but soon everything is defined as an “emergency”. One loan gets rolled into a second, and then a third, and soon borrowers are engulfed by debt.
This is a difficult industry to eradicate. While some states like New York, Georgia and New Jersey ban loans, this does not stop lenders who operate at the state borders or online. The Consumer Finance Protection board recently proposed a law that would require payday lenders to perform a background check and confirm that applicants actually can pay back the loans, but even this does not go far enough.[3] It addresses the symptoms and not the disease. People will not learn to manage their money wisely until they are forced to; if they cannot make ends meet before the end of the month, they must wait until they can afford it and develop the habit of saving.
Ban Automobile Financing
Another area where big players prey upon the poor and less numerically literate is car loans. For people with poor credit, the average car loan can run between 6-14%. According to the National Auto Dealer Association, most dealers make $82 for every new car they sell for cash, but $775 for new financed cars. There is a reason the loan offer is prominently displayed in car commercials, and why the finance office is often the nicest room in the dealership!
To emphasize just how bad this rate this, it actually exceeds car depreciation outside of the first year of ownership. Over the course of 5 years, the average driver pays thousands of dollars extra for their car at the same time the vehicle is crashing in value. A car that costs $20,000 would cost you an extra $5000 to drive if you did not pay it in cash. If you repeat this habit of financing a car a dozen times over the course of a life and it becomes obvious why many people never become wealthy.
Ban Credit Cards
A third idea for creating a financially sound country is a fairly radical one: banning credit cards. While they seem necessary to everyday life, and are increasingly used in lieu of cash, they are destructive to the livelihood of nearly every American. Why do I say nearly every American? Because its true. Nearly 70% of credit card users fail to pay off their balance every month, and half of those people only pay the bare minimum, paying off the interest and none of the principle. These people often have an average debt load of $5,000, which at 15% a year (an average rate) is $750 a year. This is several months’ worth of groceries and utilities, several months’ worth of retirement savings that are simply wasted.
Even people who do pay off their credit cards are not unharmed. The simple of act of paying things by scanning a card for them, as opposed to paying cash, encourages people to lose track of their money and spend more. Dunn & Bradstreet, a commercial analytics company, found that the average person spends 12-18% more with a credit card, and a separate study by McDonald’s saw a 35% increase.[4] If you’re money is out of sight, it’s out of mind too. If you spend $20,000 a year, this means you could be wasting an extra $2,000 simply because of how you pay for things.
Making matters worse, the industry also targets teenagers and the young to manipulate them into becoming big spenders. Back in the day they even partnered with toy manufacturers to distribute ” Cool Shopping Barbie”, which featured Barbie with a packages at cash register using a MasterCard. Even today you’ll see ads on every college campus beckoning teenagers with the promise of free money. We don’t let cigarette companies target minors; we don’t let alcohol companies target minors; we certainly shouldn’t let credit card companies do so either.
Mandate a year of financial education be a part of the curriculum
Our school system presently spends no time whatsoever educating students about personal finance. Teachers spend more time discussing the intricacies of micro and macro economics than how to balance a checkbook. I ask you here, what is more useful – knowledge how the Federal Reserve manipulates the money flow, or how to make the use of compound interest over time maximize your savings for retirement?
Given how poorly many families manage their personal finances, this is not a subject we can rely on parents to teach their children. It’s not a question of who has the better method of saving money, but who has any method of saving money. The grandparents of today’s children never saved money,their children didn’t save any either; and now their kids have few positive examples to live by. Instruction is necessary here.
Just think, if we can increase the financial knowledge of the young, then we can improve our society from the ground up. We create a country that is not only more stable and prosperous, but has a prosperity rooted in the ingrained habits and knowledge of every man and every women and every child. That is change you can believe in.
Counterarguments about an economy without debt
Of course, there is a counter argument to these ideas about regulating payday lenders, car loans, and credits cards. Some economists say that since the economy operates through the use of debt, and is fueled in large part by debt, that it would collapse should it be constrained in any way.
That might be case if we eliminated debt entirely; few can afford to buy a house in straight cash after all. But would the economy really crash if people were pushed to only spend what they had, when they had it, on consumer goods? After a one time reset from people assuming new spending habits, wouldn’t the economy continue to flow, if at a different pace?
And what about the positive aspects of a society free of debt? The economy would be more stable and would have fewer swings in consumer confidence, as people would have enough of a financial cushion that the seasonal vagaries of business would impact them less. As society becomes increasingly based in solid, substantial wealth, it would become more stable and better prepared to handle any emergencies that crop up, whether it be from personal illness or sudden job loss or the car breaking down. With no money worries, a stable home life would do wonders for many individuals, many couples, and certainly the children of those couples who fight less.
We can imagine too that giving would increase as no one would feel too poor to donate to others. Welfare and social security spending would drop as fewer and fewer people would need it to survive. If that happens, taxes would go down too, which would again put more money in everyone’s pockets and create a positive economic cycle. What is there to fear from any of this? From even half of this?
Conclusion
As you can see then, we’re faced with two competing visions. On the one hand we have a society free of personal debt, where prosperity is based on money that is actually there and did not simply exist in the form of IOU’s. A society where people know how money works, have money, and are thus secure and confident in their life at home and in the office. On the other hand, we have our present society where we tolerate predators desperate to rip money from your pocket and let their victims suffer what they’re stupid enough to fall for. While there will always be poor people – people with no money sense whatsoever – they do not need to further victimized by payday lenders, auto loan dealers, and credit card swindlers who rob them of their future. Every paycheck you lose today is a paycheck you lose forever. You don’t get that time back. Write to your congressman today.
[1] https://www.forbes.com/sites/maggiemcgrath/2016/01/06/63-of-americans-dont-have-enough-savings-to-cover-a-500-emergency/#3580d3c94e0d
[2] http://time.com/money/4258451/retirement-savings-survey/
[3] https://www.washingtonpost.com/news/made-by-history/wp/2017/10/09/federal-regulation-of-payday-loans-is-actually-a-win-for-states-rights/?utm_term=.bb31897178fd
[4] https://www.nerdwallet.com/blog/credit-cards/credit-cards-make-you-spend-more/
