9 MIN READ
The American Dream Trap: Is Your Stuff Putting You In Debt?
I'm a born worrier, so watching our income drop 60% in the last three years has been a challenge. Still, my wife and I live well, and we bought our small home for cash last year. And while watching our business income disappear, I've quit four jobs I didn't like.
I do struggle to make money (especially now) but I can quit a job and try something else when I feel like it because we have no debt, we keep our expenses low and we set money aside. I've always valued freedom above owning things, so I've chosen not to chase after the usual versions of success. Sure, it would be nice to have a big home with a soaker tub in an over-sized master bedroom. Add a new car (or two) and a huge TV, and I'd be living the American Dream.
But paying for the American Dream can be difficult. Federal Reserve statistics show median household income in the U.S. has fallen 8% since 2007, even as personal consumption expenditures per capita continue to grow. In other words, we’re making less and spending more.
“American Dream Inflation”
“Americans, including myself, are so addicted to pointless spending that a brutal recession and a genuine threat to our living standards have barely made a dent in the amount of money that flies out of our wallets for no good reason,” says financial author Rick Newman. Desires multiply and become “necessities,” and we always need more to demonstrate our success. Newman refers to this development as “American Dream Inflation.”
What happens when go down that road and start spending more than you make? You get to work a lot, feel stressed and have an ever-growing debt and expense load that makes you less free and less financially secure. Someday, you might discover you're one of the growing number of people who need a job at age 70 or 80. Doesn't that sound more like the American Nightmare?
The problem isn't buying things you need, or that enrich your life, and are affordable. And you probably can afford some luxuries. But often the trappings of wealth feel like a necessary part of success when they're really, well, a trap.
So how do you avoid the hyper-consumption and debt that can cause so much financial trouble? Try this:
- Stop measuring success by other people's standards
- Change your spending habits
What Does Your Success Look Like?
There's nothing wrong with buying nice things, but there's also nothing wrong with valuing experiences or simplicity over things. And it's never all one or the other. Think carefully about what has actually made you happy (and what hasn't) to decide how to balance competing values and how much to pay for satisfying them.
For example, imagine a beautiful RV in your driveway. Kiplinger says the average motor home costs $100,000. Now add the cost of gas, insurance, taxes, licensing, maintenance, and resort spaces that rent for up to $70 per night. After 10 years of ownership, you might discover you paid $1,000 per night to use your RV. Is it worth it?
The RV looks impressive and it's a sign of your success, but how much is that symbol worth? There's no right answer here (we all have our own values), but put a number on it — your number. Then tally up what you would save by just renting an RV for the occasional trip. You could find that you're paying much more than your number just to turn a few strangers' heads.
Who can say how much of your spending is motivated by a desire to impress others, but nobody is immune to this ego factor. And even if you consciously place some value on impressing others, you probably have other, more important values. Plus, recent research shows that spending money to impress others doesn't make you happier.
Maybe you value freedom. Perhaps your life would be more enriched by a trip around the world than by having a few more fancy gadgets. Time with friends, a year off to write a book, a better or earlier retirement — all of these values and goals are potentially traded away if you chase a vision of success that involves over-consuming and working longer hours to pay for it all.
What can you do about this trap? Think carefully about what you really value and make a list. Include your general values and specific important goals. Put the list in your wallet or purse, and look it over when deciding whether to buy something. Calculate the true cost (I'll have more to say about that in a moment), and ask a few “value questions,” like…
- Does this purchase fit with my values?
- Does it move me closer to my goals?
- Is it worth the total (true) cost?
Change Your Spending Habits
Maybe you don't buy things to impress others or to chase a dream you only think is yours. You might spend money for comfort, entertainment and various momentary desires. Still, if you spend too much and spend it in the wrong ways, you get into financial trouble. Here are the two types of spending that cause the biggest problems:
- Spending borrowed money
- Spending on things that add future expenses
Everyone talks about debt, and the average U.S. household owes $7,300 on credit cards.
But the second type of spending, the kind that adds other expenses to your life, is also important. After all, even if you pay cash for that fancy RV you still have licensing, insurance and other costs that continue as long as you own it. And then there are the purchases that add other expenses and debt payments to your life.
For example, homes are bigger than ever; the average house offers 2,600 square feet of living space. That extra space is enjoyable, but it’s also expensive in two ways. First, if you borrow $190,000 instead of $130,000 to buy your house, you'll pay $109,400 more over 30 years on a 4.5 percent mortgage.
Second, bigger homes cost more for property taxes, insurance, maintenance and utilities. Over the years, you could shell out an extra $160,000 for that spacious feel. Is it worth that much to you? How many hours of work is that? What could you do or have instead if you saved all that money?
Sometimes you don't realize how much things really cost. Knowing that can change your mind about a purchase, so learn to ask and answer this question…
What's the Total Cost?
What did it cost? It's a question usually answered with a price. But for many purchases the initial price is just the beginning.
For example, if you save up and buy a hot tub for $2,500 in cash, you might think you're smart because you at least didn't go into debt for it. But you did add future expenses to your life.
The annual electricity cost for a hot tub is more than $250. You need chemicals, cleaners and repairs, costing perhaps $350 per year. Some hot tubs only last about six years, so the total cost, including the purchase price and expenses could be $6,100, or more than $1,000 per year.
A hot tub, riding mower or second car might be worth the price and the ongoing expense, but how can you be sure if you don't even know the cost? Calculate the total cost of ownership before you make a decision to buy something, and then decide if the purchase enriches your life enough for what you'll pay. Then ask this question…
How Can You Pay Cash?
Think about all the interest you've paid over the years on credit cards and car loans, and what you could you do with that money if you got it all back right now.
Sorry, you can't get it back, but you can start to pay cash for things and/or pay off your credit cards every month to avoid interest charges (and if you can’t do that, it may be time to cut up those cards). You'll get one or more of these benefits from a pay-now policy:
- Fewer payments to keep track of
- Less work needed to earn money to pay interest
- Money not going to interest can be used for important goals
- Less stress with a debt-free lifestyle
You’ll probably need to borrow money to buy a house (although half of home sales in Florida are for cash), but for almost anything else there is a way to pay cash.
For small stuff, just stop buying so much, so you can pay as you go. Remind yourself that all these small things can prevent you from achieving your big goals.
For larger purchases, anticipate the need and set aside money in a special account. For example, suppose you have a car, but would like something better. If you think you can afford a $400 car payment, prove it by setting aside $400 every month until you can pay cash for your new wheels. And always ask yourself…
Do You Need It Now?
One of the easiest ways to control your spending is to wait to buy things. There are a number of reasons procrastination can save you money, but the simplest one is that you might change your mind and not buy the item. That's what the science shows.
Studies also show that a healthy dose of procrastination will reduce the frequency of purchases — you might save a lot of money if you eat out half as often or make your furniture last twice as long.
Make procrastination into a good habit, and wait to buy those clothes or that new computer. Even if you still decide to buy them, maybe they'll go on sale while you wait. And finally, ask yourself the big questions, like…
Is the Dream Worth the Price of Excessive Debt and Expenses?
You'll always waste some money — everyone makes mistakes and indulges momentary desires.
The real trouble comes when you feel the need to buy what everyone else has regardless of your own values, and you take on a load of debt and higher expenses. Then your American Dream might become an American Nightmare. The possible consequences include:
- You pay more for everything because of interest charges
- You sacrifice meaningful goals for momentary pleasures
- You give up freedom for a job you hate because it covers the bills
- You trade free time for more work hours to pay off those credit cards
- You chase after more stuff instead of enjoying what you have
- You are a few months from bankruptcy if you lose your income
- You trade your happiness for a version of success created by others
Why not define success according to your values? Create and implement a plan to pay off everything you owe and stay debt-free. And use the rest of the tips above to avoid ever falling back into the trap. After all, you probably have better things to do than always be struggling to live in someone else's dream.
Your Turn: Do you find that you spend money on too many things that add more debt and stress than real value to your life?