8 Questions for the Constantly Broke
|May 7, 2010||Posted by Roshawn Watson under Uncategorized|
- The number one reason for divorce in North America is money problems.
- 95% of millionaires are married and 70% have spouses that are more frugal than the highest income earner of that household. (Millionaire Next Door)
It is extremely difficult, and sometimes impossible, to make progress if your significant other is not on board with the plan. If you are married, you are not a joint venture and should strongly consider managing your finances together. It not only enhances communication about finances but also allows you to share the financial burden of the household. There is clearly a strong association with financial agreement and becoming a millionaire, so don’t neglect this important principle.
Watch Those Big Ticket Items
I am so old school conservative when it comes to big purchases and for good reason. Big ticket items are a quick way to become poor or at least an under accumulator of wealth. Dave Ramsey offers sage advice regarding major purchases that I agree with: your monthly mortgage should not exceed 25% of your take home (net) income, you shouldn’t finance a car ever, you cannot afford to purchase a new car unless you are already a millionaire, and your wedding shouldn’t exceed 50% of the annual income of the people who are paying for the wedding. Probably the hardest rules of thumbs are not buying a new car and the reducing the costs of the wedding. Most of us are car people, but as the original article suggests, cars are being made now better than ever, so the risk of buying a bad used car is lower than ever. Buying a gently used car instead of a new car can literally save you tens of thousands of dollars. Additionally, most new cars depreciate 45% in the first 3 years, and most people simply cannot afford to lose that much of their net worth. Containing wedding costs is even more challenging because it is such an emotional purchase, so we often rationalize expenses that we simply cannot afford. However, beginning a marriage saddled with debt provides a challenge for the newlyweds: the stress of money problems. Remember, the number one reason for divorce in North America is money problems. Of course, I am not saying it cannot be done (it certainly can and has), but I can personally vouch for the fact that it is great to begin your marriage without money stresses. Other big ticket items to monitor are debt and groceries (note that the cost of groceries tend to add up and are a major expense).
Are You Wasting Too Much Money Carrying Debt
Some of you have called me out on this before, but I never tried to hide my bias: I hate debt. However, let me attempt to make a logical argument for why you shouldn’t be carrying consumer debt. The second biggest constraint to the cash flow of most people is debt. Consider that the typical car payment in North America is $480 monthly (Edmund.com), the second car payment averages $200 monthly, the average student loan payment is $250 monthly, and a typical credit card payment is around $200 monthly, and then there are other miscellaneous debts (i.e. furniture, stereos, personal loans etc.) of around $120 monthly. You can easily see how debt costs the typical American family in excess of $1000 monthly. If this were invested for 25 years instead and received a conservative 10% return, you would have $1.3 million. It is no wonder that 75% of the 400 richest Americans (Forbes 400) say “the best way to build wealth is to become and stay debt-free.” Simply put, paying off your consumer debts gives you a guaranteed return on investment (ROI) and liberates your most powerful wealth-building tool: your income.
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.