When discussing the current economic meltdown, I frequently hear the lament that it’s all Bush’s fault because of the war, banking regulations, Federal Reserve policies, etc. Now, I’m no defender of the president, and when it comes to arrogance, ignorance, and colossal blunder, George W. Bush will hold the Guinness record for decades to come. However, the Blame Bush attitude suggests that an inept president got us into this mess, and a competent president (Obama) will get us out of it. Ah, if it were only that simple. No question that the previous lunatic lending policies and a trillion-dollar war of choice have hurt the economy, but they are not the core problems.
A major source of the current economic crisis started a couple of generations ago with kids who were raised with the attitude that they could have anything they wanted just by asking for it. Never mind whether they or their parents could afford it or even had any money at all; I want it so give it to me. And their parents, ever worried that their little princes and princesses might not be keeping up with the Jones’ kids next door, conceded to every childhood demand.
At eighteen and off to college, this entitled economic mindset continued on. Can’t afford that trendy college of choice? Not to worry, we’ve got a student loan for you that you can pay off someday down the road when you’re making the big bucks. Work a night job to pay for school? Work and save money, then go to school later? Join the military for educational benefits? Not for these little darlings. We want it all and we want it now.
Fast-forward ten years: You have a good paying job, a spouse, two or three kids, a home mortgage, car loans, and those student loans. You are now officially Mr. and Mrs. Jones living the American Dream. Now, you and the spouse make good money, but not quite enough for the requirements of today’s demanding middle-class standards. Not to worry though, this is the era of easy credit. Just put it all on the credit card and you can pay it off someday. Not to be outdone by your friends, you want to vacation on Maui this year. Just put it on the credit card and earn all those sky miles for the next vacation! And for the really big necessities – that new designer kitchen, that boat you always wanted – we have the home equity loan. No problem, we’ll take a $50,000 stake in your home (on which you still have twenty-five more years to pay off the first mortgage) and you can pay it off someday. You and your spouse make $100K, have a nice home, drive late model cars, have all the toys, vacation on Maui, and … are dead broke. Every dollar earned goes to paying off ten credit cards, mortgages, student loans, car loans, and your kids’ latest demands, but hey, you’re living in style in America.
And then one day, Someday arrives. The credit cards are maxed out, you’re barely making the mortgages each month, still paying down the student loans, the cars are worn out but you’re upside down on the loans, and then you lose your job. Not to worry though, you have a six-month emergency fund to get by on until you find another job, right? Oh, I see ….
The credit binge we’ve been on for forty years is responsible for our current economic condition, not just Bush. All it took was the convergence of a housing slowdown, rising energy costs, and some Wall Street shenanigans to make our financial house of cards come tumbling down. In recent months economists and government regulators have pontificated on the complexities of our economy to figure out where it all went wrong and how to fix it: buy up bad loans, bail out failing businesses, and enact new credit regulations. However, I don’t think the primary problem lies in the complexities at all.
Now, I’m not an economist, but as someone who has been in debt, and then took the long hard road to get out of debt, I do know something about a household budget. It’s not complex economic theory, and there is just one simple rule, although it seems to elude the average citizen, economists, and analysts alike: Don’t spend more money than you earn, which means don’t borrow money for things you can’t afford to pay in cash. The only exception to this rule is buying a home, and in that case you must put at least 25% down, with a monthly payment that doesn’t exceed 30% of your take home pay. You don’t have a 25% down payment or enough income to stay within 30% of your take home pay? Then you can’t afford to own a home, period. Don’t have enough cash to buy that new car? Then you can’t afford it; buy a beater and save up for a new car.
Somewhere along the way, living the American Dream became a guaranteed right rather than something you earned through hard work, sacrifice, and living within your means. And the truly bizarre aspect of this credit binge is that it is not just limited to the lower and middle classes who struggle to make ends meet. Many households that make $150K+ still live beyond their means and are effectively broke. Whether you make $25K or $125K, you have to live within your budget and not use credit for things you cannot afford to pay for in cash.
In their defense, the American Dreamers have been bombarded for decades by lenders and credit card companies with the message that it is smart to use credit and make the dream come true – after all, you’re building up your credit score! The obvious recent example was the promotion of sub-prime lending for homes. However, the fact that credit is heavily marketed doesn’t necessarily make it a good idea. How many dumb and worthless products do you see advertised every day? Thousands, but we don’t run out and buy them. While credit companies certainly hold responsibility for peddling a bad financial plan, consumers are ultimately liable for making the decision to dive in over their head.
Living within your income also requires being prepared for emergencies and the unexpected: an emergency cash savings account (6-12 months of expenses minimum), health insurance, and home/renters insurance for when the unexpected does happen. Can’t afford health insurance for your family? Let me detour for a moment to say something that you will never hear any politician say, and is considered taboo in our politically correct crybaby culture, but it needs to be said: If you can’t afford health insurance (or food or shelter) for your family, then you can’t afford a family. Family and children are sacred in our culture, and for some reason all financial common sense goes out the window with family-related issues. If someone with a very limited income went out and bought a brand new BMW, we would all readily agree he/she is a financial fool, and deserves whatever hardship follows. But if the very same person goes out and has a kid or two that they cannot afford, we get all sentimental and roll out the welfare wagon. Before you send the hate mail, let me say that I’m not suggesting we abandon kids in poverty. The point is that living within your means also includes not starting a family before you can afford it. Of course, this does not help those who started a family in good financial condition then hit on hard times. But the fact is that the vast majority of those who cannot afford food, shelter and health insurance for their families made dumb choices in life and started out unable to afford them.
While most people don’t want to think of their children as an “expense” to be tallied in the budget ledger, in reality that’s exactly what they are – and a big one. At the current cost of living, if you don’t have at least an extra $1000 available after the rent/mortgage is paid, after all other bills are paid, and after contributing to your emergency savings and retirement funds at the end of the month, then you can’t afford a child, or another one if you already have kids. By those economic standards, nearly all low-income households and many middle-income households today really cannot afford the families they’ve created, and live way beyond their means. This is not a popular position with the traditional family values mentality that rules in our society today, but it is a financial reality.
Several recent surveys suggest that maybe 50% of American households are in serious financial jeopardy today because they’ve lived beyond their means and have binged on credit. That translates into the inconvenient fact that half of American households are in large part to blame for the current economic crisis, not just Bush. So, next time you are engaged in a discussion about who is to blame for our economic condition, just take a look around you (or in the mirror) and see who is living beyond their means. But I still wish we could just blame it all on Bush.
[Matthew Hardy is the author of A Culture of Crybabies: The 21st Century World of Wimps, Whiners, and Victims.]