Many people are able to pay their bills and save money on income levels that are a fraction of other people's who may gross 5x as much money, but they are unable to save anything let alone service their debt obligations. The amount of income is really unrelated to the ability to save money. Debt obligations place some people with $200,000 of income in a position where they can't make their payments let alone contribute to savings while someone making $40,000 per year can save a meaningful percentage of their gross income if their debt is relative and at appropriate levels.
The consumer credit is really a 1980's and current phenomenon for many if not most families. People who are accustomed to paying for necessities with debt instruments (credit cards, home equity loans, etc.) must change their habits or this situation will simply revolve around and around.
Not a day goes by where I am not in line at the gas station or small corner store where someone pays for a purchase of less than $1 with either credit cards or debit cards. This is a very troubling situation for several reasons;
1. Cash, real green old fashioned American currency has both tangible value as well as true psychological value. Paying for a $500 purchase with cash is by far, for the vast majority of people, a "real" value experience. When one pays for such a purchase by counting out the currency, it makes the cost of the transaction "much more realistic". It is easier for people to "realize" the true cost of a $500 transaction when paying in cash verses simply "charging it." On the other hand, simply charging it to a credit card removes it's true relative value and people are much more likely to spend the $500 by charging it or placing the payment on a debit card than when they pay cash. For people who are having budget problems, adopting a policy where you pay for your purchases in cash helps bring the true value to peoples awareness. It helps them avoid making unnecessary, wasteful purchases.
2. Anyone who makes purchases based upon their amount of remaining available credit is very likely to have to make periodic payments to repay for the purchase. The added cost of the debt service, along with the increasing expenses by incurring the debt are especially dangerous for those who have income amounts which vary (self employed, production pay, etc.). Many people were in immediate financial cash flow difficulties when their overtime pay was no longer available. Simply working "full time" 40 hours per week made meeting financial obligations difficult. This is a very common situation. This is extremely troubling as the likelyhood of again reaching the previous income is not assured.
3. Far too many people "justify" purchases with debt instruments in order to be rewarded "points" or other incentives from credit card companies. Unless someone has the cash in the bank at the time they are considering the purchase, they should not find a justification to incur the expense / debt. Let me repeat this.
"Unless someone has the cash in the bank at the time they are considering the purchase, they should not find a justification to incur the expense / debt"
THE MONEY MUST BE ON DEPOSIT BEFORE THE PURCASE IS MADE and the money must not be needed to meet other obligations. Relaying on receivables or pending income is dangerous, regardless of the creditor who owes you the money.
There was a time in this country where people saved to make purchases. The Credit Card industry along with the store brand cards are an incentive to avoid delaying the purchase until the cash is available. They want you to buy now, why wait? This simple fact has led to consumers having multiple layers of debt such as home mortgage, vehicle loans, credit cards, store (Brand) Cards, education loans, etc., etc.
This is NOT a trend we can return to.
Consumers who have honestly shed all credit card use find themselves with the greatest financial flexability and with less financial risk of failure. Most people start with credit cards with good intentions. They regularly pay their monthly purchase bills in full when received. But then something happens so they pay part of the bill this month and the balance next month. Then something else occurs and now this purchase is spread out over more than a few months. Soon, we are finding these people sliding further and further in the hole.
I am simply amazed that anyone would ever use a home equity loan to pay for unsecured debt obligations, but it used to happen all of the time. People justified doing this by claiming the "tax deduction" or the lengthened loan amortization periods transitioning from a 5 to 8 year amortization period to a 30 or even 40 year amortization. Why risk losing your home, which is a secured hard asset simply to gain a tax deduction for debt incurred to purchase depreciable assets or even worse, items which no longer even exist, such as charged vacations, meals, etc.?
People can rationalize just about anything to justify making bad financial decisions.
Recently, a forum member was asking the question as to whether she and her husband should take a 401(K) withdrawal to pay off a mortgage which is down to less than 5 years remaining. People gave opinions of a variety of actions. It is amazing how some people would "justify" their answer by claiming some perceived advantage by taking their steps. Bottom line is the following;
A. Any withdrawal prior to age 59.5 results in a 10% Federal Penalty for premature withdrawal. 10% thrown away to the IRS.
NEVER pay penalties willingly as part of a purchase or expenditure strategy. You will lose every time. Guaranteed.
B. All withdrawals are also taxable as ordinary income in the year received. All Tax Qualified accounts are taxed as ordinary income, which is the highest tax rate for personal income.
C. Unless the 401(k) plan has loan provisions, one can not simply "withdrawal" the money unless they are seperated from the employers service (fired, quit, no longer working) disabled, dead or qualifiy for a hardship withdrawal. The 401(k) is not near as liquid as many seem to believe.
D. The mortgage was down to paying 96% principal in each payment. So little interest costs are incurred to allow the mortgage to be paid to term that the interest really amounts to a minimal sum. This is the point these people have paid to reach where the vast amount of money paid each month is going to the loan principle. Now is NOT the time to extend or alter this unless completely unavoidable, and this situation (for this couple) is completely avoidable.
E. Money withdrawn from the 401(k) is no longer invested and no longer available for retirement income. Period. Gone until replaced with a new contribution to a qualified retirement plan.
F. The couple mentioned the desire to retire in the near future as a primary goal, however, I think the total account value in the 401(k) WAS ABOUT $60,000. The entire account value, net after taxes, roughly equaled one years current total income. In other words, if the goal is to retire at their current income level, they have 12 months before they have no retirement income from this source at the account values BEFORE taking money out to pay off the mortgage. It is impossible to use the same money to meet the goals of paying off this mortgage early and having it available to recieve as retirement income. Once the money is gone, it's gone. Sadly, these people are a long ways off from truly retiring because they have no way to replace their current income and unless they can truly live on 50% of what they currently earn, and most people can NOT, retirement is a long ways away.
G. While there is tremendous emotional value in having your home debt free, it doesn't always make the best financial sense. If the majority of the couples assets are in the value of the home, they either have to sell the home or mortgage the home to pull the cash out of the house to pay living expenses. Or a third option is a reverse mortgage, which needs to be discussed in an entirely different thread.
I think the husband wanted to cash out the retirement account and pay off the house and use the balance to buy Gold and Silver. While Gold has made substantial movements upward in value, it has plateaued in the last 6 months and has made no meaningful forward momentum.
The time to buy gold solely for investment has already passed. Expecting gold to reach $2,500 per ounce, which is roughly where it would have to get to match the gains made in the last 3 years, is very unrealistic and very unlikely. While Silver has other potential, this is literally all of this couples retirement money.
Purchasing Gold because of the declining value of the U.S. currency is an entirely different reason for making this transaction. If they fear the dollar will have little or no future value, that is one thing. Buying gold thinking it will contunue to increase in value like it has the last 3 years, is entirely unlikely. This is a bet which could wipe out the remaining value of this couples retirement account. It is critical to always remember that Trees do Not Grow to Reach the Clouds. Everything has limits, Gold / Silver investments are no different.
American's need to return to the times where we saved to make purchases and we didn't buy what we couldn't pay for. In a strange way, the FICO scores have made debt much more difficult to obtain, which is good for the most part. But the FICO system is seriously flawed and does not represent sound financial lending practices. The sooner banks return to lending money based upon the true fundamentals of their customers, the better off we will all be.
America is at a crossroads with critical decisions to be made. Our economic Survival depends upon it. This is a time for serious people to make serious financial commitments to their future. The sad reality is that the vast majority of Americans have no ability to ever retire, which is truly sad. Our nation is at a crossroads which unfortunately, finds hostile political foes seriously damaging our peoples future. Every dime we pay in taxes or for regulation such as VAT's or Cap N Tax, higher health care costs, etc., we are preventing our nation from reaching it's collective financial goals.
This is a very serious situation, as most everyone who posts on this board know. It truely will be life and death for many people.
