Wealth Building Lessons

NPR had an interesting section on increasing economic anxiety in the middle class. Even though the economy is thriving, 7 out of 10 Americans report living paycheck to paycheck, meaning there never seems to be enough left over for savings.

I definitely don’t agree that the economy is thriving. I think the economy is actually in recession but it won’t be announced for another 6 months, meaning it’ll be March before the Fed actually admits to it. (Thats one reason why I think Ben Bernanke will reduce the Fed Funds rate 50 basis points this week, but I digress).

The fact that 70% of Americans are living paycheck to paycheck is terrible. It means that a job loss, a medical emergency, or even a car breaking down can seriously impact someone’s ability to stay solvent. If you’re in this kind of situation, you may find yourself in a never ending circle of debt. You use each paycheck to pay off pressing bills and since you have nothing left over for savings, you accumulate more debt by the time the next pay period comes around. As a result, you’re barely keeping your head above water and aren’t saving enough for emergencies, retirement or for wealth building strategies.

In order to get out of this trap, some you may need to take drastic measures like following a tight budget, brown bagging it, getting a roommate or selling your luxury “premium-fuel-only” automobile. For some it might be as simple as not buying anymore crap, while some of you may embrace it fully and take up a second job and live out of your car.

If you have uncontrollable consumer debt, just like the US Government, you’re running a trade deficit. But unlike the Government, you can’t turn on the money spigot to pay for things. And according to Warren Buffet, the trade deficit is turning Americans into a “nation of sharecroppers”. [A sharecropper is a small time farmer who pays the landowner rent in kind rather than cash - basically because he doesn’t make enough to generate any extra cash]. Sounds like a kind of indentured servitude.

While you have debt pulling you down by your ankles, you can never start to attain wealth. Just one emergency will send you to the payday loan sharks charging upwards of 100% interest per year and you’ll never get out of that trap. (Unless you’re able to get a loan from Prosper.com to pay it off. But ideally you want to be a lender on Prosper earning 18% interest, not a borrower!).

Once you get out of debt, its much easier to focus on building wealth. You have less worries and you can start to compound your wealth (instead of your debt). Wealth brings freedom - the freedom to do whatever you want, whenever you want.

What would you like to be, a free man or a sharecropper?

Related Readings:

1. Green With Envy: A Whole New Way to Look at Financial (Un)Happiness

2. The Overspent American: Why We Want What We Don’t Need

3. Money Changes Everything: Twenty-Two Writers Tackle the Last Taboo with Tales of Sudden Windfalls, Staggering Debts, and Other Surprising Turns of Fortune

4. The Essays of Warren Buffett : Lessons for Corporate America

5. The Millionaire Maker’s Guide to Wealth Cycle Investing

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