The Indentured Generation

Ah the American Dream, right? So innocently, we start out on the journey to fulfill what we think is our destiny. We all know what it is, but let’s indulge for a second to recall a dream that most of us once shared.

The Journey Begins

We are taught from a young age that education is the path to success. No doubt there were numbers to back it up. They would show those graphs that on average people with college degrees made millions of dollars more over their lifetime than high school graduates. If you were like me working a minimum wage job then that sounded pretty damn good to you! So college was the obvious choice. Honestly, I didn’t know there was any other choice. You graduated high school and went to college. That is just what you did.

Curiously they fail to mention the staggering amount of money that college tuition and expenses costs. Not to worry, though, student loans are very readily available. So off I went through my college career taking loans every year to cover all of my expenses. Indeed thousands and possibly millions of students across the US were all doing something similar. Then comes graduation.

For some this can be a truly exhilarating experience as the hard work has finally paid off. For others it can be terrifying as now they need to go out and get jobs. The reality of adulthood smacks you square in the face. This is when many college graduates find out that the ideas we were taught from a young age, that all you needed in your life was a college education and then you would be set, are mostly unfounded. Coming out of college the unemployment rate was around 8.5% in 2014. Moreover a total of 16.5% were unemployed or working part-time or not searching for full time because they have given up. These are no doubt staggering numbers, but it gets much worse. Of those that do find jobs, the Federal Reserve of New York found that around 44% of them were not in jobs that technically required a college degree.

Now historically these numbers are on par with the 1990’s but one major factor has changed. For the class of 2015 the average amount of debt per student is $35,000! Compare that to just over $10,000 in 1994. What’s even worse is that real wages (wages adjusted for inflation) have been basically flat since the 1960’s.

So let’s sum this up: Students are graduating with nearly three times the average amount of debt than in the 1990’s AFTER adjusting for inflation and it is only getting higher, over half of them either can’t find a job and/or are employed in jobs that they could have got with a high school diploma or less, and overall they are making the same amount of money after adjusting for inflation than in the 1990’s. Did anyone mention those things when you were in high school?

Unfortunately this is only the beginning. Upon graduation many people start their lives already heavily in debt yet are still yearning for that standard of living that they think they are entitled to. They want to buy a nice car, get a nice home in a nice neighborhood, and start a family. But how can they afford to do these things when they are already in debt and/or underemployed? Not to worry, the market has a solution.

The Return Of The Gilded Age

Before your first paycheck can even hit your bank account the market has begun its tireless fight to get a small chunk of your income. They know that you’re already being stretched from your student loans and just trying to live so they found a way to get a piece of your income. It’s called financing.

Debt is marketed all around us. It runs so deep that most people simply accept it to be the truth and the only way to operate your life. Want to buy a car? You need to get a loan of course. How about those new shoes you want? Well you need to charge it on your credit card or you are an unsophisticated idiot. How about some new furniture? Make sure to take the financing option and pay off your couch over 3 years because it is free money. The good thing about all this is that you are building your credit score so that you can get more loans later! Since you are already in debt from your student loans you are already used to making payments so what’s another payment?

Let’s fast forward a bit. 10 to 15 years down the road is when most people start to wake up and take a look at their lives. Their kids are growing up and thoughts begin to shift away from the present and into the future. All of those payments have added up and with extra expenses for the kid’s activities most people find themselves living paycheck to paycheck with no savings and hardly any retirement. Actually many surveys say that about 75% of Americans are living this way. Now they are officially trapped under the mountain of debt that they have accumulated little by little over the years. They have to go to work every day to a job they hate (or worse one that is just “okay”) because they have bills that have to be paid. Stress about the finances puts undue stress on relationships. The fire that was once there is nothing more than smoldering ashes that are ever so slowly dying out. It is no wonder that the number one cause of divorce is financial disagreements and money problems! The freedom you once dreamed of as a kid was just that, a dream. Reality is you are a slave to your situation. Things look bleak. It is at this point when people begin to search for help with their finances and learn the truth that I am telling you. The problem is they have lost 10, 15, 20, and sometimes 30 years of their life in debt. This starts to make retirement look like nothing more than a dream as well. People hope and pray that the government will take care of them with their expert ability to handle money. All of this started from a simple loan that you took because that is what people do. They will say things like “the interest rate is so low” or “look no interest, it’s free money” or “You don’t need to spend all of your cash, get a loan and save that money”. On the surface these things make sense and will make you feel like a sophisticated shopper when you are “properly using leverage”. Yet the costs are so much more.

The Real Results

We can definitively say that debt always results in a reduction or elimination of options. If you decide to buy a car with a loan then you can kiss $300 a month for 5 years goodbye. What happens if you lose your job or have a nice trip you want to take? Do they let you skip a month? Nope. You have to pay no matter what. Your options on that $300 a month are gone. It is for the car payment and the car payment only. Multiply this out for furniture, electronics, credit cards, and everything else and it is easy to see how people can get stuck. For many people the idea of being financially free is science fiction. They can’t imagine being able to save enough money or invest well enough to be able to cover expenses. I believe it drives people to scams and gimmicks that are all over the place in the stock market and investing space. It leads people to doing day trading to try to turn $1,000 into a million which will undoubtedly fail driving them further into debt and despair. So what is this debt really costing you? It is costing you not only your freedom, but a TON of money in lost opportunity costs that are hard to quantify and see. It is like us, being that we live in a 3 dimensional world, trying to imagine what it would feel like to live in a 4 dimensional world. We don’t know until we are there. Likewise people who have only known debt their whole lives usually find it hard to understand the opportunities there are outside of it until they experience it.

I don’t know about you, but the situation I described above sounds like pure hell to me. More than anything in my life I value my freedom of choice. In terms of money this means that I want to do everything I can to achieve financial freedom. I believe you only have one life and I sure as hell don’t want to spend the majority of it in a job I hate but have to keep because I have bills to pay my payments. I want to be able to do what I want and have the freedom to pursue my passions. The only practical way to do this is to become financially free, but what does that mean?

Financial freedom means to have enough money to be able to cover your living expenses indefinitely. I call this amount of money my F#$k You Money. It’s the amount I need to have to be able to hypothetically go to work and throw a big middle finger up and walk out without worrying about going bankrupt. Now this doesn’t necessarily mean you would retire (which you could). It just means that you only have to work when you want to. You are not tied down to just working a “job” because you have to pay your bills. The math is simple:

F#$k You Money = (Monthly Expenses*12)/.04

Basically this is saying that if you draw at a rate of 4% per year (which is a good rule of thumb for draw rate) then that is the amount of money you would need to have saved and invested in order to be financially free. So where does debt come into this? Well let’s use an example. Let’s say you make $4000 a month in income and your monthly expenses are $3000 so you are able to save $1000 per month on average. The amount of money you would need invested to have your FU money would be about $900,000. So if you are able to save $1000 a month and invest it to earn 8% then it would take you  23.5 years to save that amount. Indeed a long time. Now let’s say $1000 of that $3000 of expenses was debt. If you were to pay off that debt then now you could save $2000 per month and have expenses of only $2000. Now it only takes you about 13.5 years to have your FU Money. That is because taking on debt does two things in regards to achieving financial freedom: It raises the amount of FU money you will need and it lowers the amount of money you have free to save every month. So what your debt is really costing you is your freedom regardless of the interest rate. Just to add onto that here are some other things that debt is costing you (I am taking these from Jim Collins Blog):

  • Your lifestyle is diminished. Set aside any aspirations to financial freedom. Even if your goal is living the maximum consumer lifestyle, the more debt you carry the more of your income is devoured by interest payments. A (sometimes huge) portion of your income has already been spent.
  • You are enslaved to whatever source of income you have. Your debt needs to be serviced. Your practical ability to make choices congruent with your values and long-term goals is seriously constrained.
  • Your stress levels build. It feels as if you are being buried alive. The emotional and psychological effects of being saddled with debt are real and dangerous.
  • You endure the same type of negative emotions experienced by any addict: Shame, guilt, loneliness, and above all, helplessness. The fact that it’s a prison of your own making makes it all the more difficult.
  • Your options can become so narrowed and your stress levels so high, you risk turning to self-destructive patterns that only reinforce the dependence on spending. Drinking perhaps, or smoking.  Or, ironically, shopping and still more spending. It’s a dangerous self-perpetuating cycle.
  • Your debt tends to focus your attention exclusively on the past, present and future in the worst possible way. You become fixated on your past mistakes, your present pain and the disaster looming ahead.
  • Your brain tends to shut down on the subject with the vague hope it will all resolve itself in some magical way and in the magical time of later. Living with debt becomes hardwired in your financial attitudes, habits and values.

These effects are very real and very destructive. The vast majority of Americans will never truly know what freedom is about. Moreover they accept this as normal and draw others to follow the same path. This leads to a generation that is even more in debt and desperate than the next. A generation that feels victimized by anything and everything around them. A generation that feels entitled to the promises that have been shoved down their throats since they were in middle school. A generation that is scared to face reality and is content living life in their parent's basement in a fantasy land where responsibilities are ignored and activism is rampant in the hopes that some public official will make all their problems go away. It is truly a generation that is nothing more than glorified indentured servants. Think I am crazy? Ask around to your friends and family about their financial situations. Look around you and tell me that I am lying. If you open your eyes you will see that we are surrounded by people who think that looking good is living good. That having a nice car and a cool smartphone is living the life only to realize decades later that they have been treading water and have made little to no financial progress. They realize that they have been worshiping the false prophet of the credit score. That a credit score is really only good for going into more debt. I really wish it wasn’t true. Unfortunately the facts don’t lie. Is this really how you want to live?

Maybe I Am Crazy...

When I started my journey down the path of learning about personal finance I found these things very disturbing. At first thinking that this was such a huge problem for everyone else. The real shocker came when I began to look at my own life. Coming out of college I was $65,000 in student loan debt. Luckily I got my chemical engineering degree and was able to land a good job, but I was well on my way to becoming just another statistic. I was trying to decide what kind of nice car I was going to finance and what sweet TV and electronics I was going to buy on what credit card that I was going to apply for. Luckily I stopped myself before I made the damage worse. I went around to other people to spread this epiphany I just had, but ran into some reactions that were strange to me. It was usually one of these four:

  1. A mixed reaction of skepticism and the attitude that “well, I am different”.

  2. They said that this is great information for “other people”. Meaning that they are above such “low class ideas”...

  3. An actual positive reaction and a move to research more.

  4. Anger that I would ever say such a thing and in some cases complete loss of contact.

I guess if you are reading this then you are experiencing some version of 1, 2, or 3 because if you were feeling 4 you probably would have stopped reading by this point. I openly welcome skepticism, but you must have the guts to be skeptical of yourself as well as others. It is important to understand that we are ALL susceptible to the same fate as above. Was it an extreme case that I described? Not really. Extreme cases generally have fixed methods to deal with them. People either go through bankruptcy, just continue on and live enslaved until they eventually end up on government aid, or in some of the most extreme cases commit suicide. The case I believe I described is a normal one. One that usually flies under the radar of everyday life because it is not so easily sensationalized.

The biggest enemy to success is not failure, but mediocrity. Most American people have accepted just that. I don’t believe it is because they are lazy or stupid. I think it is because they are ill-informed. We don’t teach financial literacy in the schools. We leave that responsibility up to the parents who know little to nothing more than the generation before. Do you know who is very willing to educate people on financial literacy? The banks and credit card companies who are in the business of lending people money. Look around at most financial blogs, sites, and apps. They are chock full of ads for credit cards and information on how to make your credit score better and get better rates on your car loans or negotiate your car lease. That is because they are not incentivized to give you quality information that is beneficial to your life. They are mostly incentivized to give you information that will make you are lower risk borrower so they can lend money to you. The bad part about all of this is that it has worked. People accept these ideas because they are able to get some short term gain from overextending their income to get some shiny goods. Businesses like this because it means more revenue from financing and interest. It is all great until it comes crashing down which leads to a perpetual credit cycle.

So are we doomed forever? Is the only thing we can do is to hope that Bernie Sanders or some other president will save us from all the evil? Thankfully the answer is a loud and clear “hell to the fuck no”.

After digging into the finance literature I set out to learn the truth about how to handle money. I wanted to know the in depth facts on what to do and how to do it. I didn’t just want a prescription. I wanted to know the details. So I dug deep into the trenches for the better part of 3 years and have been able to tease out the simple and effective ways to set up systems so that I never become “normal”. I have made it my duty to teach as many people I can the same thing, but I wanted to do it a little different. I want to give people the facts, mathematical tools, and scientific base to be able to prove to themselves without a doubt that they are on the right track. The financial series is a series of articles that I have written which lay a solid foundation for which we can begin to build off of. Whether you are already a well read financial scholar or starting out with no base it has something for everyone. Instead of just telling you “here is some good stuff and you should do it” , I intend to prove it to you. I make sure to use analytics and science where ever possible to make sure you know the method to the madness and are able to use that foundation to continue to explore. This is not for the lay reader who just wants to be told what to do. This is for the skeptic and analytical mind that want to know the facts. I invite you to explore my site and join in on the conversation. As also, feel free to drop me a line to my email at joshua.bird@younganalyticalmind.com. Happy reading.