Consumer confidence falling & the $600 checks to save the day

Did you get your $600 check yet? What will you do with it? Surveys are saying that most Americans will use their “Economic Stimulus” check to deal with gas, food, and catching up on bills. This doesn’t stimulate the economy.

Consumer spending stimulates the economy. In other words, the Department of Treasury sent out checks to us all totaling $150 billion in hopes that we would buy clothes, jewelry, and electronics. Let’s take a step back for a moment and assess how our system works:

Two thirds of our nation’s economic activity is coming from people spending money. When our economy is “going good” it is because people are spending money – often more than they make or have. When our economy is “doing badly” it is because people are saving money or living within their means.

Finances 101

This is America and everyone wants to be rich. How does one become rich?

Make more money than you spend.

Or spend less than you make… in case that hits closer to home for you.

A person following those rules is becoming wealthy, while a person who practices opposite rules is becoming poorer. Here’s where things start to look funny. Our economic system is booming when people are becoming poorer.

Let’s examine two people: Frank & Jimmy.

Frank makes $60k per year. He

  • lives in the suburbs of a city
  • supports his family
  • gets a fancy new car every 3 years
  • has a TV in every room of his house
  • commutes across town to work
  • eats out for lunch every day
  • takes his family out to dinner twice a week
  • always has the latest cell phone with neat gadgets and features
  • has a guest bedroom in his home
  • drinks Starbucks on the way to work each morning
  • goes on a fishing trip twice a year

…you get the idea: a fairly average middle class American. The tricky part is that this lifestyle costs Frank $85k per year. So his credit card debt is increasing, and he borrows against his home’s equity at every chance he gets.

Jimmy also makes $60k per year. He:

  • lives near his work
  • supports his family
  • gets functional new used car every 10 years
  • has one old TV in his house
  • brings his lunch to work every day
  • takes his family out to dinner once per month
  • has a basic cell phone – one that simply makes and receives phone calls

This lifestyle costs Jimmy $37k per year. He has 0 consumer debt and is on track to pay his home mortgage off in 10 years while continuing to save and invest.

Frank looks rich, but is becoming poorer.
Jimmy looks poor, but is becoming rich.

Frank is boosting the U.S. economy.
Jimmy is hindering the U.S. economy.

If everyone was always like Frank, then the U.S. economy would rapidly boom to its fatal destruction… an economy and society completely bankrupt.
If everyone was like Jimmy, then the U.S. economy would be very different. The wealth would be spread among the many and the modest separation between the haves and the have-nots would be a result of innovation.

Back in reality, while a small portion of Americans are just like either Frank or Jimmy, the vast majority of us are sometimes like Frank and sometimes like Jimmy. Let’s call this chameleon Brian.

When everybody else is spending themselves into slavery-like indebtedness, Brian follows suit. If the guy down the street gets a Mercedes, Brian gets a BMW. When flatscreen TVs go on sale, Brian gets two: one for each living area in his large home which he upgrades every 5 years. When tech stocks are hot, he’s buying them. When homes are rapidly appreciating mysteriously, he’s buying them with the 95% LTV stated income mortgage that his brother in law told him about.

When everyone starts to lose confidence in this “we’re all magically rich” nonsense, Brian starts to change color. His BMW regularly has 1/16th of tank of gas in it. He sells his tech stocks after they’ve crashed. The “investment” homes he bought have negative monthly cash flow and negative equity. Six more months of this and he’ll have to go through foreclosure on one or more of his homes.

…hence the economic cycle. The peculiarity is that individual financial health is opposed to our country’s overall economic health. That tells me that the economic system is broken. But there are two economies to watch: the national economy & the individual economy. I don’t know how we can fix the national economy, but fixing our individual finances is completely at our fingertips:

Spend less than you make / Make less than you spend

So there are two factors: income and expenses. As tough as it is, we all know how to reduce expenses. Income can be further broken down: personal income and investment income. The large opportunity lies in the latter because many Americans don’t know how to increase their investment income. That’s why they have put money in the stock market through retirement plans… because they don’t know how to invest it themselves.

It’s difficult to increase personal income, because most workers are simply trading their time for money. We only have a limited amount of time to trade for money, and our time doesn’t compound. Our investment income does compound.

So here’s where I see the largest opportunity of modern times for massive individual wealth growth… increased individual investor sophistication. Most Americans know how to buy things and hope, but they don’t know how to evaluate investment opportunities and manage risk well. Yet everyone has the chance to learn these fundamental investment concepts.

The trick is you have to turn off the TV, hang up the phone, park the car, and find a quiet place to read. We’re all chasing wealth, and it’s simply in the bookstore and on the internet. I’m doing my best to find, understand, integrate, use and share everything I can through this blog, Realtor CE courses, professional education, my online radio show and monthly newsletter. With the availability of such tools to increase investor sophistication, I believe that today the average American is in just as good a position as ever to become independently wealthy.

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