I have recently realized that wool is being pulled over our eyes, and many things deserve to be unpacked. The most significant point of frustration to me is that we do not supply our members with the proper financial education.
I see the lack of financial education equivalent to playing Monopoly with a professional that decided not to share the rules or any of the strategies behind the game. I imagine in many cases when the pro can exploit my ignorance that they would. I am sure the people who play monopoly professionally are kind, but they would not be incentivized to teach me in that example. Teaching me means decreasing their chances of taking home a "W."
I view our society as operating within a similar incentive structure. It may not be on purpose, but our ignorance leads us to traps larger institutions set. Keep in mind this article, we are going to zoom in on a minor issue, but there are larger systems at play when you examine this deeper.
Many things that we do NEED in life are sold to us by people who are paid a commission (or earn a profit) to sell to us. The intention is to help us navigate through these complicated life choices (look for Fiduciaries). Instead, we created people who are motivated to sell us the most expensive thing that we can legally buy, or they encourage us to buy the new shiny thing.
The HGTV effect
I think the best way to understand this is by anecdotal example. Imagine being a first-time homebuyer with a steady income of about $100k. They have also saved $20k for a down payment (let's make the math easy). A common question would be, what should the budget be in this scenario?
If you ask the mortgage brokers or the real estate agents, they are taught that 30-45% of your income can go towards monthly payments. If you are not careful, they can and will show you houses in the $350k-$450k range because you can afford it on paper.
Although if you ask a financial professional, all of your housing expenses (mortgage, insurance, future repairs, and utilities) should not surpass 35% of your monthly income. Your mortgage payments need to be less than what the mortgage brokers and real estate agents are taught.
With the situation I outlined above, the absolute max they could afford in the scenario would be $300k. The difference between what financial professionals teach and what selling professionals are told is a $50-150K difference.
If you watch HGTV, you can see this in practice.
Real Estate Agent: What's your budget?
Couple: Oh, about $300K
Real Estate Agent: *shows 400-450k homes*
Couple: *buys house entirely out of their budget*
New cars are more expensive than we let on
The auto industry has a rule of thumb called the 20/4/10 rule. Twenty percent down payment, 4-year loan, and 10 percent of your total income on the cost of ownership (8% on car payments and 2% on everything else).
If the point of capitalism is to buy INCOME PRODUCING assets, why am I spending 10 percent of my salary on a DEPRECIATING ASSET? Although the rule factors in total expenses, it isn't thinking about the whole financial picture and your unique needs/interests.
Let's use that same $100k salary example. This means you could afford about 800 dollars a month for the vehicle and upkeep. If you are passionate about having all the best things in your car, by all means, go wild.
If you buy the most expensive car in the budget created above, it would require a 6,000 dollar down payment. If you are not crazy about needing the newest car model, you can take that same down payment and buy an older model. This is not frequently referenced in the mainstream discourse; most conversations are focused on Leasing vs. Financing.
If we are okay with sacrificing a few new features, we can quickly free up 200-500 dollars a month to put towards something about which we care a little bit more.
Why does this happen to us?
In western culture, we often tell ourselves that we need newer, bigger, and shinier instead of saying to ourselves, "this is good enough." I blame unchecked consumerism paired with expectations built by social media.
In my video, where we discuss the questions that can replace budgeting, we play with the idea that all progress in your financial world primarily starts with internal reflection. Learning how to become more intentional with the dollars you spend to avoid these upgrades Learning how to become more intentional with the dollars you spend to avoid these upsells and unnecessary purchases.
In life and our finances, too often, we allow our circumstances to make our choices for us. Routinely ask yourself one question (in addition to the 3 in the video), and I will assure you that it will make a significant impact on your financial world:
"Can I Really Afford This?"
Design your life around the ability to spend your money on the things that will enhance your life versus what you think will.