Are You a Prisoner of the American Dream?

Are you a prisoner of the American Dream?

Most people go through life with blinders on... never realizing that there's a bigger picture that they fail to see. Even sadder, is the fact that the people they turn to for guidance, help, and advice usually do not see the bigger picture either. Parents, thinking they're doing the right thing, blindly hand their children over to a lifetime of slavery. Teachers, guidance counselors, ministers, and even financial advisors, clueless to the scars left from an invisible whip, perpetuate the imprisonment. Like some lost episode of the Twilight Zone, only a small percentage of the population has the ability to see the bars of the prisons in which we live.

Don't get me wrong, I'm a very proud American. I love this country and all it stands for.

So what's wrong with the American Dream? Nothing! What's wrong is the exploitation of the population by financial institutions. What's wrong is the intellectual dumbing down and moral decay of the average American caused by mindless television shows and movies. What's wrong is the constant propaganda by the giant retail machine training us to be good and obedient consumers. What's wrong is that, like clones, we're taught from grade school to grow up, get a job, take on a debt load that you never have a chance of recovering from, give each day of the best years of our lives in trade for a salary, and retire broke or in debt. We are regularly enslaved and systematically brainwashed into thinking we're free to live our lives as we please, when, in fact we're so far in debt that we can't possibly do so. What's most amazing of all is that most people don't see this for what it is, nor do they see that these problems are related and incestuously intertwined.

So what IS the problem? Let's say I'm just out of college and buy a car. I get a fairly nice one for a little under $30,000 and put a few thousand down. That leaves me borrowing $25,000. If I finance it for 5 years with an 8.5% interest rate, I'm going to pay back $30,774.00 (that's $5,700.00 in interest). That's almost $6,000 in interest. The problem is that I don't have any money! If I did, I wouldn't have needed to borrow the money to purchase the car, I would have paid cash. But this is the norm: take someone without money and get them to pay an extra $6,000.

Credit cards are even worse because their interest rates are much higher. Late on a payment? If so there are late fees and your interest rate will jump to the maximum allowed by law. Now I'm going to give most people the benefit of the doubt and say that we're not late on our credit card payments because we're rolling in dough and just don't want to send in our payments. No, we're late because we can't pay our bills. But now, because we don't have the money to pay our bills, we owe even more. Kind of sounds like a torture chamber or prison camp where the person being tortured passes out from the pain and they bring in a doctor to fix him up enough to be tortured some more. Some credit card companies push credit like a pusher at a playground; they get you hooked and then bleed you for everything you've got. Some people never seem to notice that their balance never goes down much at all if they just pay the minimum payment. Are you starting to see those prison bars yet?

Let's expand our discussion to houses. Let's say that a year or so after I purchase my new car and run up some decent credit card balances, I want to purchase a house. I don't have any real savings, so I look at the various 100% financing or close to 100% financing options that are available. I find a modest house I like for around $200,000. I borrow $200,000 at 6% interest for 30 years. I have a $1,200 per month house payment. In 30 years I'll be a homeowner. I'll pay a total of $431,676.00 for my $200,000 house. That's $231,676.00 in interest. That's more than the house was purchased for. Woops! There's the problem... I didn't purchase the house for $200,000 I purchased it for $431,676.00. There are two very important facts in this paragraph. 1) I'll be a home owner in 30 years, not when I close on my loan, because the bank owns the house until I pay off the mortgage, and 2) I can say I bought my house for $200,000 but the fact is that if I'm going to pay the bank $431,676.00 for my house, then I bought the house for $431,676.00. The funny thing is I celebrated when I bought my house. I had family and friends over and cooked a great dinner. We toasted to my success. Strange how no one mentioned hearing the cell door slam shut behind me... starting to see those prison bars yet?

These are not extreme examples either. I've tried to be conservative.

Some would say we need more laws to stop the credit problems in this country. I don't agree. Some laws are good, like the "Truth in Lending" law that requires the bank to show you exactly how much interest you'll payback over the course of your loan. The problem is by the time most people see that figure, they've signed so many sheets of paper and are so confused by the complexity of the loan and closing process that they don't comprehend what they're being told. Plus, they're so far along in the process that they are not going to back out. We probably have enough laws. What we need is more education about debt and money at the high school and college level. But that goes back to my opening paragraph...

If you catch someone when they're just starting out, before they've bought the car, loaded up the credit cards, and purchased a mortgage, I mean house, then they might have a chance. They might have a chance, if you can convince them that a few years of living cheap and saving everything will make them wealthier in the long run. You don't earn much interest on savings these days; most people just compare the interest rate on savings to 0. What we should do is compare the interest rate on savings (as a positive amount) to the interest rate and payback on loans (as a negative amount). It's then much easier to visualize, as in the above examples, how much better off you are living cheap for a while and saving than spending your life in debt.

But wait, there's a hidden bonus in the savings route vs. the borrowing route. You will have much more flexibility and ability to start your own business when you're not saddled with debt. And that's where true financial freedom comes from. There are very few jobs that pay enough to generate any true wealth. You need to create your own business and income streams to become wealthy. You need to create businesses that you own but not necessarily work day in and day out. It's really hard to do that when you're saddled with debt and living paycheck to paycheck. Get on the positive side financially and it becomes easier. It's partly easier because you don't have the debt hanging around your neck like a huge anchor, and, it's partly easier because your frame of mind is completely different.

Once you're on the debt treadmill it's hard to get off, but it can be done. It's even harder if you're fortunate enough to have a family, but it can be done. I'm working on it myself. I'm not there yet, but I will be. This blog is one of the things that will help me achieve it. I hope that I will also be able to pull a few others along with me to the other side.

Sincerely,
Fred Black

Update 4/6/2007: Here's a great entry by Terry Dean that talks about Debt and Debt Free Living.

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