The Financial Reader

It is no secret that the average poor and middle class North American family have not fared very well financially over the last 30 years.  Do you ever wonder why is this?? Why has the average “poor” person not excelled within the last 30 years??  I include the middle class in the “poor” category since they usually hold the biggest debt to disposable income.  Many people suggest different reasons for this: social pressures to buy stuff, lack of motivation, taxes, lack of education, lack of self control, etc.  However, is this really the case??  Over the last fifteen years, there has been an explosion of free online financial information that is free for the taking.  Unfortunately, however, many people decide that learning about their finances and saving for their future is just not that important. 

Let me start by saying that learning about your finances is as important as keeping up with the education for your profession, keeping in shape, and staying mentally healthy.  So why do many of us ignore it??  If you asked the average Joe/Jane how interest rates work, what compound interest is, or what an exponential curve looks like, do you think they would know??  Do you know??  Fact is that anyone who has a credit card should know what these are and how they work.  If you don’t, you stand to lose a lot of money!  This got me to think, what do the poor and middle class do that keeps them that way??  Well, this is what I came up with.

The poor and middle class spend their money – As we have read in How to Save Money, we should be saving around 20% of our income.  However, ever since 1985, the average savings rate has dropped steadily (from around 15% to 3%) and recently, even reached a negative savings rate.  Not saving money is a recipe for disaster as discussed in Why should I Save.  Many people think that because the rich are wealthy, they spend their money extravagantly. This cannot be further from the truth. While it is true that after they have accumulated money spend it on luxury items later in life, many have not witnessed the sacrifice and self control when they were saving their money.  Another important note is that the rich never go overboard or get into debt for something they want.   This is a critical mistake that the poor and middle class always make.  Many think that a “payment plan” is a smart way to go.  What you are really buying is a debt plan where you pay dramatically more for that car, television, couch or whatever.  All self-made millionaires have learned how to control their desires, and as a result, their wants are in line with their incomes. Never do they spend beyond their means. A nice car may be purchased, but it is done so with money that was saved up.

The poor and middle class learn about things that do not benefit them – Where the rich greatly differ from the poor and middle class is education.  It is also a well known fact that the rich have a higher level of post secondary education than the poor; however, they also have a much higher level of financial education than their money less counterpart.  While the rich are attending classes on how to invest in real estate, and how to time markets; the poor are taking classes like: cake decorating, couponing, golf lessons, or a guided cemetery walking tour.  Yes these are real courses than can be learned by any schmuck – for a fee of course.  But are they really beneficial?? 

The poor and middle class focus excessively on entertainment – Many people, rich and poor want to go on vacation, buy things, and spend money that they don’t have.  However, rich people are very good at controlling their desires.  On the other hand, the poor and middle class tend to want to spend before they have saved.  These people are the ones who put vacations on their credit card, buy a new DVD on credit, or buy a new car for only $159/ bi-weekly for 84 months @ 8%.  Whatever the entertainment is, if you cannot afford it by paying cash for it, don’t buy it, period.  Many commercials use the “you deserve it” or “because you’re worth it” to tempt you to buy that makeup, car or go on that vacation. 

The poor and middle class are too self conscious – We’ve all heard of the saying “keeping up the Joneses”.  Well this is something that the poor and middle class has got burned by in the last 30 years.  Today, we look at what the neighbor has and we, in many cases, feel like we should have exactly what he does.  We should buy something not because everyone else has a nicer one, but because you really need it.  It is just not worth trying to keep up with the ‘Joneses’ for they are in massive debt and probably insolvent.  If you do feel self-conscious, checkout the article Do you fear criticism??

The poor and middle class have their money all in one asset class – The poor and middle class tie up all of their money into one asset – usually real estate.  This is exactly what burned the US middle class during their now six year real estate collapse and is the reason why many of them are under water (ie. they owe more money on their house than it is worth). Just because real estate has done well in the last decade (think Vancouver and Toronto), doesn’t mean it is a good place to invest – in fact, it is usually the opposite.  Once again financial education can teach these people to wisely invest their money and never trusting real estate as a safe means.  Want to know what causes real estate to collapse?  Checkout the article What Causes Real Estate to Collapse.