The Prosperity Blog

The Minority Report

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“Despite a voluminous and often fervent literature on “income distribution,” the cold fact is that most income is not distributed: It is earned.”

Thomas Sowell

Table Of Contents

For your own enlightenment, answer the following 3½ questions. (Approximation is okay.)

1. Are you currently saving money on a regular basis?
2. Did you pay income taxes in 2019?
3a. Was your 2019 adjusted gross income greater than $68,400?

or…

3b. Was your 2019 adjusted gross income greater than $97,973

If you’re reading this post, it’s likely you answered “yes” to more than two of the three questions, which means you are a part of a demographic minority in the United States. Whether you know it or not, you have a unique financial standing relative to most of the nation.

For an interesting take on what it means to be part of the financial minority, read on. You probably won’t get this type of commentary from the teleprompter-reading, talking heads in the national media.

In determining your status as part of the financial minority in the United States, there are two key indicators:

1. Are you paying income taxes?
2. Are you saving money?

In ways you may not have considered, these two financial actions are closely linked. This is especially true for those in the financial minority. Let’s look at the significance of income and taxes.

You are One of the “Golden Geese” Supporting the Inverted Pyramid (and That’s Okay)

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According to Pew Research, American household incomes have trended up over the last 40 years. And, it’s been just over 10 years since 2009’s Great Recession. The median U.S. income in 2018 was $74,600. This represents a 49% uptick from 1970 when median income stood at $50,200. However, this doesn’t factor in the pandemic (an obvious outlier).

While household incomes have grown modestly over the past century, household wealth has not. What’s more, the bottom 90% own just over 50% of the real estate in the U.S. This is a cause for concern with wealth inequality when comparing stocks and real estate.  

When housing prices increase, wealth inequality shrinks, and the middle-class increases. And yet, if the stock market outperforms housing, this too can widen the wealth inequality gap.

(As a side note, middle-income families rely more on home equity than upper-income families. The latter derives some of its wealth from business equity and financial market assets.)

Mind the Gap

It’s estimated that the top 10% of households own about 90% of the stocks in the United States. Now, keep in mind that there’s a big difference between 10% for someone who’s a millionaire, versus 10% for someone in the middle class.

A millennial under 35 with $1 million is classified as rich. This is slightly over the 99th percentile for household wealth, which stops at $998,000. If you’re older, though, it’s a different story. People aged 35-44 with $1 million are barely scraping the 95th percentile. What’s more, those over the age of 55 are barely reaching the 85th percentile.      

Consider inflation and an increasing lifespan, and a million dollars may not go as far as it used to.

And it raises a deeper question, what is rich? When exploring wealth, why is the economic playing field skewed to favor the wealthy?

What’s Rich Anyway?

Defining the term “rich” is an exercise in relativity (it’s often applied to someone who earns or owns more than you). And of course, the U.S. tax system isn’t flat, so Americans are paying more or less tax based on income.

The top 1% with an income just under $2 million made up 20.9% of income in the U.S. last year. However, they paid 24.1% of taxes. This wasn’t the case with the middle 20%. While they accounted for 10.9% of U.S. income, their income levels ranged from $41,000-$66,000 and they paid 9.4% of taxes. The remaining 20% with salaries under $23,000 paid 2.8% of America’s taxes.

This group of unlucky duckies paid the most significant amount in taxes because they may not have real estate and tax advantages.

Now, let’s say a person has $2 million. That’s rich, right? Not exactly. 

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Having $2 million puts people in the top 10th percentile unless they’re aged 55-64. They would actually need $2.1 million to qualify in this category. A recent study found that 39% of U.S. residents tracked over 44 years only spent one year in the top 5% of incomes. Hence, income can fluctuate and affect how much a person can save.

And there are other contributing factors.

The wealthy might include people who inherit money or have high savings and little income (retirees). This can also include college graduates with high-paying jobs (and student loans). A family that’s in the 90th percentile has about 6x the median wealth as they do income. This sounds lopsided until it’s viewed as a ratio.

Look at it like this:

  • A family in the 50th percentile can have a $53,000 salary and a median net worth of $97,000. Their wealth to income ratio is nearly 2:1.
  • A family in the top 10% has a ratio that’s 6:1. 
  • Respectively, for a family in the top 20%, it’s 3:1.

So, what happened? The wealthiest save into assets they control.

The Wealth of the Minority Grows Faster—and Receives More Government Support

In general, the amount of taxation imposed by various government entities in the United States is high. In particular, the income tax burden on the financial minority is steep. Income taxes have risen disproportionately for the top 25%. For example, the top 1% pay 40% of all federal income taxes. The top 20% pay nearly 90%. By way of comparison, the bottom 50% only pay 3% of all federal income taxes or less than 0.001%.

There’s a quirky occurrence—the rich pay more taxes and yet so many complain about income disparity. Why? The government’s attempt to manage the national economy while not controlling it entirely. Here’s how this works.   

The Golden Goose

Taxes, tariffs and other monetary policies are used to siphon some of the productivity of the wealthy to pay for government programs and services (social welfare, consumer regulation, law and order, national defense, etc.).

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Once governmental units establish streams of revenue, they don’t want them to dry up. If there is no financial production, there is no economy to manage. It’s the personification of the golden goose fable. If governments want ongoing streams of revenue from their citizens, they can’t destroy the ones who generate them. Since they generate and hold a disproportionate percentage of income and assets, governments need the financial support (or at least compliance) of wealthy individuals.

Governments make the rules in concert with those who are most affected by them. And since all governments (at the federal, state and local levels) need money to function, they have a vested interest in maintaining a working relationship with the wealthy minority.

On an institutional level, the corporatism mentality explains why some parts of the economy look “too big to fail.” These receive government-sponsored financial help, while others go into bankruptcy.

On an individual level, it explains why the wealthiest segment of the population uses individual tax breaks. This is partly because wealthier individuals can save more. And the tax advantage is greater for those in higher income tax brackets.

Friends with Benefits

The idea of governments supporting the wealthy minority may sound like political commentary. However, this isn’t a liberal or conservative talking point. Commentators from very disparate ends of the political spectrum say the same thing. The current economic system helps the wealthy—once they get there—and gives them an edge going forward.

This perspective can apply at an individual level. Individuals with money get the tax advantages because they have the money and knowledge to take advantage of these breaks. They explore personal finance and financial advising and hire the best advisors. For example, taxable income from capital gains receives favorable tax treatment compared to income from wages.

Mortgage interest deductions are for homebuyers, not renters. Individuals in the wealthy minority have clear advantages. And they can borrow more money at better rates because they have leverage.

The Necessity of the Wealthy Minority to Save

If the only things you’re doing as a member of the financial minority are earning an income and paying taxes, you’re not playing the game. To take advantage of your minority status, it is imperative to accumulate assets (and write-offs). You must save for your own financial benefit and the preservation of the whole inverted-pyramid/golden-goose system.

Someone has to make a profit. And, while governments are better at assessing taxes on profits, their intention isn’t to make a profit, (they may not know how). Making a profit requires a forward-thinking, future-oriented mindset. People save because they understand that it’s not only what is happening today that matters–it’s just as (if not more) important to prepare for an unknown future.

Creating Seed Money 

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Some reasons for savings reflect a prudent view of the future. A pandemic can occur. A job may not last forever. Things (homes, vehicles, a mother-in-law) need replacing. And yet, saving is also the seed money for future productivity.

Saving provides the capital that moves innovative ideas into practical use. Eventually, some of those innovations become new engines of progress, improving existing markets and opening new ones. Whether it stems from an attitude of caution or ambition, people who save contribute to a functioning economy.

This emphasis on saving and accumulating assets can read like “economics for fifth-graders.” However, a quick once-over of the facts reveals most Americans don’t understand the importance of saving. They also may not understand the consequences of not saving. This is why the economic playing field skews to favor the wealthy minority.

How to Accumulate Assets as Part of the Wealthy Minority

People acting on behalf of the government (legislators, political analysts, economic advisors, etc.) may know that saving is a critical component in maintaining a solid economy. Often, they enact legislation to encourage saving. This can come in the form of IRAs or 401(k)s. Yet, the governmental perspective on saving and asset accumulation is short-sighted or incomplete.

Consider that the major purpose of IRAs or 401(k)s is to provide retirement income. Saving for your future is a worthwhile objective, and yet there are plenty of other reasons to save. Picture Bill Gates at age 25. What would have been the value of saving in a 401(k) for retirement as opposed to saving directly into his business? In real life, especially when one wants to make a profit, the need for capital is fluid, constantly changing. Most government-sponsored asset accumulation programs don’t offer much flexibility.

This leads to a controversial conclusion. The best way for the wealthy minority to save or accumulate assets is often outside of government-sponsored savings programs. Why? Because assets beyond government programs offer control, liquidity, leverage, and tax advantages. Our personal favorite, dividend-paying whole life insurance, also offers permanent coverage of your income earning potential–with additional riders for greater certainty.

The Pragmatic Idealist

There are compelling social and philosophical issues regarding the widening wealth gap in the United States between the top 25% and everyone else. And, some Americans feel a sense of anxiety when comparing themselves to their wealthy neighbors.

In his book, Dream Hoarders, Richard Reeves explores the growing disparities among the top 20%. The widening gap passes down to the children of the affluent and it increases social divisions while reducing social mobility. There are also gaps in neighborhoods, lifestyles, travel, and attitudes of the affluent.

And, maybe that’s why a tipping point existed in 2015.

The Tipping Point

The richest 1% owned as much as the rest of the planet. Or, from another perspective, 8 men owned as much as 3.6 billion people across the globe. Hence, equality concerns are obvious. The rest of the population might secretly fear a tilted economy, monopoly and ability to leverage political power.

These are justified views but not everyone shares them. There are Americans who feel more secure with affluent neighbors next door. America is better if everyone pays taxes. And yet, so many argue we need fewer affluent people, rather than seeking more opportunities to grow wealth. These are interesting perspectives.

This is not a discussion of the social or ethical ramifications of the gap between the wealthy minority and everyone else. It’s simply a practical assessment of which approaches work best in light of the current state of affairs. As it stands, most people’s economic lives are better off if they earn enough to both pay income taxes and save.

And, let’s face it. Our economic system has been through a lot over recent years.

Maintaining Balance Amidst Major Economic Shifts

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From the pandemic and financial crisis to new technologies and production changes, maintaining a pyramid balance is crucial. This is especially true when it shifts in new directions. Years ago, big business included names like GE, Exxon, PetroChina, Bank of China and China Mobile. Today, the 5 biggest global companies include Amazon, Facebook, Apple, Google (Alphabet) and Microsoft.

Furthermore, a shift in industries is a driving factor in our economy:

  • Construction: Spending reached $1.365 trillion in 2019. It’s projected to grow 4% in the next 10 years, based on Bureau of Labor Statistics (BLS) data.
  • Healthcare: This sector added 2.8 million jobs from 2006-2016. What’s more, from 2008-2018, jobs increased by 20%. The BLS projects 18% growth through 2026.
  • Non-durable manufacturing: This includes items like gas, clothing, and electricity. It makes up 4.8% of GDP and contributes 4.4 million jobs. By way of comparison, durable manufacturing only accounts for 349,000 jobs.
  • Retail: This sector makes up 5.5% of the GDP and 9.6% of jobs, based on BLS data. Further, the NRF estimates a 4.1% increase occurred in holiday sales from 2018 to 2019.
  • Technology: It’s estimated to grow 11% by 2029. In 23 states, this sector is among the top 5 contributors, and in 28 states it’s among the top 10.

Hence, successful economic rebounds are somewhat reliant on multilateral cooperation from those who pay the most in taxes which include big businesses.

Is It Time for a Personal Assessment?

If you’re concerned about personal finance or financial advising, you may have questions. Perhaps you’re paying income taxes and not accumulating assets. It’s time to reassess your financial behavior.

Those who earn enough to pay taxes never acquire the saving habit. The long-term prognosis is they eventually become part of the financial majority.

If you are already saving, it’s time to address the other issue. What percentage of your asset accumulation program do you allocate into “outside” (outside of government control) sources?

These concepts relating to your position as part of the financial minority may be a bit counter-intuitive, and yet it’s relatively simple. However, the applications of these ideas are complex (don’t try a Roth IRA conversion on your own). The practical answer: Consult with our team at Partners 4 Prosperity! You can contact us here, or email welcome@partners4prosperity.com.

“Expect the best. Prepare for the worst. Capitalize on what comes.”

– Zig Ziglar

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Life Insurance Policyholders Conclude: We Don’t Want The Risk

Last Updated: December 8, 2020

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“A policy of life insurance is the cheapest and safest mode of making a certain provision for one’s family.” 

Benjamin Franklin

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For most people, discussing the working parts of a life insurance policy probably isn’t a captivating after-dinner conversation. Yet, recent reports about shifts in the U.S. life insurance industry reveals worthwhile information.

Despite over $20 Trillion in Coverage and Growing Digital Trends, 16% of Americans (41 Million) Need Life Insurance Yet Don’t Have It…

  • Term – 03%
  • Whole Life – 04%
  • Universal Life – 29%
  • Variable Life – 72%

The pandemic showed the need for insurance amidst unexpected life circumstances. Customer preferences include personalized insurance products instead of one-size-fits-all strategies. However, the surprise is that consumers mistakenly perceive the cost of life insurance is high. Considering lifestyle and employment changes, people should want insurance, even if they believe they don’t. People want to have certainty in their finances, although some lack information about how insurance creates certainty.

Average term life insurance costs for 20-30-year-old nonsmokers ranges from $10-$50 each month. Whole life insurance functions similarly, with premiums being lowest as you’re young (not to mention the cash value). However, the longer people wait, the greater the cost. And in uncertain times, greater financial certainty can help soften the blow in the event of a job loss or other event. 

Whole life insurance can help you start a fresh path. The cash value of your policy is not only an emergency fund, it’s a fund for opportunities. With a policy loan, you can fund a new business venture, make an investment, or support a loss of income. The sooner you begin a policy, the sooner you can have that peace of mind.

Consumers who enjoy extreme sports are in high-risk categories. Or, they may have a job that’s high-risk like construction or high-stress like sales. Illness and injury become likelier with age, so having insurance in place can act as a safety net. Thrill-seekers and those in high-risk environments should state their hobbies honestly on their applications.  Disclosing an extreme hobby might increase the base premium, however, you’ll still walk away insured. Simply put, policyholders can still leave their loved ones with a death benefit despite the slight policy increase.   

Small business owners can protect their businesses with life insurance. In the event of the insured’s death or disability, employees can receive pay if the policy includes “buy/sell agreements” or a “key person” as stipulated in their policy. With these policies, a co-owner acts as the beneficiary. With advantages including mutual benefits and payments for total disabilities or a medical trauma, it’s another reason life insurance is integral in the business process. And you can use the cash value like any other whole life insurance policy. With a death benefit, the loan balances pays out while the remaining balances go to beneficiaries. 

A Life Insurance Research and Marketing Association (LIMRA) report notes an uptick in online insurance searches. While 64% of Americans purchased insurance in person 10 years ago, online purchases increased from 17% to 29% today. What’s more, 1 out of every 4 consumers uses social media to pursue financial topics. 59% want information on specific products and services and 62% read reviews left by others.

The Insurance Barometer report explored the type of life insurance owned from 2011-2020 with three categories: Individual-only, Group-Only, and Both.

Here is the year-over-year change for each type:

  • Individual-Only: Increase from 40% to 55%
  • Group-Only: Decrease from 32% to 27%
  • Both: Decrease from 28% to 18%

Considering the noted decreases, the increase in individual-only coverage confirms consumers know they need insurance. And in fact, the LIMRA report noted that 36% of Americans want to purchase insurance within 12-months. This intent to purchase is a record high. “Educating consumers about the value and importance of life insurance—while also providing them information about the true cost of purchasing coverage—will help get more consumers to buy the coverage they say they need.” That’s according to Faisa Stafford, Life Happens CEO.

The Nuts and Bolts: Who assumes the risk? (This is the part that’s worth exploring)

A life insurance policy has three sections: the cost of insurance, the operating expense of the company, and the return generated from the collected premiums.

Term is the cheapest insurance (though not necessarily the best value). Term insurance is insurance for a period of your life, often 25-60, and has no cash value. Despite its popularity, about 88% of consumers don’t receive benefits, because the policy is in-force when the risk of dying is at its lowest. Prices spike at age 60 because the likelihood of death is much more significant. Term insurance works best in conjunction with whole life insurance, to provide full coverage and peace of mind.

Unlike Term, Whole Life Insurance includes a cash value. This permanent insurance lasts for your whole life, which means as long as you pay premiums, you will receive a death benefit. People often see premiums and think it’s expensive, however you share risk with the insurance company. Term insurance is cheap because the companies bear almost no risk. Whole life insurance, on the other hand, is guaranteed to pay out, therefore the company assumes all the risk. And the opportunities afforded by the cash value, which eventually exceeds premiums paid, are priceless.

With both policies, policyholders must pay their premiums. The insurance company shoulders all other financial responsibilities.

So What Has Changed?

Years ago, when consumers started explored life insurance and underwriting, they did so in-person. They sat with an agent and discussed financial advising to explore their options. They also understood the ramifications if they missed their premiums. With the Digital Era and smartphone technologies, consumers can now conveniently buy their insurance products online. However, they may fall prey to misinformation.

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With this approach to underwriting: 

  • 66% of consumers want a simple application process
  • 58% want transparent and easy-to-understand explanations and pricing
  • 56% want to avoid a medical exam (urine sample, blood sample)
  • 55% don’t want to visit a physician 

However, it’s important to remember that without exams, you may not be getting the insurance you want. Whole life insurance underwriting requires a physical exam, however it’s now possible to do so as painlessly as possible through hassle-free scheduling. And you can consider it a free check-up. Furthermore, many advisors are working entirely online, which means you can meet from the convenience of your own home. Gone are the days of in-person consultations.

If the purpose of insurance is to manage risk, making you feel comfortable and confident is important to us. And as best-selling financial author Garrett Gunderson, who is a friend of ours, is fond of saying, “Self-insurance is really no insurance.” Considering life-altering events like the pandemic, it’s logical that individuals are more risk-averse and less likely to gamble on any financial decision – including their life insurance policy.

During the last decade, consumers and especially millennials are exploring more insurance topics. They’re also concerned about the financial future of their beneficiaries. As recent data shows, there are no shortcuts when it comes to life insurance. The sooner a person signs up the sooner they have coverage, and the lower their premiums are. Doing the research, understanding different policies, and working with an advisor who understands you are paramount.

Do you currently have an insurance policy? There’s no better time than the present to meet with an advisor.

“Discipline is choosing between what you want now and what you want most.”

Abraham Lincoln

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Remembering 9/11

When the stock market closed in September 10, 2001 the Dow Jones Industrial Average (DJIA) stood at 9,605.51. The next day, the terrorist attacks on the World Trade Center occurred.

Question: Eight years later, on September 11, 2009, was the closing price of the DJIA…

a. higher?
b. lower?
c. the same?

Click here for the answer

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Whole Life Insurance: A Unique Asset Class

Last Updated: December 8, 2020

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“Don’t put all your eggs in one basket.”

This old saying reflects a common-sense approach to long-term asset accumulation. Even if current returns from a particular investment are quite profitable, there’s wisdom in not putting too much of your savings into a single financial asset or product, whether it’s in the stock market, real estate, certificates of deposit, or countless other items.

Since each class of financial asset possesses unique characteristics, a well-rounded financial portfolio typically includes a mix of asset types. Some may be valued for their guarantees or liquidity, while others may be prized for their steady income or potential for long-term appreciation. 

Where Does Whole Life Insurance Fit As An Asset Class?

It’s an interesting question, one for which the answer seems to be changing.

One long-held conventional perspective regarding asset classification has been that “insurance is insurance and investments are investments, and the two should not mix.” In this line of thinking, insurance (of any type) is a different type of asset. Insurance provides protection against loss, which is an important part of a well-rounded financial program. But insurance is not an accumulation asset – you cannot accumulate insurance, then “spend” it when you retire.

What if Whole Life Insurance is Neither Insurance Nor Investment – Instead, It’s a Unique Asset Class?

That’s the position advanced by Richard M. Weber in a recent paper titled, “Life Insurance as an Asset Class: A Value Added Component of an Asset Allocation.” In this 106-page document, Weber, an MBA and founder of an insurance consulting firm, concludes that whole life insurance (along with other versions of cash-value life insurance) is an asset with singular characteristics.

In the May 2009 issue of Financial Advisor magazine, an article featuring Weber’s ideas, writer Mary Rowland comments on how the investment in a permanent life policy “matures” at the insured’s death, rather than a specified date or market event. While the timing of one’s death is uncertain, the certainty of financial settlement at that moment can make estate and inheritance plans much more effective and secure, as well as establishing values in business plans.

In the period prior to death, cash values accumulate on a tax-deferred basis, yet policyholders can access funds through either loans or withdrawals at any time. According to Rowland, these characteristics mean that whole life insurance is “uncorrelated with nearly every other asset class.”

Not only is whole life insurance different, Weber further states that owning it can “produce a return that is just as favorable, with less risk, than the same portfolio without life insurance.” He provides an example where interest from an income-producing bond portfolio is used to pay the premiums for a permanent life insurance policy, as opposed to being reinvested in additional bonds. In the early years of the comparison, the reinvested bond account produces a greater asset value (but contains no insurance benefit). However, as the time goes on, the combination of cash values and bond values exceeds the bond-only account – and provides a guaranteed insurance benefit as well. In other words, having whole life insurance doesn’t necessarily require a decrease in your total asset value – in the long run, you can have your cake and eat it too.

Weber goes on to make another interesting observation about whole life insurance: It is an asset that needs regular management. With its unique “maturity” features, a whole life insurance policy is a long-term holding in someone’s financial portfolio – once you buy it, you are planning to have it for your whole life. But during your lifetime, the policy’s design flexibility, which may include various riders and options1 as well as the liquidity of cash values through loans or withdrawals2 may prompt you to make adjustments to align with your current goals.

To take full advantage of these possibilities, a whole life insurance policy requires regular review and management: it is not a “set-it-and-forget-it” financial product.

Even The Wall Street Journal acknowledges the value of considering life insurance as a unique asset class. Start thinking of life insurance as an asset by asking yourself the following questions: 

  • IS WHOLE LIFE INSURANCE PART OF YOUR PORTFOLIO?
  • IF SO, IS IT PROPERLY MANAGED?
  • IF NOT, WHY NOT FIND OUT IF ADDING WHOLE LIFE CAN MAKE YOUR FINANCIAL PICTURE EVEN BETTER!

1 Riders may incur additional costs.

2Policy benefits will be reduced by withdrawals, loans and loan interest.

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No Assets, No Credit?

LISTEN: mp3 audio (6:18 min)

For a long time, the way to climb the financial ladder was to accumulate wealth incrementally through diligence and thrift. People scrimped, saved, laid a financial foundation, and built their fortune over time. They left their heirs with assets to continue the process.

In the past half-century, the incremental, multi-generational method of wealth-building has been supplanted by a leveraged approach. Calculated borrowing (for a better education, for a home in an up-scale neighborhood, for a business opportunity, etc.) made it possible to acquire things today, pay for them tomorrow, and end up with substantial accumulated wealth as well (because the home appreciated in value, the college education brought a lifetime of higher income, and the business was sold to someone else).

The leveraged approach makes it easier for more people to have more of the “good life” sooner, as long two conditions are present: first, borrowers faithfully make monthly payments for their mortgage, auto loans, and credit cards; second, the underlying assets continue to appreciate.

Many Americans and many American businesses, have taken the leveraged approach. Some borrowed because they had no other options. Others reasoned that rising income and future profitability would let them use credit as a financial shortcut. Today, they find themselves with limited savings, too much debt, and only one way to keep afloat: by deferring payments until a later date. The President is correct in stating that many Americans are dependent on lenders for their economic survival.

But a revived credit economy will happen only if lenders believe their loans will be repaid.

And there is the rub.

Right now, lenders don’t think the average American, or his/her business, is a good risk. The economy is in the tank, real estate values have plummeted, unemployment is up. Legislators can regulate lending practices and give institutions more money, but they can’t force lenders to make risky loans.

Right now, lenders have a particular aversion to borrowers without assets. For those with assets (positive cash flow, savings, equity, etc.) credit is available, often on better terms than before the recession. But for those without assets, credit is either expensive or unavailable.

This separation of credit haves and have-nots based on accumulated assets was highlighted in the headline article from the August 29-30, 2009 Wall Street Journal, titled “Halting Recovery Divides America in Two.” On one end, the CEO of a national restaurant chain with $100 million in cash and no debt says;

“For us, this is the best of times. Cash is king and this is a buyer’s market.”

At the other end a high-tech irrigation company can’t get financing to fill large orders because

“these are the bumps in the road that are driven by being cash-poor.”

At some point, individuals have to come to grips with these realities. Notwithstanding the big-picture perspectives of economists and policy-makers, the only intelligent response to the contraction of credit is to accumulate assets – to save. Otherwise, you run the risk of becoming a lifelong debt slave, with no guarantees that more credit will be available in the future. In the long run, credit-dependent individuals and businesses will be left behind.

Chris Isidore may think that a groundswell of saving and debt reduction will “only make matters worse.”  There are those who beg to differ. Steven Horwitz, an economics professor at St. Lawrence offers the following rebuttal in the September 2009 issue of The Freeman:

Most saving takes the form of financial instruments, including everything from basic checking accounts to the fanciest investment tools. If people are keeping higher checking account balances or putting more in savings accounts or money market balances, that wealth is not withdrawn from the economy. It is simply channelled elsewhere than into consumer goods.

An increase in the savings rate represents a change in consumers’ time preferences: They are saying; they are less interested in current consumption and more interested in future consumption… Restricting consumption does not
hamper economic growth. In the long run, economic growth requires savings and the creation of new capital goods.

Credit-fueled economies usually overheat, then flame out after many people have been burned. And the boom-bust cycle of credit always punishes greed and impatience.

The key action for financial recovery is saving. Even in this recession, there are still financial instruments that can serve as safe and productive repositories for your dollars. Find these instruments, and use them.

There are still legitimate, wealth-building reasons to borrow, but borrowers strike the best credit agreements when they can bring assets to the table. Even better, savers may eventually become lenders. If borrowers are debt slaves, then lenders are the masters.

Plato is right: to refuse to master your finances puts you at risk of being mastered by others – and not liking it. Saving is the essential action that makes it possible for you to control your financial destiny.

  • WHERE DO YOU STAND ON THE DEBT DIVIDE? ARE YOU A BORROWER WITHOUT ASSETS?
  • WHO CONTROLS YOUR FINANCIAL DESTINY?
  • THERE ARE STILL GOOD PLACES TO SAVE!
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Divided By Debt

Last Updated: December 8, 2020

Where You Stand Today May Determine
Where You End Up Tomorrow

While the financial crisis that originated with the subprime mortgage sector in 2007 is over, a growing concern is credit card debt and student loans. In the aftermath of a wave of credit card offers and student loans, families in financial distress are significantly impacting the financial culture of the United States.

Among the issues that most likely will see a major change: the use of credit, and the business of lending, borrowing, and saving.

Table Of Contents

Assessing The Credit Landscape

Ch-ch-changes

Don’t want to be a richer man

Ch-ch-changes

Just gonna have to be a different man

– David Bowie

Today, on a global basis, we are feeling the aftershocks of too much credit gone bad. After a boom period of easy credit when almost anyone could buy anything, we could be looking at a bust. People are searching for strategies and actions that will lead to recovery. Some responses to the current financial adversity are logical and self-explanatory, others are unexpected or unusual.

No Surprise: Financial Institutions Have Tightened Their Lending Standards

It doesn’t make sense to lend to people who can’t make payments. With both credit card and mortgage default rates at all-time highs, lenders have become more conservative in their lending practices.

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Similar to the Great Recession, Banks are Tightening the Spigot, Sitting on Money and Increasing Their Lending Standards. While the stock market is soaring (reaching over 30,000 basis points for the first time), the same isn’t true with banks. They’re limiting their exposure by offering fewer loans and credit and raising their standards. 

Remember how you used to spend hours filling out paperwork and waiting weeks for a bank loan approval? The good news is the wait time has decreased and consumers can receive their denials in a matter of seconds online. The downside is banks are still lending money – to people that don’t desire it. This is leading to an uptick in bankruptcy filings as a last alternative. 

The Fed is doing all they can to avoid a depression. From buying corporate bonds to record low-interest rates, it looks like help is only available for rich borrowers and banks. Consumers must tap into the Cares Act if they need assistance.

2. A Bit of a Surprise: Americans Have Decreased Their Borrowing and Increased Their Saving

For years, financial commentators have lamented Americans’ pathetic savings rate. Apparently, you can teach old and young dogs new tricks.

Under the headline, “Americans are Rapidly Shrinking Their Credit Card Debt During the Pandemic,” a July 9, 2020 article posted on cnn.com stated:

“Consumer revolving debt declined by an additional $24 billion in the month of May, according to Fed data.” Down over $100 billion from it’s record February high, this is the first time it’s been under $1 trillion in 3 years.

It’s somewhat remarkable that Americans are reducing debts. However, some are using banking leverage during the pandemic to lower staggering interest rates. The reduction in spending is attributed to concerns over economic uncertainty. However the increase in savings suggests that people have money and are choosing not to spend it.

And it’s a lack of consumer spending that’s problematic. As more businesses struggle to stay afloat during lockdowns, every American must do his/her part by continuing to be a healthy consumer. In the same CNN article, RSM International chief economist, Joe Brusuelas notes about the spending decline: 

That’s bad news for the economy. You want a confident consumer to expense her income. We’re just not seeing that right now.” 

Increasing savings and spending is crucial for our economic growth. A healthy economy is one where people save and spend. The impact of stagnation isn’t good if consumers aren’t using disposable income (average incomes minus taxes). 

Businesses hire more employees to meet demand as people have more income. What’s more, when wages increase, so does spending. It’s a perpetual cycle for healthy economic expansions. There are no benefits to the economy if earners only save and don’t spend.  

Strike a balance by setting a 15-20% savings rate for yourself, and remember to support businesses that are important to you. You’ll be prepared for emergencies and opportunities, and you’ll be stimulating the economy.

3. A Controversial Theme: A Major Campaign Plank Among Progressives is Student Loan Forgiveness

President-elect Joe Biden is affirming his support for erasing some types of student debt. However, this comes with much speculation. Biden is proposing a provision that pays off up to $10,000 for economically distressed borrowers. And yet, the average student loan is $24,000 for each borrower. Around 6% of students owe over $100,000, making up a third of total outstanding loans. 

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Student loan debt presents a growing concern as it surpassed credit card debt levels back in 2010. Student loan interest rates hover around 6% on average and yet credit card debt interest rates average about 15%. Credit card balances average about $6,200 when broken down by borrowers. Another concern is that credit cards are expungable with bankruptcy filings while most student debts are not. 

This loophole of sorts means more work for bankruptcy lawyers as Jason Iuliano, a law professor at Villanova University points out borrowers have to prove “undue hardship.” “More than 99% of the student loan debtors in bankruptcy just give up without even trying.” Recent data and the research Iuliano completed shows that about 50% of the time, borrowers can get help through bankruptcy. “So I think that’s really important for bankruptcy attorneys to see that there are judges out there who are willing to grant undue-hardship discharges and that people are much more likely to obtain relief in bankruptcy for their student loan debt,” (NPR, 01/22/2020).

Senators are citing Harvard legal clinic attorneys who agree the President can cancel federal student debts. This is feasible with a new administration at the helm, as it’s possible to erase all debts regardless of who is controlling the senate. The premise is that debt cancellation can return education to a public good. Further, it has the potential to reduce the racial wealth gap, boost the economy, and help people buy new homes and start new businesses. Yet not everyone is in agreement. 

The concern is that canceling debts is regressive. Borrowers with high student debts usually make more money and have more advantages. Then there’s the additional concern that canceling loans might tempt people to take out more credit. The ability to get a loan is a responsibility. Delinquent borrowers might act irresponsibly if they receive forgiveness for their debts.

Too many bad loans are problematic. With so much debt, banks might fear a write-off and money they can’t recoup. Borrowers might win in the short run. However, our economy may suffer more if delinquent borrowers have access to credit in the future.

Saving more and reducing debt might sound like a good strategy if we head into another recession. However, there’s a delicate balance to strike.

In brief, lenders are getting tighter, individuals are saving more and starting to borrow less, and experts want both groups to loosen their purse strings.

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