An interesting discussion popped up in my comment section yesterday around Helaine Olen’s recent article in Pacific Standard about Dave Ramsey. I’ll let Helaine handle the questions about the details about her article. I’m just going to deal with her big message, which is that no one gets rich by simply making lifestyle changes.
In the mid 90s, I dated a Columbia medical student. He and his friends were in the same boat as me and my friends. We were all in graduate school, living off student loans, and with very little income coming in. However, there was a huge difference in our spending habits. Even though the medical students had major six figure loans, they spent money like crazy. They used their student loans to finance cruises and nice sweaters from J. Crew. My PhD crowd bought our clothes from the discount stores on 34th street and never vacationed anywhere. The med students ate in nice restaurants, while the PhD students ate rice and beans at a local Chinese-Cuban restaurant. Guess who’s richer now.
The med students could afford to make seemingly bad financial choices, because they knew that they were going to bring in the big bucks down the road as plastic surgeons and heart specialists. And when you’re taking out 300,000 grand in loans, what differences is another 2K to pay for a cruise to Mexico?
Dave Ramsey preaches the word of wealth. His audience isn’t me or the medical students or most of my readership. He’s talking to people with much more limited financial resources who are in over their heads and are looking for some control in these economically unstable times.
When Steve lost his job last year, I went into full panic mode. One afternoon, I went to Barnes and Noble and sat in front of the personal finance book section looking for answers. I found none. The suggested three-month safety fund is meaningless, when it can take up to a year to find a new job in Steve’s field. Simply giving up the Starbucks coffee wasn’t going to pay the mortgage.
Actually, giving up the Starbucks coffee isn’t really going to help anyone.
The road to wealth isn’t frugality. The road to wealth is growing up in the right family, having the right combination of genes, escaping debilitating illnesses and personal crises, and making sensible career decisions. (I’m looking at you, worthless PhD diploma.)
There isn’t anything wrong with frugality. Making good decisions about homes and cars can make a big difference for a middle class family. It doesn’t make any difference if you’re wealthy. It doesn’t make a difference when your income is barely above the poverty line and when the economy has shifted and taking away career dreams that seemed sensible in your 20’s.
What makes the Dave Ramsey-types dangerous is that they distract people from the man behind the curtain. They place the blame for poverty on the individual, instead of looking at the huge societal and political forces that create inequality. They let the wealthy believe that they are wealthy simply because they have good habits and not because of the sheer luck of being born in the right family and with the right genes. They give a “get out of jail card” to politicians who really ought to be concerned with the larger political-societal forces that are creating inequality.
There’s also some cruel about telling the salesgirl at TJ Maxx that she’s poor, because she bought herself a nice pair of boots on Zappo’s, when the real reason that she’s poor is that she’s getting a crappy paycheck from TJ Maxx, she didn’t attend college, her rent is $1,000 per month, she doesn’t have any financial help from her parents, and she doesn’t know anybody who has a middle class job. It’s that cruelty that really ticks me off.
Frugality is a good thing. In comparison to our friends, Steve and I live very simple lives and avoid debt and all the things that Ramsey suggests. But frugality isn’t the bedrock of our success. Our bedrock is Steve’s paycheck. And Steve is able to make that paycheck, because he’s very smart and because we made serious career changes fourteen years ago. He left academia and went into finance, and I made other sacrifices to make sure that he is able to devote all of his brain power to his job. We also benefited from my parents who gave us a handout, when we had to start over.
The real road to financial success — luck, genes, support — doesn’t make for a snappy finance book, which can be leveraged into a popular and lucrative conference talk. It’s too bad, because I’m still pissed off at my last freelance check this month and am looking around for the next project.
Apt. 11d 
I don’t follow this argument at all. Giving good advice to middle class families is dangerous, merely because such advice is unnecessary for the rich, and insufficient for the poor?
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I agree with many of the points you make, especially that often the blame for poverty is huge societal and political forces that create inequality. The problem is that what is the salesgirl at TJ Maxx supposed to do about huge societal and political forces? Those are issues beyond her control. Way beyond her control.
While I also agree that Dave Ramsey’s advise will not create wealth for that salesgirl, what it will do is help, to some extent, mitigate the effect of those societal and political forces. Politician rightly should be concerned with the larger political-societal forces creating inequality. But the salesgirl has no control over that, certainly not in the short term.
Realistically, most humans can only live within the societal boundaries imposed upon them. While it’s true Ramsey’s advice may be distracting, what other advise should one give to that salesgirl? Vote differently? Write to her congressional representative? Protest? None of those will have any impact on her life in the short term, if even the long term.
Frugality was not the bedrock of your success (or mine, I freely admit, I damn, damn lucky, I know) but it helps in any situation.
Ramsey may be a huckster and his advice certainly won’t create wealth. But his advice on frugality will help, especially to those who never heard the message before.
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Laura said:
“There’s also some cruel about telling the salesgirl at TJ Maxx that she’s poor, because she bought herself a nice pair of boots on Zappo’s, when the real reason that she’s poor is that she’s getting a crappy paycheck from TJ Maxx, she didn’t attend college, her rent is $1,000 per month, she doesn’t have any financial help from her parents, and she doesn’t know anybody who has a middle class job. It’s that cruelty that really ticks me off.”
Isn’t that kind of a strawman? Who is saying that? If you listen to Dave Ramsey when he’s taking calls, he isn’t asking about boot purchases. The first question are about major expenses–rent, cars, etc. It may be that the salesgirl has a $400 car payment, her alcoholic mom has been stealing her identity since her toddlerhood, and she’s supporting a loser boyfriend. There is often low-hanging fruit. If you fix some of that stuff, her life is going to be hard, but it is possible to make her life better, within certain parameters.
What I think is cruel is telling her that it’s all useless and she should give up. Other than jumping off a bridge, what choice does she have but to do the best with the resources she has? That sort of optimizing of resources is one of the things that DR helps people do.
“Frugality is a good thing. In comparison to our friends, Steve and I live very simple lives and avoid debt and all the things that Ramsey suggests. But frugality isn’t the bedrock of our success.”
Dave Ramsey is not a big frugality guru. Generally speaking, he tells poor people to make more money and he tells more prosperous people to spend way less money (obviously, one of those is easier than the other). And he’s also very good with regard to explaining their rights as debtors to callers who have finally hit the wall.
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I don’t know what advice to give the salesgirl at TJ Maxx or whether Dave Ramsey’s advice is actually bad for her. I worry about the effect of that type of advice on people who are well off and how they conduct themselves politically and as employers.
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Dave Ramsey’s company (The Lampo Group) is consistently rated as one of the best places to work in Nashville.
http://www.bizjournals.com/nashville/blog/2013/02/2013-best-places-to-work-honorees-named.html?page=all
A solvent employer is a better employer than an insolvent employer, for obvious reasons.
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Likewise, a solvent landlord is a better landlord than an insolvent one.
People do bad things when their businesses are in trouble.
Here’s a letter on a forum from a woman who says that her employer (who is also her BIL) stopped paying her 4 months ago.
http://forums.catholic.com/showthread.php?t=833515
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A solvent employer is better than an insolvent employer, but a society where the returns to labor are steadily declining and one political party’s solution is “work harder for less” is not a healthy society.
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No, I don’t think we should tell the TJ Maxx salesgirl that she should give up. I just don’t think that shopping in bulk at costco is going to change her life either, and that’s it’s cruel to give her that false hope.
(I’m having this conversation on three different platforms right now, so excuse the cut and paste job.)
Everything is fucked up, and I think it’s worth saying that over and over and finding ways to make things less fucked up. Given the fucked up situation, I think there is some room for individuals to improve their situation but it’s more complicated that simply buying in bulk at Costco.
We visited family in Cleveland over the summer after a ten year break. The ten years have not been kind to the folks of Cleveland. Whole industries — steel, cars — are in the toilet. Jobs that used to provide a nice living don’t exist anymore. Steve’s family and friends have felt the pain. People in their 20’s are in hot water with few job options, useless college degrees, and no income. The TJ Maxx girl is a real person, not someone with an evil mother or a fancy car. (Trying not to give too much info here.)
Individuals, especially the particular individuals in my mind, could have made some better personal decisions even without top SAT scores. They could move. They could have made better higher ed decisions. They could transfer to the one or two industries that seems to still function in Cleveland. But frugality wouldn’t solve the problems.
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“But frugality wouldn’t solve the problems.”
Somebody is probably saying that frugality will solve all problems, but it’s not Dave Ramsey.
Trust me–I’ve listened to the guy for seven years. That is not his message to low-income workers.
He also doesn’t tell low-income people to shop in bulk at Costco, or anywhere else, actually. (My personal opinion on Costco is that it’s hard to leave there without dropping $200. That may be why they check your receipt at the door, actually. I purposely do not hold a Sam’s Club card. Too much temptation.)
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You are also conflating wealth (a stock) and income (a flow). The sales girl has low income and no wealth. The frugality people are about telling those with decent income (ala Amy in the prior post) how to build wealth. The crap you are talking about is largely orthogonal to that and not relevant to their advice.
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What makes the Dave Ramsey-types dangerous is that they distract people from the man behind the curtain. They place the blame for poverty on the individual, instead of looking at the huge societal and political forces that create inequality.
It’s not dangerous to have a different philosophy of life. Thrift and hard work have traditionally been the bedrock of the middle class. Blaming societal forces does nothing to help an individual facing foreclosure. That person need concrete actions to take today. Our education system does not teach students how to set up a budget. It probably should–but who would teach it?
It doesn’t matter how much money someone makes. It’s possible to go deeply into debt with a very high income. If you search online for “doctor files for bankruptcy,” you’ll find reports of doctors who’ve had to file for bankruptcy. It’s not uncommon.
I don’t like debt. I particularly don’t like people counseling others that there is such a thing as “good debt.” I could tell you lots of stories of people I know who got in over their heads by taking on too much debt, especially mortgage debt.
Over the last few years, I’ve been reading books about famous wealthy families. I think I started this after reading “Richistan,” by Robert Frank. In that pre-crash book, he outlines general budgets for the rich people he studied and interviewed for the book. He made the offhand observation that many of the subjects were spending at a rate which was not sustainable. In 2011, he wrote “The High Beta Rich,” which is the post-crash conclusion that, yep, it was not sustainable. Jewelry (particularly watches), club memberships, clothing, houses and private jets were frequent large items in the lists.
If anyone wants to follow my odd, voyeuristic habit, I can spare you the trouble. In general, the great fortunes disappear in a very drab way. The heirs spend it. Usually there’s some extreme lifestyle thing going on, frequent divorces, etc. It seems to me that often the risk-taking drive which lead the ancestor to accumulate wealth leads the heirs to take up racing jet planes or some such. (I did enjoy _Dead End Gene Pool_, by Wendy Burden. Many of the other works prove that great fortunes and writing ability usually don’t go hand in hand.)
No one is saying that frugality solves all problems. On the other hand, many, many people spend more than they realize. Being in debt limits the capacity to function. It limits choices. It also makes people hostage to their lenders’ decisions. There are many people who look upper middle class on the outside, but have a negative net worth. No one forces anyone to buy designer clothing, or fancy cars, or to buy expensive vodka (I’ve been reading books by the author of “The Millionaire Next Door.”)
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I love the vodka chapter in the book you’re talking about. So funny! He should have an electronics chapter, though.
I know a family in a high-cost area that earns about a quarter million dollars a year. A few years back, they had half a million on a personal line of credit and it was looking like their real estate (which was in low seven figures) was underwater. This is a very high-earning family that started in a new country with nothing but their education, but at some point, they picked up the idea that they could always just earn more money to buy whatever they wanted. They were working so hard at making the quarter million that they didn’t notice it was dribbling away, leaving them with nothing.
Mysteriously, a couple years back, they suddenly got much smarter about money. I have no idea what happened (they’re around their sixties).
I also know a pilot’s family that was making probably around $200k in a moderate cost-of-living area, but also regularly milking their rental properties for money. After their divorce, the wife (a sixty-something) smartened up, and is saving like a fiend on a fraction of their old income.
I’ve seen quite a few examples in my immediate circle of people getting the financial religion suddenly in their 50s and 60s. Better late than never, I guess.
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staggeringly lucky here: I hit Laura’s trifecta, AND the girl of my dreams did too. Still, we’ve seen folks at her firm who made the mistake of thinking the good times would roll forever, and found themselves when downsized out of $350000 a year with houses they could not make payments on, and no health coverage. Ramsey’s advice is not very different from my grandmother’s – it’s she who we were following, really, but it’s worked for us, and if her coworkers had followed it, it would have been better for them.
McMegan talked some about her business school fellow students, who comported themselves like Our Gracious Hostess’ med student, and then found themselves skint when the graduated into a recession. Like AmyP, I think it’s good to underspend your income if you can, and to build wealth.
The Maxx girl is in trouble. There are a lot of people who cannot generate enough value in the workplace that someone can afford to pay a middle class income. They work at McD and pump gas. If you require the minimum wage to go to $15 Maxx will close its store and clothes will come from Amazon, McD’s will invest in burger frying machines and cut their payroll in half. I am inclined to think the best way to make it work for them is more and better EITD, and that citizens in this position will be truly screwed by immigration reform – which benefits rich people like Pelosi and Obama and the Kochs who like a vast reserve army of compliant workers who don’t complain much.
The adjunct is someone who does generate enough value that an employer could pay more, if forced to. Since there are fifteen desperate PhDs for every position, it’s hard to get leverage, but they are not in the position of the Maxx girl. Faculty unions might work, or putting something into the US News and World Report rankings which pays attention to fraction of tenured/level of faculty pay etc.
This morning I went to the local supermarket and talked to one of the few remaining full time union cashiers. I’ve been going to the same store for fifteen years, and they know me. He told me they are going into a cooling off period, and then likely strike in a week and a half, it’s over the store forcing them into the Obamacare exchanges, and they will get only a third of the cost from their employers. A part timer at the same store told me week and a half ago that management is forcing down their hours below 30 so they won’t have to do health care for them (MH, this is for you!). Here I think the desperation is from the stores; they can’t keep their cost structure if everyone is ordering all the staples from Amazon and only coming into the store for perishables and last-minute stuff, but the result is that this cashier is facing a big hit to income and has been spending up to his income up to now. So his position is becoming a lot more like the Maxx girl’s.
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Oy. I completely agree with the central message of your post — sensibly frugal financial decisions aren’t going to make the difference between poverty and affluence for anyone. But I’ve got enough working-class low-income family to say that sensibly frugal financial decisions can be the difference between fairly comfortable, stable, unfrightening poverty (or lower-middle-classness), and a life that’s an unstable scary mess. It’s not so much about being affluent, as about having a little money in the bank to fix your car with so you don’t lose your (probably lousy, but better than nothing) job when the car breaks down.
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Amen @elizardbreath: “sensibly frugal financial decisions can be the difference between fairly comfortable, stable, unfrightening poverty (or lower-middle-classness), and a life that’s an unstable scary mess.” Exactly. That’s the economic cohort for whom “penny pinching” advice is actually helpful.
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McMegan has done something about grocery stores versus Amazon: http://www.bloomberg.com/news/2013-10-29/would-you-buy-groceries-on-amazon-.html and she suggests they aren’t quite as much sitting ducks as the book stores were.
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You say you went looking for financial books when Steve lost his job. I don’t know any financial advisor who thinks that is the time to start so that all will be well. You are supposed to have been frugal before the bad thing happens. Starting then is probably better than nothing in that it can keep you from going as far into the hole, but nobody thinks it fixes everything.
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I think the point is that no amount of preparation ahead of time will prepare you for the stress and uncertainty of and extended period without an income. The admonition of PF gurus is that if you’re super careful with your money you don’t have to worry about weathering an extended period of unemployment. But that’s bullshit. If you could save enough to to be unemployed forever, you wouldn’t be working in the first place.
This is basically what happened to my father. He lost his job in his late 50’s and was never able to find a new one and his financial house is in tatters because of it. He was certainly willing and wanted to work but no one in his field would hire someone as “old” as him. Eventually he just retired because collecting social security was a lot better deal than running through his savings.
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I think Laura would agree that frugality is important on an individual level in that it helps people to learn to recognize their financial constraints and learn to live within them. But personal finance does very little to change those financial constraints. It doesn’t help you to earn more or get out of debt all that much faster.
Lessening the burden of financial constraints is really the role of public policy and what’s concerning is that there is absolutely nothing being done at that level to make things better for entire communities or the population in general. So, yeah, Dave Ramsey is fine if you need some basic advice on how to pay down your credit card debt but he’s doing nothing to help people avoid living precarious financial lives in the first place.
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But none of those books would have helped us, because we already did all those things. We had no debt. We saved a good chunk of our earnings. We drive crappy cars. We do EVERYTHING that Ramsey and his ilk suggest, because that’s how we operate. But all that frugality would have done nothing to help us, if Steve hadn’t been lucky enough to get another job so quickly. We have a 9 month cushion, which is way more than Ramsey suggests. But some of Steve’s friends have gone for much longer without getting another job. If that happens, then Ramsey’s advice is worthless.
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Who is Ramsey’s audience? Is it Amy P, who really did need some tips and tricks, but was on pretty solid finance ground to begin with? If so, then great. It sounds like he really did help her.
Is his audience working-class folks who have seen their economic world turned upside down in the past couple of decades? If so, then he’s preaching the wrong message.
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If half of people in Steve’s position get jobs between three and six months out, and the other half take more than six months, then advice to have a six month cushion isn’t worthless — it keeps half the people from having their lives disrupted. Doesn’t solve everything for everyone, but it’s not worthless.
But none of those books would have helped us, because we already did all those things.
It is obvious advice, if you have any sense, but it’s still sensible. (And of course I agree that it does nothing to solve the problem of financial insecurity on a societal level.)
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What conceivable advice does anyone have for “working-class folks who have seen their economic world turned upside down in the past couple of decades,” other than the hackneyed “Vote for Obama” (which many of them did, but it hasn’t helped them at all)? This is what I don’t understand: we had a Democratic president, a filibuster-proof Democratic Senate, and a Democratic House of Representatives for two years, and what did the working class get? Nothing. Now someone comes along with good advice for working class individuals, and he is condemned for not doing something systematic, when the president himself can’t or won’t do anything systematic?
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The filibuster-proof majority lasted what, three weeks? And all this happened on the downside of the a the largest crash since the Great Depression.
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Laura, you mentioned that in the past you made BIG changes in your employment, etc. in order to succeed financially — and it’s my understanding that this IS part of Dave Ramsey’s ethos as well. That sometimes what is actually required is more than a ‘tweak’ (I completely empathize here because whenever a read an article in Ladie’s Home Journal telling me I can “find” an extra hundred dollars for Christmas by turning down the thermostat and turning out a few lights and not going to Starbucks, I find myself thinking ‘Clearly you’ve never been to my house. We already do all that.”)
On the radio show, Dave Ramsey WILL tell people — you need to come to terms with something major, like the fact that you actually can’t afford to live in the DC suburbs, or LA on your current income, and that you need to actually do something radical like moving to Oklahoma. You can’t afford to drive that car — He does advocate big changes.
But what you’re talking about is structural deficits that are much larger than any individual’s saving patterns — There was an article I read last year which talked about that show Undercover Boss, and it talked about how on every episode the boss discovers some hard-working joe and gives him ten thousand bucks to finish college, and isn’t that nice that he gets to act like somebody’s fairy godmother, but the real issue is all the other people who work for his corporation who will never finish college because he failed to pay a living wage.
All the shouting about “we’re debt free” doesn’t really explain why it is that previously the guy with four kids and a stay at home wife could manage to clothe them all without shopping at the thrift store twenty years ago and now he can’t. All the “shabby chic” websites that try to make poverty cool don’t really get at the main problem, which is an appreciable drop in the standard of living for many people in this country.
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I do not believe a guy with four kids and a stay at home wife and an average income (not upper middle class) did clothe them all without the thrift store. Growing up, I wore hand me downs from my sister and my cousins and I think that was pretty common. We also went to the thrift shop. I think people used to make such a big deal bout getting a NEW whatever because it wasn’t as common. it was always a big deal to me to get new jeans or new dress. My parents have never had a new car.
We had an extensive garden and our canning/freezing was not on the hobby level I see people doing today. We couldn’t have made it without that garden. Although housing and health care costs have risen dramatically, most people have far more material goods than ever before. Almost entirely purchased new if anything I think the use of thrift stores is lower than it used to be. Things are repaired either – it is less expensive to buy new.
Spending on food as a percentage of income has fallen across the board. This is in fact, why aid to the poor does not go as far. It used to be expected that food purchase would be 30% of the budget. Other aid is determined as a multiple of food aid. Since food, relative to other goods is much lower, the poor do not receive enough aid for housing etc.
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“I do not believe a guy with four kids and a stay at home wife and an average income (not upper middle class) did clothe them all without the thrift store.”
Clothes are way cheaper than they were in the past.
I think my mom would probably rather have died than gone to the thrift store to buy kid clothes, but hand-me-downs were not a big deal 30 years ago.
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A college education is strongly associated with higher wages and lower unemployment, but borrowing is bad, and public post-secondary education spending other than loans is being cut. You need to save money and still get to work. Not having a car and using public transportation is a great way to do that, but that funding is being cut greatly, at least around here.
In a certain environment, advising frugality is very hard to distinguish from shouting “get a job” at the hobo. The whole “race-to-the-bottom” nature of it is alarming.
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It might be better to say that Ramsey’s surface-level advice is fine, for what it is. What is problematic is the undertone that everyone has complete control over every aspect of their lives and if they are financially unwell it is a sign of a personal failing, not something bigger. This is pretty common in the PF world where all of the self-named experts want to tell you that if you lived just like them you wouldn’t be in this mess, so maybe the fact that you are means you’re getting what you deserve. I would be more sympathetic to the Ramseys’ of the world if they would acknowledge that most people have very little control over their lives and that the biggest factor in determining their financial stability is not buying a latte at Starbucks.
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Sort of a stalking horse for Calvinism.
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I think most people’s primary obstacle to managing their spending is the feeling that it is out of their control. If Dave Ramsey’s rhetoric helps people feel more in control of their life, the real-world result of that is that they make better decisions. When he excoriates bad spending habits, he’s giving people the narrative structure they need to support major changes in their habits. He’s helping them disassociate from their former ways of thinking — creating a new persona.
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“I think most people’s primary obstacle to managing their spending is the feeling that it is out of their control.”
Exactly.
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Half my street had somebody laid off at one point or another since 2008. Nobody lost a house because you can make a mortgage payment on PA unemployment checks and because those got extended during the recession.
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Or rather, half of the half that wasn’t elderly. Lots of old people.
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“I think most people’s primary obstacle to managing their spending is the feeling that it is out of their control. ”
But for some people (I will continue to cite to the McDonald’s budget), spending is out of their control. They do not have enough value in their economic labor to sustain a household. Does pretending (as Visa & McDonald’s did) that managing spending can solve the problem of too little income do the worker any good? It’s true that reacting to a stressor that is out of your control causes learned helplessness. But does pretending that a stressor that’s out of your control is in your control increase one’s ability to make reasonable choices?
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I don’t read/listen to Dave Ramsey, but I’m a big proponent of frugality *and* making the economic structure of our society work better.
But here is my input: this weekend my mom was visiting, and we were talking about my sisters and I learned that two of them make more than I do and are struggling more financially. WTF? Is it debt or spending or what? We’re a little cash poor right now ourselves and struggling to remind ourselves that we can’t just buy something on Amazon whenever we feel like it. And a genealogy hobby gets expensive when one is trying to get records in Ireland and one has to look through the records of 50 different Mary Kellys to figure out which is the right one. Anyway, I want to sit down with my sisters and go through their budgets like Ben and Chris did with Eagleton on Parks and Rec a few weeks ago. (Darn, can’t find the clip I wanted, but the beginning of this clip shows Eagleton’s profligacy: http://www.youtube.com/watch?v=4iZOL63vej8 )
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I remember that episode!
It might be that you and your sisters are doing more or less the same, but they whine more. I remember once my mom was feeling sorry for my uncle and aunt (auntie had been complaining about how expensive everything is–truck, kid’s college, etc.) and my dad had to remind her that they made at least several times more than he and my mom did.
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Great story – and isn’t that the truth, @AmyP! My husband’s colleagues are also Oversharing Cheapskates Who Act Poor, meanwhile colleague’s daddy bankrolls their every move including paying for their kids’ college. Ugh.
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hush said:
“Great story – and isn’t that the truth, @AmyP! My husband’s colleagues are also Oversharing Cheapskates Who Act Poor, meanwhile colleague’s daddy bankrolls their every move including paying for their kids’ college. Ugh.”
That’s the funny thing–poor people try to act rich, while rich people try to act poor.
I think I almost never complained about money when I had very little of it, although you will catch me whining about it now that we are more prosperous.
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Yes, we’re shouting “get a job” to the hobo and telling a working class family to embrace “shabby chic.” Scrimping pennies don’t pay the rent, when you’re making minimum wage.
That said, let’s end this thread on a positive note. What advice do we have for young people? What should they do to avoid being in a minimum wage, dead-end job? What can they to do avoid poverty, if some unexpected disasater hits?
1. Sock away the money when you have it. Avoid debt. Don’t spend on stupid stuff. Keep records of spending. As I said, I don’t hate everything Ramsey says. I just don’t think it is sufficient. So, what else?
2. If married, try to have two incomes, but live on one. This is not practical advice for most people, but I thought I would throw it out there.
3. Go to the best four year public college in your state. Finish in four years. Live at home, if possible. In order to that, you have to positioned yourself in high school to get into that good public college. So, this requires a lot of work by your parents early on. A philosophy degree from a good public college is worth more than a business degree from a low-end college.
4. Be flexible about your career. If you found that you’ve chosen wrong, then switch quickly. If there are too many teachers, then get a nursing degree. If there are too many nurses, then go into insurance. Don’t wait for the perfect job. Take the available job.
5. Work your ass off in your 20’s.
6. Hang out with people who have good jobs and good habits.
7. When you have kids, live in the worst house in the best town to help set them up for #3.
8. Don’t have kids, if you can’t afford them.
Do I think that this advice is useful for people who have bad SAT scores and complicated family lives? Probably not. But I’m trying to be positive.
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2.a. Don’t buy a house that takes two incomes to pay for. Don’t spend nearly as much on a house as the realtor says you are “approved” for.
4.a. Be flexible about where you live. Don’t insist on living in San Francisco or NY.
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6a Do what you can to ensure that your kids’ peer group are go getters and have similar values.
7a Teach your kids emotional intelligence to go along with the “smarts”.
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Be ready to face risk and restart, in a different direction, which could include moving, changing jobs, changing careers.
Pair the readiness to face risk individually with a demand that you be fairly compensated for your work when you are working, including for the risk that you are shouldering.
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When you don’t know what you want to do with your life, do what will make you the most money that won’t kill your soul. You can use the money once you figure out what you want to do.
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Why wouldn’t Dave Ramsey’s advice be helpful for someone that is lower middle class? I don’t quite get that part. If you have a bunch of consumer debt, your spending is constrained by the need to make interest payments. Interest payments can easily reach 15% of your income. (Actually that would be low for many people.) On the other hand, if you practice the same constrained spending, only you do it voluntarily, you can use that same 15% of your income to save for retirement or for major emergencies. These are two very different paths that a low income person can take, with very different outcomes.
Is it POSSIBLE that your luck will be so bad that you’ll still end up bankrupt, even if you follow Ramsey’s advice? Sure. But in what crazy universe is that the measure of whether advice is good or not? Lots of people would be much, much better off if they followed Dave Ramsey’s program.
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“Why wouldn’t Dave Ramsey’s advice be helpful for someone that is lower middle class? I don’t quite get that part. If you have a bunch of consumer debt, your spending is constrained by the need to make interest payments. Interest payments can easily reach 15% of your income. (Actually that would be low for many people.)”
Exactly.
He’s also very good on cautioning people away from predatory lenders. There are whole industries devoted to extracting the last penny from low-income people.
As I always say, poor people are surprisingly good eating.
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As others are pointing out, the advice of frugality, no debt, and personal responsibility is pretty common in financial planning. Michelle Singletery gives very similar advice, a d so does marketplace money (though potentially with different style — I can’t say, cause I don’t listen to Ramsey).
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I would also give the advice to think about the public policies that will help you and yours in the long term and to work towards them. The TJ Maxx worker can’t just “vote for Obama.” She needs to think about what government would make her life better. Yes, I have ideas about what those things are, but the key is hunkering down and thinking about debt isn’t enough. Politicall active involvement and learning about the world is also important.
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My father had a Harvard J.D. and a job at Dewey Ballantine, and we wore hand-me-downs. My [college valedictorian] SAHM didn’t shop at thrift shops, but she made her own dresses, and she darned my father’s socks. (Living in an apartment, gardening and canning were not possible.) That was middle class life fifty years ago.
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Dewey Ballantine, and we wore hand-me-downs
Which they eventually shortened to just Dewey Ballantine before merging with the firm formerly known as LeBoeuf, Lamb, Greene, MacRae, and we walked up the hill both ways in the snow.
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How I wish there was a “like” button for comments. And I think that’s Green with no “e”.
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My mom was expected to make all of her clothes once she got to a certain age. They were a farm family, though.
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Frugality is great, saving is great, avoiding debt is great. I think everyone agrees on that. But, even if we lived in a society where everyone was super frugal, there would still be a lot of people who have six figure health debt, lose their homes because they can’t afford their mortgage payment, and go through extended unemployment, because we don’t have systems to support individuals and families in times of hardship.
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We do have systems to support people. You just don’t like them. Bankruptcy is how six figure health debts are resolved. Losing a home and living in an apartment is really not the end of the world and it is how we resolve not being able to pay the mortgage. The systems will not sustain someone in an upper middle class lifestyle. So? No one and no system can completely remove the effect of every piece of bad luck. I don’t want to go back to being lower working class, but it would not be the end of the world. Good luck moved me up and bad luck can me move me down. So?
When I got my current job my mother asked me how much I would make. When I told her she started to cry because she never thought a child of hers would ever make that much. I am well below 200K a year. I have little sympathy for upper middle class whiners, and that is where most people on this board are upper middle class. The nominal post is about someone at TJ MAXX, but I really read this ( and the recent education ones) as more about upper middle class anxiety.
Plus, I just truly, truly hate the bs about how everything was better in some mythical past. No one ever had to buy used goods back then. Every job was a living wage job. What crap! I always want to ask, you mean things were great when white men didn’t have to compete with African-Americans, Hispanics, Asians, and women? Yeah – cause we can always just get the stuff we want – none of that bad stuff is ever connected….
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I like bankruptcy just fine! I would love it if student loans were once again considered dischargeable debt. My point is that people like Ramsey scorn bankruptcy, seeing it as a personal failure and the easy way out when really it is the absolute last option for everyone who goes through it.
If you don’t want to hear a bunch of whiny UMC types talk about why we as a society seem to be doing such a piss poor job of providing economic stability for average folks, then there are quite a few PF blogs and message boards you can go to where you will only have to talk to other people who have life all figured out, just like you.
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“My point is that people like Ramsey scorn bankruptcy, seeing it as a personal failure and the easy way out when really it is the absolute last option for everyone who goes through it.”
Actually, that is not Ramsey’s verbiage at all.
Usually, when a caller is telling their sad tale of woe, Ramsey points out some of the following points:
1. If you want to keep your house, then bankruptcy will not get the mortgage off your back
2. If you want to keep your cars, then bankruptcy will not get the car payments off your back.
3. Child support is not bankruptable.
4. IRS debt is not bankruptable.
5. Federally insured student loans are not bankruptable.
6. Unsecured creditors will take settlements.
7. With a low enough income (for instance Social Security or disability), the caller is judgment-proof. There is no point in them declaring bankruptcy, because their creditors don’t have a prayer of collecting on the debt.
http://en.wikipedia.org/wiki/Judgment_proof
Often, by the time you peel away the stuff that the bankruptcy will not cover or that the caller doesn’t want to give up, the remaining balance is more or less manageable.
Also, a lot of bankruptcies are very badly done. For instance, many debtors reaffirm debts that they should have used the bankruptcy to escape.
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The USA is pretty much the only major economy in which “medical bankruptcy” is something that people worry about. That we, collectively, allow that to continue is terribly sad.
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One time, back in my 20s, when my Dad’s 4 sons were still trying to get landed, I made the mistake of saying that he came of age in the 1950s, when they were “giving out careers like candy.”
He said “they were never giving them out like candy.”
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Tulip, you are dead right: we don’t have debtor’s prison, although if you can’t pay your student loans (which, like an idiot, you took to let you take a degree in Chicano Studies with a minor in basketweaving at Cal State Fullerton) you will get humiliating phone calls from debt collectors and your wages will be garnished forever. And if you get sick you can bankrupt out of those debts, but you may well lose the house. There has to be some kind of a goad to get people to do socially useful things which aren’t necessarily fun all the time (forensic accounting! insurance adjuster! sewage plant worker!). If we try and put in place the No Harm Fairy, our sewage will go untreated. Some victims in fact deserve blame.
So many of the fairy tales we read our kids have to do with a child of privilege getting knocked off by misfortune – Cinderella’s real mom died, Sleeping Beauty, etc. And there’s huge power to the idea of a child who could reasonably look forward to one sort of life losing it through misfortune. There was a big discussion in this very blog couple weeks ago about what is it fair to do for one’s own child, to get that child well launched. We’ve all also seen wastrels doing their best to make real ‘shirtsleeves to shirtsleeves in three generations’ (I’m thinking of a particular dentist’s son at Directional State College in my student days, I wonder that has become of him).
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Felix Salmon has a very good post on Olen and Ramsey: “The red-blue divide in personal finance:” http://blogs.reuters.com/felix-salmon/2013/10/30/the-red-blue-divide-in-personal-finance/?dlvrit=60132
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Speaking of cultural context, one of the interesting things about Dave Ramsey is that he has to be counted as a major anti-prosperity gospel figure. Here’s a side-by-side comparison.
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Back to Laura’s case study:
“There’s also some cruel about telling the salesgirl at TJ Maxx that she’s poor, because she bought herself a nice pair of boots on Zappo’s, when the real reason that she’s poor is that she’s getting a crappy paycheck from TJ Maxx, she didn’t attend college, her rent is $1,000 per month, she doesn’t have any financial help from her parents, and she doesn’t know anybody who has a middle class job. It’s that cruelty that really ticks me off.”
First off, she’s in Cleveland, she’s a single person and her rent is $1,000. Really?
Secondly, here are a couple of different approaches:
1. Elizabeth Warren’s All Your Worth would recommend a 50/30/20 budget, with no more than 50% of income going to needs/fixed costs (food, housing, transportation), 30% going to wants (so she can have the boots with a clear conscience, or the latte, or silly drinks with umbrellas, if they fit into the 30%), and 20% going to savings/debt-repayment. I’m pretty sure that the first thing Elizabeth Warren would tell the TJ Maxx salesgirl to do is to cut down her housing costs. (I personally find the system too unwieldy for our large household, but I think it might work very well for a single girl.)
Here’s the book:
2. You could give her and her mom or sister or whatever tickets to the next Dave Ramsey Total Money Makeover Event in her area.
http://www.daveramsey.com/events/life-money
I don’t see anything promising on the schedule, so you might instead prefer to scholarship her to the Financial Peace University class. Here’s the list of topics:
–Why saving is important.
–spouses and money, parents and kids and money, accountability for singles
–developing a budget
–getting rid of debt
–resisting marketing
–good insurance, bad insurance
–retirement and college planning
–real estate and mortgages
–“unleashing the power of generous giving”
If she takes the class, she’ll pick up a lot of street smarts about financial stuff. I’m not saying her life is going to be amazing financially, but she will be able to avoid a lot of unnecessary difficulties.
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I don’t understand what the “luck of one’s genes” means exactly. Does it mean that there are some people who are better suited to face the economic reality of the times, because of intelligence, resilience, entrepreneurial skills, social skills? Has the world ever been different?
I see macroeconomic trends that require a range of people to change their expectations for the future, and I have real concern for those whose whose labor value is minimal. I also see trends, for example, at will labor, for which the costs are being born by one group of people while the rewards are going to others.
In the fight about rate of return, in cartoonish terms, Bill Gross argues that the rate of return of the stock market (7%), combined with 3.5% GDP growth means that non-equity holders have born the cost of the equity yield (i.e. real growth is 3.5%, if capital holders get 7%, others, including labor, government, and bond holders get -3.5%). That’s a net transfer that’s unsustainable in the long run, but even more clearly, if bonds, government, labor are bearing similar risk to equity holders, it’s an economically irrational result — since the risk premium is being given selectively to one group of producers even though others sustain equivalent risk.
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Luck of the genes refers to the theory that the ability to defer gratification may be genetic. And really, when you talk about saving for some future event, whether it’s a house downpayment or retirement or paying cash for those boots rather than charging them, that’s deferred gratification. As McMegan wrote once, the rich and the poor know what the middle class does not: deferred gratification is no fun.
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I’d like to know how successful Ramsey’s advice is specifically with his population (for example, a follow-up study of those who take one of his classes). It would be fascinating to see his system in practice (just like, say, with diet studies). Does it work, and for which subgroups of people? for example, is there a baseline income at which his advice makes a difference in financial wellbeing? What role do government benefits (unemployment insurance, social security, disability) play? What role does windfalls (family transfers, bonuses, unexpected capital gains, etc.) play?
For example, Amy’s 25% equity is based on a family transfer (12% equity is a completely different level of stability). Laura credits family help for maintaining a safety net. I have given money in similar circumstances, and I think that kind of windfall transfer, used wisely by someone working out of debt can play an enormous role in getting people on their feet and towards a stable financial future. Instead of being in a downward spiral or looking forward to a hopeless future, the extra money can make all the difference (assuming that the unsustainable spending has been stemmed).
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I think 12% is pretty darn good for a first home purchase, but our lender disagreed and insisted on at least 20% down, as it was ineligible for a normal loan. We were lucky to get any loan at all. (It’s an unusual property–we own the house, the college owns the land, and we are only allowed to sell to faculty or staff. We had to go with a credit union, as none of the national banks wanted to touch it.) Oh, and the rate is kind of terrible. But, yay, 25% equity!
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O, Wendy, I have the same problem, only in Scotland. Do you know how many Margaret MacFarlands were born in Scotland every year in the 1830s?
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Exacerbated by the many different spellings of MacFarland, too, I bet. (Also did not know how many different spellings of Haggerty there are.)
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What kills our budget is daycare. We did all the sensible things about underbuying a house, which will be paid off before our first goes to university, and saved a lot. Now with two kids in care age (one full-time, one part-time) our disposable income is thrift-store territory, no joke.
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(I’m an occasional lurker. I come here because Laura’s a good writer, posts interesting links, and…it’s an enlightening form of culture-shock for this rust-belt, blue-collar single mom. It’s like eavesdropping at the rich-kids’ table.) To piggyback off Laura’s advice, with an eye for the T.J. Maxx girl:
1. Go back to school, go back to school, go back to school. If you don’t know what area you want to study, getting the basics out of the way with an Associates isn’t going to hurt, and actual classroom work might give you a better idea of what you may want to do than secondhand anecdotes and the television. Plus, community colleges are geared towards working class students and “nontraditional” (read: older folks) students who are returning to school. While you’re there, talk to people. A lot of people. Most of them will be significantly older than you, and most have “mileage” in terms of life experiences. Listen and learn.
2. Can’t afford it? Or don’t have a nearby community college? Find a way. Do you have any relatives that live in an area with more economic prospects that also has an accessible community college? Maybe they’ll let you couch surf in exchange for doing household chores, home improvement projects, or babysitting. Don’t forget side-hustle opportunities (ex.: can you do hair? Nails? Fix things? Sew? etc.). Work part-time, and take a full load of courses. Still not doable? Take a partial load of courses—financial aid may be non-existent for a partial load, but a degree earned over the long term is still a degree. Or consider…
3. Military service. The more years in, the more education benefits. Those benefits can be used for technical schools and apprenticeships, too—not just traditional college. Service also comes with other nifty benefits, like extra points for civil service jobs and apprenticeship aptitude tests. (in Illinois, being a veteran gives you an across the board advantage for State jobs—the State is obligated to hire qualified veterans first). Plus, being a veteran gives you a network—which frankly, is a good part of what the folks going to a four-year university are paying for: access to an effective network.
4. Consider an apprenticeship to the trades. (If you’re not afraid of heights, it might interest you to know that the nation is experiencing a lack of qualified linemen. That’s a high-paying, high-benefit job. And T.J. Maxx girl? The ALBAT training center is in Ohio.) Unlike college, apprenticeships are “earn while you learn”. (most trades/Locals have evening classroom work; some do the classroom work in quarterly intensives.) The smartest decision I ever made in my life was to get into the electrical apprenticeship. (and having that Associates degree helped me get in.)
5. Moving might not be in the cards for you until you get the kind of job credentials that make it worthwhile. But moving might not be a bad idea. Do the narratives of the people who stayed in your town sound like Bruce Springsteen songs? Nothing has gotten better over the past couple of decades? There is no shame in moving on. You can always come back to visit.
6. Don’t marry young. Live together first—it’s your last chance to dodge a bullet. And don’t ever marry a man that can’t bring the same things to the table that you can. (and frankly, this is another arena where having a degree can help—if you want to marry, having an education makes you more “marriageable”.)
7. Laura’s #7 isn’t very good advice for most people, especially people who just may have to live on unemployment benefits and who don’t have relatives they can reach out to for cash if hard times hit. The “worst house in the best town” is always going to be too expensive, and not doable if any unemployment is the picture. Be frugal about housing. You may want to avoid small towns as your kids get older because of the lack of certain college-track classes (foreign languages, higher-end math, labs, that sort of thing). Plus, commuting is a hassle and gasoline isn’t going to get any cheaper. There are always decent working-class neighborhoods in the city; find one and live there. That way, you can…
8. Save for retirement! Granted, you won’t be able to do this until you find gainful employment, but when you do, sock away money. If your employer offers matching funds for a 401k, max that puppy out! (that’s free money!!). Put back 10% into your 401k (or other form of deferred comp). Maybe more, if you can afford it.
9. When you buy a home, have the mortgage payment directly deducted from your (savings or checking) account. No late payments will keep your credit score healthy. In fact, online banking is great—check your account daily, and pay bills online when you can. Avoid those late fees!
10. Know your own mind when it comes to money. The strategies that are good for a “spender” aren’t necessarily as effective for a “saver”, and vice-versa. Use the tactics that work for you.
11. Buy quality and use forever. It costs more up front, but over a lifetime you’ll save money. There are exceptions (small electronics, computers/PDAs/phones, vehicles—the things that wear down/wear out/become obsolete fast), but for most things quality is the more frugal choice. And with quality, if you get tired of it, it’ll still be in decent enough shape to sell.
12. Speaking of quality, make room for your quality of life. Being frugal doesn’t mean being dour or doing without. The whole point is having enough to enjoy life. In order to do that, there are times you’ll have to postpone desires, but not perpetually. Balance. Moderation. Indulge yourself on occasion. Having a few “luxuries” that bring joy into your life on a daily basis goes a long way towards not feeling deprived. Work to live, don’t live to work.
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Endorsing lubiddu’s number 9. I bought a rental property when I was a young associate, but, being a young associate, I occasionally paid the mortgage late. This really hurt us when my wife and I were buying a house. (And we are talking about a purchase with 1/3 down, and liquid net worth equal to the mortgage amount. Not your typical overleveraged homebuyers.) So having a mortgage is good, but paying it late is not. We have had automatic payment since that first joint mortgage.
Although one time when we refinanced, the old bank took our monthly payment even though we had paid off the mortgage. They gave it back in a week or two, but if we were living hand to mouth, it would have been a lean two weeks.
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“The “worst house in the best town” is always going to be too expensive, and not doable if any unemployment is the picture.”
This is one of those YMMV things.
When I used to househunt in suburban MD, the holy grail was a house under $400k in an OK school district. One of the closest options I found (and it was still around $430k) turned out to have a huge water tower looming over it in the next lot. I eventually gave up and my husband took a job offer in Texas.
I was just looking at Zillow for our local hotsy-totsy suburban district. There are a few houses there for under $100k. A lot of people could safely follow Laura’s advice in that district who would have gone SPLAT doing the same thing in MD.
“Know your own mind when it comes to money. The strategies that are good for a “spender” aren’t necessarily as effective for a “saver”, and vice-versa. Use the tactics that work for you.”
Yes! There are people out there who don’t have much of a financial plan, but do OK, simply because they aren’t spenders. The money just piles up around them without them trying, if they have a reasonable income. For a spender (like me), to be told, “Well, just don’t spend money” is a sort of living death. A spender needs to know that there will be money for a big grocery trip in 2 days, they’ll have enough money for a new laptop in three months, and the car can be replaced next summer. They (we) need to see the light at the end of the tunnel. (I’m currently counting down to Nov. 1, as I’ve already started tapping our go-see-grandma money for groceries.)
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You, my friend, should write a book. Seriously. Some great, practical advice here.
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Hi all,
Laura knows I’ve had the week from hell (a 14 yr old with pneumonia and much work) but I said I would try to wade through here this evening. I’m probably much too tired to go through all this point by point (or even make grammatical sense or spell correctly), but BJ pretty much said it for me. Ramsey says has never studied the long term effect of his advice, preferring to rely on people calling his show to announce they are debt free. The two people who have probably spent the most time recently talking to people who claim to follow or have followed Ramsey who are not part of Ramsey’s organization– that would be me and Rebecca Barrett Fox — have pretty much come to BJ’s conclusion. If they get out of debt, it is thanks to a high income, or a significant degree of family support (often thanks to inheritance.). A lot of them get out of debt, only to find themselves back in it within a few yrs. Others are most certainly in less debt then before, but remain in debt. Most sad, from my perspective, is that almost everyone claims to be in debt because of irresponsible spending but when you dig — and by that, I mean interviewing them for anywhere between a half hour to two hours, not five minutes on the air — you hear about student loans, enormous health care bills, less than stable unemployment, and all the other economic plagues of the 21st century. Did they sometimes spend frivolously? Sure. Very few of us are perfect.
One other note: I notice no one addressed the political part of Ramsey. Do you believe, like Ramsey, that income inequality does not exist, that relying on Social Security in retirement is not desirable, that health care reform is bad thing because the marketplace can take care of it, and that most of us are deeply envious of the wealthy and want to take their money away from them via high taxes?
All that being said, I would love if another researcher could get in there, follow different groups of people thru Financial Peace and follow up over a period of years, and find that it really does work. I’m all for helping people, however it happens. I know a lot of you are academics. Anyone want to take it on?
I’ll try to come back on tomorrow at some point.
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When I used to househunt in suburban MD, the holy grail was a house under $400k in an OK school district.
And this is what I mean by eavesdropping at the rich kids table, LOL! I mean, there is absolutely no way that any “upper working class”/lower middle class person is going to be able to afford that, period. Approximately 85% of households in the US have an under-100k income (75% have an under 75k income). So unless you’re upper middle class? Fuggetaboutit. School districts ratings don’t tell you much about the quality of the school; they tell you a lot about the financial means/access of the parents. (What do I mean by “access”? Read “The High Cost of Being African-American” by Thomas Shapiro on the cumulative effects of generational wealth, and pay special attention to the compare/contrast section on the white two-income, college-educated family with the black two-income, college-educated family. The differences between the families have nothing to do with life paths or consumer choices, and everything to do with access to the wealth of previous generations.) Don’t worry about school districts; be an active, engaged parent. That’s what’s going to make a difference as to whether your child internalizes the message that he or she is a throwaway person, not what school district he or she is enrolled in. What is the education strategy of people in Title I schools who don’t want their children to crash and burn? To get involved in sports and/or the arts, to join AVID (or whatever they’re calling the “college-bound for the otherwise non-college-bound” program in your area), to sign on to a mentoring program to expose them to people/careers that aren’t a part of the parents’ social circle, joining a church that values children and education (something I thought would be impossible for me, until I discovered Unitarian Universalism), staying on top of their kids’ schoolwork/progress, and frequent communication with teachers and other educational staff. And it works.
Do you believe, like Ramsey, that income inequality does not exist, that relying on Social Security in retirement is not desirable, that health care reform is bad thing because the marketplace can take care of it, and that most of us are deeply envious of the wealthy and want to take their money away from them via high taxes?
Oh hell no!! The marketplace has abandoned most of us; we are living in an era of neofeudalism (only, without any land to at least be able to take care of the bottom section of Maslow’s hierarchy of needs like our peasant ancestors did). Please don’t take my previous advice as an endorsement of the current state of affairs; the hyperindividualism and bootstrapping mythology. That’s bullshit. If the majority of people are going to live a decent life, structural change is what’s needed: a European-style social safety net, stronger labor unions, collective solutions. My previous advice is just directed at a person who doesn’t have a form of safety net she can rely on and whose society considers her disposable. Damage control, that’s all.
Most people aren’t suffering financially because of overspending; rather they are either (a) under-earning, with no possibilities to change that unless they can get some higher education, specialized skills, or have both a rare talent and a astronomical amount of luck, or (b) have had some form of serious, permanent or near-permanent, life-changing disaster strike. Most people who are suffering financially aren’t in that position because of irresponsibility, but because of conflicting responsibilities. Conflicting responsibilities in a society that says “that’s your problem. I got mine, Jack.”
Yes! There are people out there who don’t have much of a financial plan, but do OK, simply because they aren’t spenders.
That’s pretty much me, LOL. Of course, in my line of work, that savings disappears during times of unemployment, but them’s the breaks. Mostly what I was thinking of when I put that in there was my dad—he’s a saver (so was my mother). He uses a credit card to buy gasoline and pays it off in full each month and gets “cash rewards” benefits. He uses another credit card (you probably know the Big Name one I’m talking about) for everything else, and pays that off in full each month, too. Because he’s a “saver”, he gains a little savings that way. But that same tactic would be a disaster for someone who is a “spender” and/or doesn’t pay off bills on time and in full. They’re better served by tactics that limit access to spending money—automatic deposits, automatic payments, limited credit lines, etc.
(On a side note, it’s expensive to be poor. Not having “extra” means an endless treadmill of short-term hand-to-mouth strategies. Examples: not being able to take advantage of buying bulk for staples, or going to the butcher shop to buy a freezer full of meat. Dealing with an unreliable vehicle and missing pay because of missed work. Dealing with unreliable childcare. Basically, always having to deal with “fallout” with no cushion. The money I spent on cab fare in the first two years of my apprenticeship could have bought me a decent vehicle several times over—-but in the meantime, I still had to get to work, so cab fare it was (since I live in a city for which bus service wouldn’t have gotten me to work on time in most cases. Actually, at all in most cases; buses don’t go everywhere. When I entered my third year, I finally made enough to make car payments on a reliable vehicle. Ramsey would have said to not make car payments, to buy the sort of used vehicle I could afford in cash—which is what I did before, which meant an endless run of money thrown down the drain along with missed work and missed pay. Car payments saved me money that would have been wasted on a junker. Yes, there is such a thing as debt that saves money over the long term. I kept that truck for fifteen years, until it too became a junker!)
(other side note: Google “just in time scheduling” for a look at what most service-industry workers are dealing with when it comes to making future plans of any sort. They can’t even reliably plan next week.)
You, my friend, should write a book. Seriously. Some great, practical advice here.
Thanks! I’ve got more where that came from, too. *smile*
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“And this is what I mean by eavesdropping at the rich kids table, LOL! I mean, there is absolutely no way that any “upper working class”/lower middle class person is going to be able to afford that, period. Approximately 85% of households in the US have an under-100k income (75% have an under 75k income).”
The funny thing is, a number of the $400kish houses I looked at were in actual working class neighborhoods (which you could tell from the test scores at the public schools). The $430k one next to the water tower was in a better neighborhood with a better school, but it was nonetheless Title 1. In the actual working class neighborhoods, I visited a $475k house and a $495k house (this was metro-accessible Rockville, MD and Wheaton, MD, so that pushed the prices up considerably–neither my husband nor I had a driver’s license at the time). They were nicely remodeled, but fairly modest in size.
This was all in 2006-2007, before the housing bubble popped, so I was visiting at the very peak of the bubble. How did working class families afford to live there? Easy. 1) They lived there without being able to afford it (there were some very interesting loans offered back in the day). 2) A group of immigrants packed in as tight as they could fit and divvied up the mortgage.
In some ways, we were lucky not to have a downpayment at the time, because if we had bought in 2007, we would have had our downpayment vaporized over the course of the next couple years. That would have been extremely depressing.
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You may think I’m joking but I’m not!
“Conflicting responsibilities in a society that says “that’s your problem. I got mine, Jack.””
Add in the mythos of “anyone can make it” and you end up with lots of finger pointing to the individual as the source of all economic woes. The flipside of “anyone can make it” is “if you didn’t, it’s your fault”.
I wonder too in this time of financial anxiety, how much of the finger pointing is a bit of “if it’s only your fault then I’m not at risk”. If it’s in fact partly/mostly a structural issue, then you or the person sitting beside you or that other person over there is ALSO at risk.
If you believe that people are generally lazy and will look for the easy way out, then you won’t be interested in building an adequate safety net. If you believe that most people want to contribute and work hard to make a good life for themselves and their families, then you will see the value of a safety net.
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I think Olen doesn’t quite have her arms around Dave Ramsey as a phenomenon, because he is such an alien figure to her. Here are some things missing from her piece:
1. DR’s does a lot of very effective counseling on how to manage creditors when your income is not big enough to manage your minimum payments or when your debt has gone to collections. (I discussed this at length in previous comments.) He does a lot to take the fear out of the debtor, reminding them that the collector that is terrifying them is an idiot in a cubicle 1,000 miles away.
2. One of the things DR is very good on is the relationship side of money. I think that comes out of his Evangelical background, where the question of how to have a good marriage is regarded as the really central one. Money is one of the big questions that destroy marriages. DR devotes an entire class out of the 9 Financial Peace University classes to the relationship side of money. His terminology is that you are either a “free spirit” or a “nerd” about money, and if you are in a mixed marriage, the nerd needs to unbend and live a little while the free spirit needs to grow up, participate in the budgeting process, and learn to stop treating the nerd like their mommy or daddy. As a reformed free spirit, I appreciate the fact that DR didn’t use more prejudicial language.
One of the things that happened once our family started doing a monthly budget (it’s budget night tonigh! woohoo!) is that I was suddenly licensed to act as I saw fit–within the budget. There’s $200 there for clothes, and you better believe I spend $200. There was no longer any need to apologize or explain during the month, because we already had the big talk, and it was all decided. Likewise, my husband, who had previously never spent any money on himself except for electronics, suddenly started spending money on hobbies. We both get $40 a month in no-questions-asked “fun money” (this is part of DR’s system by the way–not the particular sum, but the idea that both spouses deserve blow money) and he enjoys the heck out of his. $40 may not sound like a lot, but in his hands, it somehow adds up quickly and turns into telescopes, woodworking stuff, and archery equipment.
So, by doing the Baby Steps and the monthly budget meeting, I am more responsible, my husband has more fun, and we pretty much never, ever argue about money anymore.
3. DR has a lot of stuff to say to small business people. I personally saw how overextended some of my small business relatives got during the dotcom days in the 1990s. They treated their business credit as somehow being free money, that they were getting away with something. (Yes, this is dumb, but I don’t think the average human mind can really cope with credit, because it’s so counter-intuitive to think that money could somehow be anti-money.) Then the dotcom crash came, they had a mid-five figure line of credit out, their normal net 30s from vendors (you get stuff and pay in 30 days), and they were paying their payroll with credit, because they were expecting things to come around. Well, things didn’t come around, not for years. They didn’t lose the business, but it was very hard times, they had to lay off a long-term employee, and in the next few years, they discovered Dave Ramsey. Result–they’ve come through the current recession with flying colors.
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4. I think the Housing Bubble is very important context for discussing Dave Ramsey. For one thing, if everybody in the US were doing the Baby Steps (or if even half of us were), the Housing Bubble simply would not have happened. If everybody who bought a house had no debt at all, a 3-6 month emergency fund, and a substantial downpayment, and took out only a 15-year fixed mortgage, the Housing Bubble would never have inflated, and the crash would never have happened. (The Housing Boom also wouldn’t have happened, of course.)
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5. Another thing I think that is missing in Olen’s article is the way in which Dave Ramsey is, within his Southern, Evangelical community, opposed to a very strong tradition of keeping up appearances and “looking good,” which is something a Northeasterner steeped in scruffy Bohemian academic culture may not understand. This Southern church tradition of respectability and shiny! can be really crushing to people who are on hard times. (I can’t find the posts right now, but the Deputy Headmistress at the Common Room has blogged about this church culture issue a number of times.)
DR gives listeners permission to step off the consumerist treadmill and drop that culture without checking out of their communities. Furthermore, since the FPU classes are generally church-based, he’s done a lot toward changing the church communities themselves and helping to eliminate the peer pressure that can make them inhospitable to people who are economically struggling.
One notorious problem is brunch or lunch out after church. On the one hand, how better to connect with your church community? On the other hand, how better to blow a hole in your budget? (The Deputy Headmistress has blogged about this problem on a number of occasions–the growing number of church functions that require outlays to remain part of the community. She is a big advocate of inexpensive home entertaining and what she calls biblical hospitality.)
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I really like the free spirit and the nerd idea.
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Yes–I like the fact that it’s not blame-y toward the free spirit.
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I see Ramsey as a symbol of an idea and would only follow the details of a specific plan if there was evidence to support that the plan worked. The rough idea that one shouldn’t spend more than one earns is as old as the hills, and, for most of human civilization there was no other alternative. It’s the same way I feel about diets. So far, no specific diet trumps the general advice that one needs to eat less than the energy we expend (to loose weight). Different diets might give people short term behavioral tricks to implement that goal, but many fail in the long term. Very few people change their eating behavior long term.
My guess is that short term behavioral tricks might be more effective for spending, as long as there is enough income, since the behavioral I peri gives for overheating are probably stronger than those for overspending. But we need evidence on how successful the behavioral interventions are. Seems like a field ripe for studying — in my hands, the studies would be like clinical studies of diet.
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Diet and personal finance are actually very similar in the issues they raise. DR says that losing weight is harder than paying off debt, and I would have to agree (assuming a reasonable income).
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Money and food are definitely related when it comes to psychological issues. Now before anyone freaks out, I’m not saying that everyone with money issues has mental health issues!
Just that similar to bulimia and anorexia and food, people CAN be bulimic/anorexic with money.
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I know that not eating and not spending make me SAD. When I’m not eating and not spending, I’m thinking about how I’m not eating and not spending.
I know other people are different, but I personally need a serious behavior modification program in both areas. Here are a couple of examples of stuff that works for me:
–“Shopping” by browsing Amazon, putting stuff in my cart, visiting the cart later, sifting through the stuff I put in my cart, visiting it again when I have money and buying a couple of items according to a plan. Stuff can sit for literally years in my Amazon cart before I either buy it or decide I don’t need it. With this method, I maximize the “shopping” while minimizing the buying.
–Planning eating. I can say no to a rushed brownie at dinner if I know I’m getting ice cream while watching 30 Rock after the kids go to bed. I don’t have to be sad about the deprivation earlier during the day if I don’t have to deprive myself every day, forever. (This is still under development, but the general principle is sound.)
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I also maintain (as part of our monthly budget papers) a huge list of stuff Amy wants. It’s got over 40 items on it right now, ranging from a baby pool for next summer and a new tablecloth to a minivan and a kitchen renovation, with approximate prices listed next to each item. As money comes in, we peruse the list and get the items that we can afford and that will most improve our quality of life.
I find that just keeping the list and crossing items off (I just did three) keeps me from feeling deprived.
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Lubbidu — I do love it when you unlurk. “Eavesdropping at the rich kids table”, indeed. I have to remind myself frequently how unrepresentative my personal sample is, and I appreciate the reminder. It is very easy to slip into let them eat cake moments.
The role of generational wealth is also an important reminder of the different worlds different individuals earning the same income face. Often when people say those words, they are thinking Rockefeller, and that can convey safety nets. but so does having parents who have stable jobs, or a college fund, or enough money to fund a down payment, or knowing that if you really have no place to live, someone will take you in.
We had a week when we didn’t have a house (rental over, closing not yet complete). We stayed with a friend. We joked that we were “homeless”, which drove our friend nuts, ’cause, of course we did have a home, his. Having people who can do that favor for you without straining is a huge asset.
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Even just having family that is not a net drain on you is a big plus.
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I side with Charles Dickens. Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. http://www.telegraph.co.uk/finance/personalfinance/9066005/What-Charles-Dickens-said-about-money-12-memorable-quotes.html
Dickens’ novels often turn around money, power, greed and generosity.
In our upper-middle class neighborhood, finances enforce cultural practices. If a couple divorces, the kids frequently disappear from the school, as the family can’t afford two homes. Due to zoning, many of the “best school districts” have few or no rentals.
There are rentals, however. Before the bust, I think a number of families regarded their mortgages as a temporary expense. One of our neighbors moved in the day before their twins started high school, and moved out the day after graduation. That can work, as long as the real estate market remains steady or rises during the time period, and you can sell your house at the end of the time period.
I am not convinced that the “least expensive house in the best school district” always works. There are a multitude of ways for families to gain advantages in good public school districts. One way is the institution of fees for participation in extracurricular activities and sports. So, you may be in the district, but your child can’t become editor of the yearbook, or play on the soccer team. And, many parents invest in sports skills training or musical training well before high school, so a walk-on or rank beginner will not be allowed to play. There may also be materials fees for certain classes. I don’t approve of any of this; I do observe it happening. The parents on the PTA or school board will be likely to be able to afford the fees and planning involved in getting the best result from the system.
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Here are a few more thoughts:
1. Generally, one of the most pressing issue for DR’s lowest income listeners is that they have become ensnared in a web of debt: pay day loans with 800% interest, cars from the tote-the-note lot on 20% interest with a sticker price 2 or 3 times the open market value (so selling it won’t free you from the debt), weird deals from the furniture store (ever notice how EAGER those people are to send you home with furniture and only start charging three years from now–ever wonder why?), etc. There are entire industries devoted to wringing the last drop out of poor people. Since starting to listen to Dave Ramsey, I have never looked at a “BAD CREDIT, NO CREDIT” sign the same way, and I have never since darkened the doorway of an establishment with that sign in their window.
2. Aside from church, there’s a lot of social pressure from friends and family to spend. I’m a Dear Wendy fan, and 20-somethings seem to be under horrible pressure from their peers to spend on weddings and bridesmaid responsibilities. There’s been an explosion of showers and an inflation in expectations for things like bachelorette parties (which may now include out-of-town travel), and it sounds like being asked to be a bridesmaid can easily turn into a $1,000 ordeal, even without counting wedding expenses. It’s really hard to say “I can’t afford to do that” and not sound like a kill joy or a bad friend. That is to say nothing of the dark underworld of multi-level marketing “parties.”
Family is another source of social pressure to spend beyond one’s means. I’ve seen the ecology of this in my own family, where my wealthiest aunt and uncle are now the unofficial heads of the family. They have bought a quarter share in a condo in a Canadian ski town, and now every big family trip needs to be to that location, which only they (and their kids with their help) can really comfortably afford. Some of the family has stopped going, and some other relatives are still going that can’t really afford it. My family (or parts of it) has gone on that trip twice, but the second time, I was roughly dividing the cost of the trip by the hours the kids actually spent skiing, and the resulting number was terrible.
DR helps give moral support to people who are being pushed into doing things that will ultimately harm them and their families, and this is a very important role. Out in real life, how many of us have a friend or relative saying, don’t worry, you don’t have to buy that–I’ll still love you if you don’t.
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There’s a lot of shame involved in having to say, I can’t afford that, and one of the things that DR does is helping to remove the shame and instill a sense of pride and self-worth in people who are beat down by their circumstances.
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The “millionaire next door” guy says never to buy the cheapest home in the best neighborhood, for the reasons that Cranberry noted. When we lived in Vienna, VA there was a kindergarten field trip to the Baltimore Aquarium where the school seriously sent home a note asking each family to send in a check for fifty six dollars, along with the permission slip. That’s a great example of people who have a lot of disposable income just assuming that everybody has almost sixty bucks for a field trip. Brownies and Girl Scouts cost more in that school. So did the weekly crafty homework projects that regularly clocked in at ten dollars at Michael’s per child per week. The PTA silent auction where they suggested that you donate things like “a week at your beach house or a pair of tickets from my family’s Red Skins subscription.” Nope, didn’t have either of those. Our child was the only third grader who wasn’t getting tutored in math. That kind of stuff.
THere was a lot of social pressure to consume there, and our kids were little. I can only imagine how much worse it is now.
GOt invited to a Silpada silver jewelry party recently — the cheapest thing in the catalog was one hundred dollars. I could see buying a little Tupperware, but do people really routinely spend one hundred dollars on impulse buys? I could see that adding up fast.
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“The PTA silent auction where they suggested that you donate things like “a week at your beach house or a pair of tickets from my family’s Red Skins subscription.””
Gah.
“GOt invited to a Silpada silver jewelry party recently — the cheapest thing in the catalog was one hundred dollars. I could see buying a little Tupperware, but do people really routinely spend one hundred dollars on impulse buys? I could see that adding up fast.”
Friends don’t come cheap these days.
There’s an interesting site here on the dark underside of the Mary Kay world:
http://www.pinktruth.com/
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I didn’t realize there was an undark part of the Mary Kay world.
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But those weekends at the beach house, and the apartment in paris, and the box seats to the football games all sell at the auction (as well as the review of your screenplay — have one of those hanging around? by an oscar winner). If you go to a school like that one, you just have to accept that there are *always* going to be people richer than you. I think the year when all the “wants” on the auction wish list were things like that, I might have decided not to bother donating much. But, in the end, that was OK, ’cause what I could have donated wouldn’t have been of that much value for the goal of the auction, raising funds.
The field trip is a different question, the assumption that everyone can pay the $60 without planning for it excludes children, unless you have a system in place for funding those fees, without question, or transparently.
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Laura said:
“The road to wealth isn’t frugality. The road to wealth is growing up in the right family, having the right combination of genes, escaping debilitating illnesses and personal crises, and making sensible career decisions.”
I was just realizing that I have a counter-example right under my own roof, namely my kids. They have roughly the same environment and approximately the same income opportunities (birthday money, chore money, etc.). Actually, the oldest has much more earning potential, as she occasionally makes $5 an hour as a mother’s helper. That fact does not translate into her being more wealthy than her younger brother.
My oldest is a 6th grader and her attitude toward money is not dissimilar from my old one. She doesn’t love money, but she loves STUFF. She is always either getting something new or wanting something new and she’s always a little short on cash. She has no bank account and (she tells me) about $20 in cash right now. She would theoretically like to start a bank account, but there’s always something she wants to buy more than she wants to start the account. (We’ve told her she needs $50 to start the account.)
Her younger brother is a 3rd grader and he is totally different. He is not a shopper and he likes having money way more than he likes stuff. When you ask him what he wants for Christmas or a birthday, he has a hard time coming up with an answer. He has about $250 in a bank account right now and a sum in the teens in cash in his piggy bank. The reason he has so much money in his bank account is that for a couple of birthday or Christmas checks, the thing that he told me that he wanted most was to make a deposit in his money market account. We allow deposits to his account in increments of $50 (as long as he has a little extra left over), so when his piggy savings have gotten to that point, he has had us make deposits for him. And that’s how he got to $250.
Obviously, I continue to work on my 6th grader, but you can see how little differences in spending habits compound. Extrapolate this situation out a few decades, and there will be a dramatic difference in net worth between the two siblings, even if their earnings are the same, or even if the 6th grader continues to outearn the 3rd grader.
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Maybe there’s a book in the evil Mary Kay world! Scandals so nasty, that they can’t be concealed with any amount of undereye make-up.
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The cultural divide between the Ramsey-world and the Olen-world is small compared to the gap between those who will try something like Mary Kay or Tupperware on the one hand and normal people on the other.
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Funny!
I was just looking at the first page Amazon gives for “Mary Kay” and it looks like there is a crying need for a Mary Kay tell-all. Anybody? You’d need to be brave and have a GOOD lawyer, of course.
One of the things I learned from “Pink Truth” is that in Mary Kay world, “sales” refer to product sold wholesale to the salesperson, not to retail sales. Hence, in their meetings, they are routinely handing out brownie points and attagirls to salespeople with boxes of product moldering in their garages rather than to salespeople who, you know, actually sell the stuff.
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It appears that MH and AmyP, and I, and maybe even Wendy, have found something (the evil of Mary Kay) to agree on.
It is a very banal evil, to be sure.
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one of the most pressing issue for DR’s lowest income listeners is that they have become ensnared in a web of debt: pay day loans with 800% interest, cars from the tote-the-note lot on 20% interest with a sticker price 2 or 3 times the open market value (so selling it won’t free you from the debt), weird deals from the furniture store (ever notice how EAGER those people are to send you home with furniture and only start charging three years from now–ever wonder why?), etc.
and…
There’s a lot of shame involved in having to say, I can’t afford that, and one of the things that DR does is helping to remove the shame and instill a sense of pride and self-worth in people who are beat down by their circumstances.
It’s not just shame. It’s fear. Legitimate fear. Those two paragraphs are intertwined. At the low end of the income scale, that high-interest rental furniture isn’t to “keep up with the Joneses” as much as it keeps DCFS off your back. Not having beds for everyone to sleep in is interpreted as child neglect. Sleeping bags on the floor vs. beds can be the difference between foster care or not. At the lower ends of the income scale, you get a lot more uninvited professional visitors. Usurious interest rates are a small price to pay for getting to keep your kids, and/or setting yourself apart from the neighborhood riffraff when the cops come knocking.
And then there’s other sorts of fear—losing one’s job due to “absenteeism”, which is interpreted as “deadbeatism” by employers who’ve never had to deal with yet another car breakdown on a junker held together by duct tape, coat hangers and hope. If keeping a vehicle moving means paying interest up the wazoo, so be it. Or the fear of having all one’s clothes stolen again from the laundry room—being left with literally just the shirt and pants on one’s backside (and trust, thrift stores in the rust belt are shit for adult clothes, especially adult women’s clothes. Frugality around here means women never get rid of anything usable unless they give it away to friends or relatives. When I was shopping in thrift stores back in the old days, it was extremely rare to find clothing smaller than size 14. Thinner women tend to be younger women, and younger women are mostly all broke. Occasionally I’d find guy’s jeans small enough to make-do, and just cinch up a belt tight while the waist bunched—looked like hell, but at least they didn’t fall down).
Which brings up the other point—-looking poor. Thrift stores in large metropolitan cities may have discarded nice clothes, but it doesn’t work that way for abandoned factory towns. Looking poor gets interpreted any number of ways, all of them very negative. It’s not just a matter of how people feel about you, it’s a matter of how they treat you. It has real-world ramifications for one’s opportunities, and one’s children’s opportunities. Getting a job. Finding an apartment. Registering your children for school. How your children get “tracked” in school. Being accepted in a church. Being accepted by people of higher SES, period. Getting pulled over or otherwise questioned by police. Being poor but not looking it makes a world of difference.
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Here’s another house-hunting story you may appreciate, on the subject of how the other half lives.
I was pursuing my holy grail (the under $400k house with access to metro) in Alexandria, VA, which is kind of a trendy place (or was at the time), but with a lot of poorer neighborhoods. Anyway, I found a house online for $399k near the metro in Alexandria and went to investigate. As I discovered once I got there (with a baby or two and my SIL and MIL in tow), the house was very much in the hood (but with some attempts here and there at gentrification). Anyway, once we got there, we discovered that not only was it near the metro, the view from the front-yard was an unbroken line of tall concrete fence surrounding the metro. You couldn’t have lived closer to the metro without moving into a station and there are probably much homier neighborhoods on the West Bank. And yes, they wanted $399k. We left without even going in, although we did pop into a nearby open house for a tiny flipper duplex (that did not have the stunning view of the cheaper home) for something like $675k.
This was around 2007 and it was the icing on the get-me-out-of-DC cake.
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Just saying….what looks like an irrational decision on the surface isn’t so when you look beneath the surface. Poverty isn’t just about lack of money, it’s about lack of opportunity and lack of options. Writ large, we have a nation of people who are under-earning. Mostly because large corporations are under-paying.
America needs a raise.
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I looked back over 99 comments as best I could, but I didn’t see this blog post linked to:
“Why do poor people make stupid, illogical decisions to buy status symbols? For the same reason all but only the most wealthy buy status symbols, I suppose. We want to belong. And, not just for the psychic rewards, but belonging to one group at the right time can mean the difference between unemployment and employment, a good job as opposed to a bad job, housing or a shelter, and so on.”
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“America needs a raise.”
A couple of times, I have been in the position of sitting in a pew when a pastor decides to preach on the subject of church attendance. As others have pointed out, there’s no point in preaching on this subject to the people that are actually there and browbeating them for the failings of the people who didn’t show up. Also, it’s very demoralizing to the people who are making an effort.
I feel that a lot of discussions of US employment are very similar. There have always, always been lousy jobs, and lots of them. The problem is not the existence of lousy jobs, but the non-existence of good jobs, and the non-eligibility of most low-income US workers for those good jobs, even if they did exist. It isn’t the fault of McDonald’s or WalMart that the Big 3 automakers are on the ropes. They didn’t do that. Sure, WalMart sells a lot of Chinese goods, but WalMart did not destroy Detroit. Detroit was in a tailspin when nobody had even heard of WalMart.
I think rather than beating up on the actual live employers who are managing, year after year, to provide employment within a functioning business model, we ought to be thinking about the businesses that aren’t there, and doing a lot of soul searching on the subject of why the contemporary US is so unattractive to industry. To use another analogy, it’s like when a guy online is complaining that none of the girls will give him the time of day. We immediately wonder, how’s his hygiene? Does he have a job? Does he treat women like garbage? Is he a moocher? Does he act entitled?
We have to ask ourselves, if I had a few million dollars burning a hole in my pocket, would I want to start a large, innovative, capital-intensive, environmentally-impactful, risky business here? Frankly, for me the answer is “no.” Even Texas is a scary place to start a new capital-intensive business (although it’s a good place to relocate your successful existing business). According to our tax law, business owners need to pay the state government 1% of the value of their capital every year. That’s a terrible law, because it’s no discriminatory toward different types of businesses that have different profit margins. It’s also very discouraging for new businesses, as you could have a new business, with lots of new equipment and not be making a dime in profit, and still need to pay 1% of the value of your business equipment to the government out of your totally nonexistent income. Frankly, that’s nuts. (And Texas isn’t the only state that does that–I hear Washington has something very similar.)
I think it is time to stop beating up on the actual functioning employers in the US and start wondering what we are doing to drive away and retard the development of higher-paying businesses.
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To put it differently, if I had a couple million dollars to invest in the US, would I put it into buying a McDonald’s franchise or would I invest it in some sort of innovative start-up? All things being as equal as possible (let’s say the McDonald’s is in a good location and the start-up is a genuinely good idea), which choice is more likely to leave me with nothing in 5 years?
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“..America needs a raise..” – well, we just saw how it worked out when the UAW got the auto workers a series of raises to a cost-to-employer in the $70/hour plus range. It created the opportunity for Nissan and Kia (and Chery will be here soon!). Now we have Detroit on our hands.
There are some people who are creating a lot more value for their employers than they are being paid for. But there are an awful lot of people whose work is worth at most what they are being paid. This is partly because of competing product from workers in Ulsan and Hiroshima and Shenzhen, and partly because machines can now pick strawberries and flip burgers. How do we keep these people on a living wage?
Part of the answer, I think, is in areas like health care provision, probably single-payer. Something with fewer kludges than Obamacare! and with incentives which will work to keep costs down. Part of the answer is in EITC, which retains the incentive to get a job, even if no one can afford to pay you enough to live on based on your existing skills. And part is in working to lower the cost of housing.
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Yes. Wages have not kept up with inflation. The median family has less purchasing power now than they did in the 70s. This is not simply because Americans are “worth less.” We have chosen to give all the profits to a very few. Why is it that we ask if McDonald’s workers are worth their pay, but not if CEOs are? Is the labor of someone earning 16 million a year worth a thousand times the labor of someone earning $16,000 a year? The short answer is no. Our problem isn’t a lack of money, it’s an unequal distribution of money. And it isn’t because people “deserve” it. It’s because we’ve created a political system which allows people to enrich themselves at the expense of the common good. CEOs deserve their high pay and bonuses and golden parachutes as much as Somali pirates deserve million dollar ransoms. Being able to earn that amount of money in the real world is not in itself proof that one ‘deserves’ that amount of money in any object or moral sense. Wages are socially determined, no matter how much we like to pretend there are natural laws of wages.
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McDonald’s employs 1,800,000 people worldwide. I don’t know what salary is fair (in fact, I don’t think that has much meaning in this context), but I think that anybody who sustainably, year in, year out, manages to provide jobs and the means of survival to that many people is doing something amazing. You and I could pay $30 an hour to employees doing the same thing, but then we’d have to close the next week, and all our good intentions would be worth nothing.
(Note that while everybody thinks that Costco is a great model for paying wages to lower skill workers, Costco has a tenth of the employees that McDonald’s does. McDonald’s is supporting 10X as many people as Costco is.)
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“which choice is more likely to leave me with nothing in 5 years?”
the startup.
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I am dispositionally a saver. If I gave in to all my neuroses about money, I would probably be living in a refrigerator box and eating free packets of saltines scrounged from restaurant dumpsters. I do spend more now that I have an income, but I still worry over money spent, and if I don’t worry about the very small stuff, then I start to worry that I’m not worrying. I have to work towards realizing that life is supposed to be enjoyed in the moment, and the goal of life is not to die having collected a large pile of money. (My grandfather’s best friend was an extreme case of this. All his furniture was constructed out of old fruit crates, and he only ate canned foods he bought in bulk. He lived to be 95, and when he died he had a million dollars in cash under his floor board. He verbally left it to my grandparents but never wrote up a will, so it went to his next of kin, some distant relatives in Canada. When the thrifty drive kicks in overtime, I have to think “do you really want to end up like Carl?” and then relax a little.)
OTOH, I everyone being extremely frugal is actually pretty terrible for the economy. Our economy operates in large part on consuming goods and services. If everyone consumes as little as possible and looks for as much free or cheap stuff as possible, then our economy as we know it collapses. We need people to both make money and spend money for a healthy economy. Before people were spending money without making it. If people stop spending money and continue not to make it, then our economy tanks even more.
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Laura is exactly right that one of the saleswoman at TJ Maxx’s core problems is that “she doesn’t know anybody who has a middle class job.” That old aphorism “You are who your friends are” undergirds a lot of these comments.
Nobody has mentioned yet the rather crass (uncomfortable, but realistic?) possibility the TJ Maxx woman could try to marry a man who is wealthy, and then do her best to live happily ever after with him. My female friends from undergrad who are well and truly rich now did exactly that.
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That relates to what I was saying earlier about encouraging your kids to be friends with “go-getters”. Success breeds success. And not just financial success – people who have their act together will have an easier time of it.
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http://opinionator.blogs.nytimes.com/2013/11/02/poverty-in-america-is-mainstream/?_r=0
Wage structure is not a result of personal worth or the ‘natural’ laws of the market. It is a result of political decisions made by people. “The market” or “productivity” didn’t create a middle class society: workers fighting very actively for their rights did. We gave up the fight some time in the 70s, and things have been rolling backwards ever since. Just like there is no stopping point in the fight against racism or the fight for gender equality, there’s no stopping point in fighting for workers’ rights. The bosses are not on “our” side, and they will never operate in our best interest, unless it coincidentally coincides with theirs. This is something that we seem to have forgotten in the US. As it stands, we have no political party which represents labor, and our political system is entirely geared towards those with deep pockets. We as a society have to decide and take action if we want to continue to be a developed country, because on autopilot we’re sliding into something else.
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“Wage structure is not a result of personal worth or the ‘natural’ laws of the market. It is a result of political decisions made by people. “The market” or “productivity” didn’t create a middle class society: workers fighting very actively for their rights did.”
Set minimum wage at $50 an hour. See what happens. I dare you.
Better yet, set the price of bread or milk or gasoline at $1 and see what happens.
Here’s an unfortunate recent story from India, where the government has decided to fix the price of basic medications. Result: shortages of medical supplies as basic as aspirin while expensive cutting edge drugs remain readily available.
http://jeevankuruvilla.blogspot.com/2013/10/medicines-for-all-dpco.html
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Let’s try $10 or $12 and see what happens. Policy and politics certainly does set the distributional outcomes within a broad range of what is possible.
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Here’s a chart showing employment as a percentage of population in the US:
http://research.stlouisfed.org/fred2/series/USAEPP
You’ll see that employment as a percentage of population in the US was, as of 2011, in very poor shape. In 2011, we had the worst numbers since the early 1980s.
Here’s another chart where you can see the unemployment rate from 1948 to the present:
http://www.tradingeconomics.com/united-states/unemployment-rate
Our current unemployment rate is something like 7.2%. That page says that the 1948-2013 average unemployment is 5.8%, so our current unemployment is still substantially above that average (which includes a lot of pretty stinky years). US labor is not playing a strong hand right now. Compare, for example, the 1990s through 2002 on that chart. If I am reading it correctly, our current “recovery” unemployment is about a full point higher than the worst unemployment seen after the dotcom bust. In a truly tight labor market, the unemployment rate is quite capable of approaching, hitting and dropping slightly below 4% (it did that just before the dotcom bust). We are nowhere close to that right now.
We are currently enjoying the Obamacare break-in period and will be for quite a while. Could we stick to one big, bright, expensive idea at a time?
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This comment thread is too long. Do you want a minimum wage blog post?
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Hooo Boy! Requests Time! Minimum wage would be swell, and I think a lot of what’s been going on here has salience for your earlier discussion of What is Middle Class? and Who Thinks S/He is Middle Class? and that would be fruitful as well. There was a lot of mud wrestling about What Is The Purpose Of College, which could us some more specific ventilation.
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And furthermore, in your splendid phrase, Middle Class Panic, and how that ties in with the Tyler Cowen book about Average is Over.
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