Author: NWA-non

On our way to increasing our net worth, one month at a time.

The reasons Americans don’t save

~ NWA-non ~ 4 Comments

Read this piece by JD Roth of GRS. Thought I would explore the topic in more detail here, rather than just leave a comment on his blog.

JD, and few of commentators on his post, talked a lot about the tactical barriers to saving. JD lays out the numbers that exemplify the sorry state of affairs and the potential solutions. Instead, in quite a role reversal, I have tried took at the malaise from a social and cultural viewpoint; the prevailing conditions that has molded us to become a nation of non-savers. I have made an attempt to answer the philosophical question on why we, Americans, don’t save more. The inherent barriers which we must understand; those that prevents us to save up.

Here are my, almost certainly controversial, reasoning.

Devoid of context, any person should be able to save as much as they want. But they don’t. Everyone knows that saving more is good but invariably they won’t. Saving is hard, or that is what we are told. Saving means sacrifice. Saving is delayed gratification.

More than anything else, saving is a mind game, where the players have made their decisions based on the following:

a) What they have seen their parents do. Knowledge transferred from a previous generation.

b) What they see their peers do. People whom we interact on a daily basis. Our immediate circle of family, friends, co-workers, neighbors.

c) What the general society considers the norm. The current culture as epitomized by television, music, sports, politics.

d) A need for them to break away from the previous 3 points. If everything in my universe tend to point that saving is not a high priority, there is no reason to prioritize it. 

Safety nets

I put the blame squarely on the various safety nets provided in American – or broadly, in first world – society. 

Insurance

Health insurance, life insurance, personal property and vehicular insurance. Insurance on phones, pet insurance, deposit insurance , even insurance on insurance! And anything else you can think so. Even declaring bankruptcy is a form of insurance – the last stand before I get wiped out clean. For generations Americans have been trained to think that insurance will bail them out of serious trouble if they were unfortunate enough to encounter some terrible event. 

Don’t get me wrong here. Obviously, health insurance, even if it is not universal, is a great thing! The point I’m trying to make here is, there are safety nets to hold you if things go south. Now compare it with a scenario in most developing countries. Insurance is a very flighty concept. It is every man, or family, for himself. There is nothing to protect the house you built if an earthquake occurs. If a family member falls ill, you go to the general hospital and get the treatment that’s available, paying all out of pocket. Your bank fails, you lose all your savings. Insurance provides us a sense of security, even entitlement. You can afford to not save, just pay the monthly premium.

Governmental safety nets

Another form of insurance, if you may. Social Security, Medicare, Medicaid. All subsidized form of guaranteed payments when you’re old or sick. 

Another reason not to worry about money for old age or while sick.

Pensions

Till about the 1980s most American workers were guaranteed a pension when they retired from active work – another form of safety net.  

Safety nets – The primary reason for Americans not to save for an unexpected rainy day.

Here’s the next big prevailing factor that intrinsically inhibit Americans to save …

Getting paid more frequently than once a month

I’m thankful that my first paychecks were monthly. I know, the horror! Monthly paychecks are standard in Europe and Asia. It’s the US where employees are paid on a more frequent basis.

Getting paid monthly instills a sense of budgeting that semi-monthly or fortnightly (it is NOT biweekly – biweekly means it’s twice in a week) or weekly paychecks fails to do. Getting paid on a more frequent basis not only fails to prepare employees to budget it actually propagates the mentality of living paycheck to paycheck.

After safety nets of insurance, getting paid more frequently than once a month is one of the primary reasons most Americans do not get to budget properly, and consequently save.

There are other, less pressing, reasons that shape the American mentality that saving is not a priority …

Relative geographic isolation and abundant natural resources of the US

This is a country that shares its borders with just two countries, one of which is another developed nation. From oil to natural gases; from fertile farmlands to verdant valleys; from cattle ranches to lobster farms. America is so fantastically blessed to have such abundant natural resources that “scarcity” is a foreign concept. Deep down no one fears that the gas at the pump is going to be so exorbitantly prohibitive that they actually have to save money to buy gas.

No war fought on home soil in over a century

Extending the previous concept about the geographic isolation of the US, we have been incredibly lucky that no war has been fought on American soil, except for Pearl Harbor. Even then, Hawaii at that point was a US Territory, and separated from the landmass of the 48 contiguous states. The international, political, and military ramifications was undoubtedly huge, but most Americans have not had to really live through a war in their backyard. Notwithstanding the physical trauma of wars, the mental scars of scarcity, fearing for one’s life, and general “staying alive” hasn’t been on the forefront of most Americans.

Contrast this with most developing nations where some kind of war has been waged in the past 50 years or so. Even the prosperous Western European nations such as Britain, France, and Germany had their beaches and cities turned into blood soaked demolition derbies.

Unprecedented economic prosperity

This runs off the previous two points. Since the Great Depression there has been no cataclysmic economic upheaval in the US. Three generations – Baby Boomers, Gen X-ers, Millennials – of adults haven’t had a need to save and scrimp. Sure there have been recessions, great ones too, but nothing to derail the economic juggernaut that is running for 80-90 years now. With this great run has come the access to easy credit, thereby loosening our resolve to save even more. ———————————————————————————————-

There you go. The safety nets provided by government, societal, and private insurance; semi-monthly or weekly paychecks; the isolation and resources of the country; with no wars on home soil; and a great economy where credit is dirt cheap, has lulled most of us into a sense of security without having to work hard for it. Saving has mostly been an afterthought.

Our parents, and possibly grandparents, never really had to save. Our friends and neighbors don’t save. Flashy, shiny, new toys are readily bought on credit, without a second thought on how to actually pay for them. Ours brains are wired to not save. There’s no justifiable reason to. Not saving has worked earlier, it is working now, and there is no reason to believe why it shouldn’t work in the future.

When presented with an alternate version of reality – FIRE  – most people are living, they tend to recoil from this supposed blasphemy. Given some time, exposure to the concept, and logical thinking, a few come around to embrace it. It’s just not human nature. Oh, make that, just not American nature.

What do you think? Any other intrinsic factors I’ve missed out?

December 2018

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With the markets having the worst December since the Great Depression it is not a surprise that we posted a loss in net worth. Valuation of assets are down almost $22k since November. A couple of factors prevented us from being more in the red than the $18.7k you see here.

a) Debt reduced by ~$3.2k

b) In addition to what we put in the markets in a regular month, we pumped in $1.5k more into our taxable brokerage accounts

When the markets rose the day after Christmas, we were able to ride the wave.

The big ticket expense for December was $1.2k that was spent on purchasing an international round trip flight tickets that we’ll be using to attend a wedding.

I’m looking forward to the next couple of posts, which have been in the works for sometime now, in which we will review the year, look at what we invest in, and one philosophical/opinion post on why Americans don’t save more.

November 2018

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nov2018

November was a three paycheck month for M and we paid little more than a full extra payment to our mortgage. Other than that nothing major for the month. The markets seems to have stabilized. Or not. We’re still putting in our usual for the month.

 

How we slayed our student loans

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This should be the last we write about student loans …we’ve written about it here and here.

This post is to give you an idea how we paid them off in about 4 years. At the end of the post you will find a Google sheet where we have painstakingly documented every penny we racked up and how we paid them off.

Granted we had a couple of things going on for us. One, both of us were working full time when we accrued these loans, so we were paying back right from the onset. Two, since we were paying them off since when they were disbursed, we avoided snowball of these loans.

To make a some things clear,

  • This is not a step by step guide on how you should pay off your debts
  • The loan balance changed over time, right from the beginning, based on when loans were disbursed and when (every month) we applied payments to them.

We started with student loans in the fall of 2014. The first disbursement was $10,250 by Navient. The second one was in spring of 2015, again $10,250, again Navient. The third one was $7,500 in fall of 2015 by Discover. The fourth one was for $7,500 in spring of 2016, by Discover. Our total loan amount was $35,500.

The fifth and final one was a consolidation of the outstanding Navient and Discover loans into a low interest Earnest loan of $ $15,284.50. This was not on top of the $35.5k but the balance left on that.

We paid a total of $4,417.25 in interest on the loan, which is about 3.11% blended rate over the 4 year period we had the loans for.

Here you go then, in glorious, excruciating details, the trail of money of our student loans.

Changes in contribution limits to retirement plans in 2019

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The IRS came out with a directive on Nov 1, 2018 announcing changes to contribution limits in 2019.

Here’s in a nutshell what is changing.

  • For employer sponsored plans such as 401(k), 403(b) – $19,000 (up from the current $18.5k)
  • IRA – $6,000 (up from the current $5.5k)
  • Roth IRA – $6,000 (up from the current $5.5k), with income phase-out range increasing from $193,000 to $203,000 (up from $189,000 to $199,000) for married couples filing jointly

You can read the original directive here or the technical guidance here.

Cheers to more saving!

October 2018

~ NWA-non ~ 3 Comments

Ah, a real beauty of a month! Months such as this one show that the going is not always smooth. We’ve been in the midst of such a bull market that dips (not even correction) are sort of necessary to show people who joined the party in 2009 or later that the markets can fluctuate quite a bit in the short term.

oct2018

We lost a tad over $14k in net worth last month. Because our retirement accounts are by far the largest asset bucket it’s no surprise these are the accounts that took the largest hit. Taxable investment accounts and 529 account are down as well. Cash reserves grew. We put in about $3k into our debt obligations.

All will be well. We’re still pumping in the same rate into our retirement and taxable accounts.

Surprisingly, the major expense of last month was ….clothes and shoes, $570 worth of them! Astounding – I know. A pair of real nice work shoes, a belt, a sport coat, a winter coat, and alterations. All of these should last for years to come.

September 2018

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sep2018

Another solid month. The key highlight to this month was stated in the last post. Another highlight was that M started on a new job. This job was lined up almost 10 months ago but the start was purposely chosen to be after the unofficial end of summer (Labor Day). We had one domestic and one international trip, each a week long, during the time M was enjoying time off between jobs.

One more thing of note. With the job change, and the corresponding change in salary, our combined annual income has gone past $250k. We will put up an income post for 2019 when we have the full year number.

The next near-term goal is to get the total assets up to a $1M by end of the year. Of course, a lot depends on the markets. As we have said in numerous posts, and will continue to reiterate, we fully acknowledge the huge role the bull market has played on our current state of affairs. We know the bears are bound to come at some point. We will ride those periods out.

Posts that give more context:

Who we are

Our income

Our Assets and Liabilities

Big news: Student loan paid off!

~ NWA-non ~ 3 Comments

In March earlier this year we wrote about how we were consolidating a couple of student loans into one single Earnest loan at 3.25%.

The Earnest loan began on Mar 21st at $15,824.50 by paying off the Navient and Discover loans.

On Aug 13th we paid off the remaining principal of $7,248.22 and the interest accrued since the last payment of $7.10, to pay a wholesome amount of $7,255.32.

In less than 6 months we’ve paid it off! We paid $180.82 in interest in that period.

earnest_paidoff

Our remaining liabilities are the car loan and mortgage. At 0.9% standing at less than $14.5k we’re in no hurry to payoff the car loan. Mortgage is the next beast we intend to slaughter. At ~$217k, we anticipate to slay this in …wait for it …..4 years!

August 2018

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aug2018

Another month where the trifecta of a) Socking money in retirement account, b) Paying down debt, and, c) Stock markets continuing in their upward trajectory – helped us in pushing our net worth close to $700k, notwithstanding the fact that we’ve been on one income for the whole month of August!

There were a couple of big expenses in August, all paid for by credit cards, which will be reconciled by cash this month and reflect in the next update. One of the expenses relate to travel (food and incidental; major categories such as flight and hotels were already paid for earlier); the other relate to a party we threw in August.

September heralds in a new job with a substantial greater income. Also, the outstanding student loan (~$8k) will be paid off by end of the end of this month (from the signing bonus of the new job).

Here’s what goes into our Assets and Liabilities.