The Rich Get Richer, The Poor Get Poorer, And The Middle Class Gets Broker (Part 1: Bad Debt)

We've all heard it before. The rich are getting richer and the poor are getting poorer. But we often leave out the middle class. What the hell are they doing? Well they are left being average. Lets paint a picture of what it means to be an average man in America.

You wake up on a Monday morning around 5:30 AM. You live in the suburbs, so you have a bit of a commute to work. Your wife could get up with you at that time because she might work, but most likely she stays at home with your 2 to 3 children. Both of you are in your mid to late thirties. You get out of your nice king size bed that you financed from the local furniture store at zero percent interest for 68 months. You walk downstairs in your nice 2 story home worth about $200,000. You get ready for work and are out the door by 6AM. You get in your new $30,000 to $40,000 car that you financed for 5 years. You make your commute to your full time job. You likely are educated. Maybe you are an accountant or an engineer. You probably work for a good company with good benefits. You probably make about $50,000 to $150,000 per year in taxable income. Most likely all this income comes from your primary job or occupation.

Sounds pretty good so far, right? Lets dig a little deeper.

Twice a month you get your paycheck. Before the money gets deposited in your account, Uncle Sam comes by to snap your neck off with taxes. Take that $50,000 to $150,000 and drop out about 20 to 30% if you live in my home state of Texas. Head over to Cali and you can drop about half your income into the government's bank account. The weather and beautiful people don't seem so nice anymore, do they? So using a really awesome website called Paycheckcity.com, I calculate your new net income to be about $40,000 to $110,000. Sounds like a lot of money, right? That is because... well, it is a lot of money. You can do really well off of that income, but the Super Middle class has a kryptonite. All those nice things we described above were bought using debt. So every month your paycheck gets chipped away little by little. The furniture, the house, the cars, the credit cards, the home equity loans, all of that just buries you in so many payments that you barely have anything left. Stack on eating out, clothes, kids activities, groceries, cable and internet, electricity, and water and you might as well sell that Superman cape back to the goodwill you bought it from because that, my dear readers, is my definition of BROKE!

While the poor don't have much, the middle class have a lot! But they could be in the exact same financial situation as the poor people because they don't have enough money to do any sort of saving or investing after all the bills come out of their paycheck. They spent too much trying to keep up with the proverbial Joneses only to find out that the Joneses are broke as hell! And it gets worse! Close the doors and I can almost guarantee that you will have serious marital problems. Stress about the finances turns little things into all out fights to the death. Eventually leaving a marriage in shambles with divorce written all over it. No wonder divorce rates are at 40%!

I don't know about you, but this sounds like a living hell to me. So the question is how do we stop it? Over the next couple of posts I am going to be dissecting the mindsets of the poor, middle, and wealthy. Together we will see what behaviors cause each person to be in the class they are in. First, we will tackle the major factor that keeps poor and middle class people broke, Bad Debt.

Bad Debt

Pretty much in almost every facet of our lives we are getting debt shoved up our butts. From cars and boats to furniture and electronics. Everybody has a financing plan. I am surprised I don't get asked if I want to finance my Big Mac at McDonalds. Oh hold up a second... they do! They are called credit cards. Great! All of our debt bases are covered. But what the poor and middle class people in America don't realize is that this bad debt is what is going to keep them exactly where they are no matter how much income they bring in. So lets tackle my top 3.

1. Pay Day Lenders

okay, so I have to admit that these places seriously make me angry. Here is the premise behind these huge pieces of crap. The first of the month is coming up and your bank account looks like the Sahara Desert. Your rent and electricity bills are coming due and your paycheck doesn't come in until a week from now. So you go get a pay day loan to pay the bills so that they are not late and get reported to the credit bureaus. You write them a check that is dated for pay day and you get, lets say, $500 in hand without a credit check. So when your pay check comes in they will cash the check that is for $500 plus the fee of about $75 to $150. Woo who! The day is saved. Except if you calculate the annual percentage rate (APR), IT IS 300% TO 750%!!!!! WHO IN THEIR RIGHT FREAKING MIND WOULD BORROW MONEY AT THAT RATE! I mean seriously people. Then what happens when your entire paycheck that you were supposed to get is eaten up by the cash advance and you spent all the money? Welp, time for another cash advance for next paycheck! Then you start having to pay the cash advance bills with credit cards and at that point you have successfully become a modern slave. You work and then you don't get paid because it all goes to cash advance bills. The dumbest part is that the people sometimes don't want to be late on bills because they don't want to ruin their credit score. In which the credit score is used primarily to GO INTO MORE DEBT!!

I dare you to do an experiment. Sit outside of a pay day loan place and watch who comes in. I guarantee you that it will be people from the poorest areas around. These places are complete scum. Taking advantage of ignorant people and pretty much stealing from them. If you have half a brain in your skull, you will avoid these places like a dirty strip club.

2. New Car Loans

I know I am going to catch a good amount of crap for this one, but someone has to say it. Buying a new car is a complete rip off! Plain and simple. Now if you are anything like me, you need some cold hard facts to back something up before you believe it. So lets run some game (that is nerd talk for use math).

In the links at the end of this post I will post a great article about this posted in 2010, but for now I will summarize it. The example they use is buying a new Nissan 370z. Very sick car! The sticker price comes in at a whopping $29,827 starting. No worries though! They are offering financing at 0% APR for 5 years with 0 down! So you sign the paper and drive it off the lot. It takes you like 2 seconds to drive it off the lot because you are so excited! In that 2 seconds you just lost about $2,500. That is about 8%! Now I don't know if you have ever lost that much money in 2 seconds, but I would be pretty pissed. You could have bought a used one that had .1 miles on it for $2,500 less! This is only the very beginning of the very downhill road so lets continue. After the first year you lost another 10% bringing the lost value up to $5,700. Lets fast forward 2 more years. The car you bought at 0% is still not paid for. It is 3 years old now and probably still in great condition. Maybe it has like 20,000 miles on it. The value of the car has dropped 42%!! You could have bought that car at a 42% discount if you would have just bought a used one! "But the new one has nice butt warmers and a cool touch screen". Let me tell you something, all that crap they put in there can be put on just about any car after market. Take the 12.5k that you saved and put in a cool touch screen. My main squeeze, Gary Briggs, put a 3G iPad mini into the dashboard of his used car Pimp My Ride style for a fraction of what you would save buying used!

After five years, you finally have a car that is paid off that lost a grand total of 60% of its value. Now we sell that car and start the whole process over again. This is exactly how middle class people will stay broke. Middle class people think that someone who has a nice new car is "rich". In reality, they are investing their money in a object that depreciates in value rapidly over time. Economists call this "a really sucky investment". Which would indeed make the new car owner much more like a poor person. More on this in later posts. In the mean time, use the calculator on this link to determine how bad you lost your ass on your new car.

http://www.edmunds.com/car-buying/how-fast-does-my-new-car-lose-value-infographic.html


3. Credit Cards

Last, but definitely not least, we have the credit card debt. The idea of always having credit card debt is so ingrained in American culture that most people can't even fathom the idea of not having it. People are so attached to them that it is like a part of the family. Hanging around eating all your food, sleeping on your couch, and stealing money out of your wallet. Sure, if you use them correctly and pay off the balance every month in full, then it is a good way to build your credit score. But the problem is when we start falling for their incentives. "Spend $500 in the first month to get $100 cash back!" Then you run out and charge it up only to realize you cant pay the balance at the end of the month because you haven't budgeted your money correctly. Still think I am lying? The third top reason people go bankrupt is poor use of credit debt. Let that sink in for a bit.

We've all heard the "reasons" for having them around. I am going to pick apart the stupidest one.

"I need it for emergencies"

This is just complete and utter crap. Using OPM (other people's money) for emergencies is a good way to make your emergencies turn into lifetime crippling event. The only reason you would need to use a credit card for an emergency is if you have no money saved. So, therefore, you wont be able to pay down the balance on your charged credit card before the interest starts to roll in. Add on a missed payment by a day and your interest skyrockets to 29.9% INDEFINITELY! So that busted AC will cost you probably twice as much after it is all said and done. Solution: save 3 to 6 months of expenses in a savings account. That means if you lose your income source, you could survive 3 to 6 months. Or if your AC goes out or your dog gets bit by a rattlesnake (this is a problem in Texas... just like horse traffic). So then your emergencies only cost you exactly what they cost you and you wont be stuck paying the piper and ruining your credit score which was the whole reason you got one in the first place, right? 

Bottom line, if you don't know how to handle your money and can never seem to keep any money in your checking account, much less your savings account, then you have no business owning a credit card. Especially if you are not even earning an income! 

Thanks for reading!! Stay tuned for parts 2 and 3 to come where we will compare the behaviors of the wealthy with the poor and middle class. I promise you will be shocked.

Recommended Links

Calculate your paycheck: http://www.paycheckcity.com/calculator/salary/

Interest on Pay Day Loans: http://paydayloansonlineresource.org/average-interest-rates-for-payday-loans/

Car Value Depreciation: http://www.edmunds.com/car-buying/how-fast-does-my-new-car-lose-value-infographic.html

Top 5 Reasons For Bankruptcy: http://finance.yahoo.com/news/pf_article_109143.html

Relevant Books

Total Money Makeover, Dave Ramsey