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

Learning How To Learn? No Thanks Bro, I'll Just Stay Up All Night

When we think of college, what images come to mind. Undoubtedly there will be the image of half naked drunk girls at a house party... okay, maybe that is just what dudes think of. Maybe its the idea of late night trips to the local campus 24/hour restaurant close by or the sports events that are to ensue. Then after all the festivities, you hit the dorm room floor for the famous all-nighter. Ah yes, energy drinks, coffee, cheap pizza, and maybe even some studying. There is something that seems so noble about the all-nighter that says "oh yeah, I am a real college student". But lets get real, in 99% of cases it really just means I procrastinated too much and didn't study like I should have and now I am going to pound my head with these books until something gets in there. Most likely you won't learn hardly anything, freak out during the exam, fail the exam, and then go onto Facebook and cry about how hard your life is. But what if there was a way to work less and get better results? What if there was a way to ace your exams with less stress and still have some free time on your hands? What if I stopped using these very cliche rhetorical questions? Well it turns out that there is, but before we go into that lets take a second to dissect why all-nighters don't accomplish anything.

**WARNING** science will be employed.

So there you sit, 9 PM on the night before the exam. Maybe you have a friend with you or maybe you are rollin' solo Knight Rider style minus the talking car. As the night begins, you start your cramming session. Slowly you start to digest and deposit the facts into your brain. You can think of your brain as a sort of filing cabinet or maybe a USB drive for the modern day. The problem is that you don't get to consciously organize the information. It turns out our brains know we probably suck at organizing that much stuff so they do it for us. But this only happens when you have over 6 HOURS OF SLEEP! So at night a little technician goes through your mess of a daily information intake and sorts through it. "oh look, here are those new Drake song lyrics. I guess we will put those somewhere.... y=mx+b? naaaaahhhh, fug that."

Clinical researchers like to call this "memory stabilization". So without sleep, you get no memory stabilization. Which means not only will you not remember those lyrics very well but you wont remember crap from what you are studying! Lets fast forward to the morning. You walk into your exam looking like you just crawled from the grave. The information in your brain looks almost as bad as this dude's hair.

You open up the exam and the battle begins. The night's intake of caffeine has you shaking like Elvis in an electric chair, but the worst has yet to come. Your brain is about to unleash mass destruction on all the information you tried to put in there. 

So you start to freak out because you have no clue what the hell you are doing. Unfortunately, the brain doesn't know the difference between this modern, fabricated fear of failing your test and the fear that would be caused by running from a bear or fighting a giant cobra. So when you start freaking out, your body starts to release cortisol into your system which then causes the release of epinephrine or adrenaline. Now at first glance you would think "oh yeah, this is gonna pump me up to do well in my exam"! Think again. It turns out this is where our brains take a huge crap on our faces. 

When the brain goes into "Fight or Flight" mode, it diverts all brain function to areas which are important for, you guessed it, fight or flight. While adrenaline enhances these areas, the cortisol/adrenaline duo gives the hippocampus and prefrontal cortex the ol' one two. The hippocampus is involved in forming and retrieving memories and the prefrontal cortex is involved in planning complex cognitive behavior, personality expression, decision making, and moderating social behavior. In other words, your brain says "oh hot damn! Something real is about to go down. We need to make sure we can still run like a cheetah and lift cars. Lets see... well I don't think we will need these Drake lyrics or this y=mx+b". Before you know it you have gone completely blank and don't remember anything you have just studied. Now you are in complete breakdown mode as you turn in your failed exam and go home to cry to your Teddy.

Have Your Brain Fight For You

That's not how it has to be though! You can use your brain's chemistry to your advantage! When I first got to the University of Houston to study for chemical engineering, I got exposed to a study program called "The Guaranteed 4.0 Program". Although it was a great program I am always skeptical of these end-all-be-all programs. I figured there had to be more research on this stuff and it turns out there is. By taking this step to learn how my brain works and how I can design a study system based on research that will optimize my brain's ability to obtain and use information, I was able to study less then many of my peers who were as "smart" if not "smarter" than me and still maintain good grades. First I will lay out the steps I took leading up to the exam and then we will go into what brain activity this enhances.

1. Read lightly over material that is going to be covered in class. Nothing major. I usually don't even write anything down. Think "what the hell are we gonna go over in class".
2. Actually go to class and attempt to learn something!! I know, I know. You don't learn anything from class and your professor sucks and cant speak english and blah blah blah. At least it will keep you accountable for your class and you will at least think a little about what the hell is going on. I know it is easier said than done. I have skipped classes before too. But at least make the attempt.
3. After class, Take your notes and condense them down to only the important material. Usually I condense the material down to only one page per lecture and I write them in a certain form. Here is an example from one of my Fluid Mechanics class lectures.
4. Before doing your homework, take your condensed class notes and go over them until you know everything in there.
5. Actually do your hw by yourself without a solutions manual. I know, its weird and shit.
6. Begin studying for the exam at least a week before. Take those condensed notes and go over them over and over again until you know better than you know your mother. After you have that down then begin going through example book problems and homework problems. Lastly, after you have really learned the info, sit down and do an old exam like a real exam. Give yourself a time limit and see how well you do.
7. This is the most important step!! Stop studying the night before the exam around 5 or 6 PM. Then go and do something FUN!! We will go into more detail later.
8. DO NOT DO ANY HEAVY STUDYING THE DAY OF THE EXAM!! The only thing you can do is go over your condensed notes over and over to make sure you know them. Nothing else.
9. Walk up into that test like you are gonna make it your bitch. Then make that test your bitch.

The Science Behind It

This section is for all you nerds out there like me. Lets get down to the nitty gritty. The system is pretty simple, but it is backed by some good science. The main thing that this emphasizes is repetition. Lets go back to our little technician in our head. Every day when we go to sleep he is looking at all the information that has been absorbed for that day and is sorting out the important things. If over time you start storing the same information, he is gonna go "oh, well this crap must be important, I'll make sure to put it in a safe place". This means when you want to access the info, it will be readily available for use. Where as when you stay up all night and don't sleep your information could be lost in limbo and you will never get to use it. The next thing that is REALLY important is step 7, stopping your study regimen the day before the test and doing something fun! This will produce endorphins from your brain which are your natural stress fighters. When stress starts to peak its head around the corner, the endorphins open up a can of "whoop ass" on it and hulk smash it into nothing. So producing these as close to test time as possible is a fantastic way to fight test anxiety and stress. This will mean that you will not experience the temporary memory lapse that you would feel from an all-nighter. Combine this with the effect with the repetition that has been going on over the past weeks then you have a major force in the fight for better grades. The information will just flow from your brain like smoke out the chimney (R.I.P. MCA). If you put this together with a good nights sleep and a well balanced breakfast then you are ready to kick some serious ass come test time.

Thanks for reading my first post!! If you want any more information on what was in this post, please don't hesitate to contact me at josh.bird.429@gmail.com. Study hard!!


Relevant Links:
http://psychcentral.com/blog/archives/2008/08/03/while-you-sleep-your-brain-keeps-working/
http://www.fitday.com/fitness-articles/fitness/body-building/the-relationship-between-adrenaline-and-stress.html#b
http://entertainment.howstuffworks.com/arts/circus-arts/adrenaline-strength1.htm
http://www.3fatchicks.com/how-endorphins-fight-stress/

and of course Wikipedia!!