How did our country get to this lowly financial place? The long answer is a series of decisions by government and the financial industry. As well as mass media’s influence and changes in our thinking over time, which led to some bigger, worse decisions, over-leveraging and risk taking that contributed to a collapse. The short answer: our society thought we deserved the best or better of everything at any cost. Let’s look at some assumptions that were at the root of the problem.
After World War II, as our economy grew, an amazing thing began happening. More and more people were accumulating wealth. This created opportunities for higher education for children and assets were passed on to future generations. There were hiccups along the way, but the standard of living was on a consistent climb. With good intentions, parents wanted to give their kids everything they never had.
“Have to have” became more important than just “having.” Kids received new luxury cars for their sixteenth birthdays. College grads bought five-bedroom houses when they landed their first jobs. High earning couples purchased their second home before funding their child’s college. In larger numbers, people bought the idea that newer and more exciting things were the path to contentment.
Buy it! It’s a good deal.
People were overtaken with the fear of missing out on a good thing and responded to the “act now” call from advertisers. It was suddenly prudent to buy something just because it was selling for more than it used to. This was most prevalent in the real estate market. It was often said real estate prices could never decline, because they hadn’t since the 1930s. At some point, that assumption became a fact. It went from haven’t fallen for a long time to not being able to fall ever. Families were afraid they would never be able to buy a house if the prices kept going up, so they made purchases whether they could afford it or not.
In my opinion, financial products and services became more exotic over the past 10 to 15 years. Multiple types of mortgages were widely available. You were a dunce if you had one of those “traditional” fixed mortgages. Traditional saving and investing strategies were being questioned for their real “worth.” Someone with everything paid off was kind of a nerd. It became a competitive “one up” discussion at dinner parties all across the country.
The concept seemed to make financial sense; use someone else’s money (the bank’s) to get what you want now. I once saw a poster in a bank touting the advantages of taking a home equity line of credit in order to take the vacation of a lifetime. Is that legal? It sure is. Is it prudent? Probably not. Complete 100 percent financing was gasoline on the rising flames of the entitlement mentality.
In the past decade, this misconception really started to multiply. Upgraded was no longer good enough. “Luxury” was the demand of the savvy consumer. With easy access to credit, desires that were once only available to the wealthy were possible for almost anyone. Our country’s financial structure is based largely on wanting what we don’t need. Satisfaction is hardly possible with the increasing desire for more.
The fiscal literacy of everyday consumers is suspect at best. In a way, it’s not entirely their fault. There are few mandatory financial education classes in junior high, senior high or college. Many young people get their first lessons in money when they sign up for a credit card in exchange for a T-shirt. Parents, stressed about their own financial decisions, don’t want to say the wrong thing. Unfortunately, people end up making choices of major consequence based on the advice of someone trying to sell them something without knowing all the pieces of the puzzle.
The point of these assumptions is simple yet profound. Our definition of wealth, success and happiness got significantly distorted. The key is to recognize how these assumptions affect you and make better financial choices to combat them.
Kris Flammang, a co-founder of LPF Financial Advisors with offices in Lakewood Ranch, can be reached at (941) 907-0101 or firstname.lastname@example.org.