The Real Reason Americans Are Broke

0:00Americans are broke for three reasons, and none of them are inflation, housing prices, or interest rates. They're actually things you have much more control over.

0:08Brian Preston:Brian, I am so excited because today, we're not just going to show you the three main reasons Americans are broke, but we're also showing you how to make sure you don't end up on the wrong side of the statistics. I'm Brian, he's Bo, and we're financial advisors here to show America there's a better way to do money. And with that, let's dive right in.

0:32Brian Preston:Yeah, Brian, right now, it's really easy to put all the blame on our finances, on factors that are working against us right now. We can think about high inflation, low housing affordability, all the other things going on. And while those do have an impact on our finances, we think that there's something deeper going on that's likely impacting the finances of most Americans. We're financial advisors. We've been doing this for decades. So we know that there's more than just the economic stuff that's the problem. Yeah, we really think there are sort of three main reasons why a lot of Americans are broke.

1:08Brian Preston:Number one, we don't do what we should do. Number two, we do do what we shouldn't do. And number three, we don't know what we don't know. I think it's important. Let's go ahead. Let's do that backwards. Let's start with, we don't know what we don't know. What do we mean by that? Yeah, this is a huge one. There's some stuff, some basic financial principles that we think are necessary for you to understand in order to make wise financial decisions. But at the end of the day, most Americans or a vast majority of Americans just don't understand or have never been taught those basic financial principles.

1:43What's crazy to me is that we've actually been tracking how much Americans understand basic core finances. And for the last nine years, it's stayed at the exact same level, right there at the 49 to 50 % of people who answer this have low financial literacy among Americans. So this isn't improving.

2:06Brian Preston:And it's no surprise that Americans struggle with financial decisions when they've never actually been taught. They've not been educated on how to make this, but there are some signs of improvement. There are some things that are changing. I think right now there are 30 different states that require personal financial literacy in order to graduate. I don't think that was the case when I was coming through high school. Well, and also, even if you're taught, we don't know the caliber of that and where is the actual instruction coming from. And then I even think about what happens in the home front.

2:40I mean, I think about my own childhood. Look, I had great parents, lots of love, really supportive, but their thoughts on what created wealth or what head start people who were wealthy had over the people who did not, it was completely wrong. It wasn't until I actually learned how money worked that I kind of could see through the noise that they had created.

3:00Brian Preston:And what's so sad is your parents had the hardest part figured out. You said that they were great savers, diligent on living on less than they made, but not understanding that they could take that and do something with it and actually turn it into true wealth. Exactly right. That's why their idea of investing was CDs. It wasn't until they till I started getting out there, learning how money worked, that I learned, you know, there's something much better like investing in markets and then there's economy. There's lots of opportunities. So there's obviously foundational principles that we don't know, but we also are not taught and don't really understand the true dangers of debt.

3:31Brian Preston:And debt can take many forms. I think the one, especially right now, that's getting a lot of headlines are student loans. A lot of 17, 18, 19-year-olds are being empowered to make gigantic life decisions at a very, very, very young age. Yeah, this one breaks my heart because education, I have such a warm fuzzies for it because I really do believe education is the ladder that gets held for you to climb and become the better version of yourself. But then imagine, because we see how much student loan debt is getting and cost of education is going up, up, up. And then you find out that 52.3 % of borrowers currently in school said they knew nothing or very little about loans when they started college.

4:13Realize a lot of these people are getting very dangerously close to six figures, and that means they signed up without even knowing what they're getting into.

4:21Brian Preston:It's wild to think about. It's harder to borrow money to go buy a home, to go make a huge asset purchase, than it is to go take on a standard loan, at least if you want to go buy a home. you have to show income verification, or you have to show that you have a job, or you have to show you have assets. When you're going to get student loans, oftentimes that's not required, and you can rack up tens of thousands, if not hundreds of thousands of debt. And when I was coming through school, Brian, I remember you could go get a free t-shirt if you signed up, if you could go get. These things exist to take advantage of young people without them really understanding what it is they're getting into.

5:00I think you make a key point. It is harder to get underwriting on our appreciating assets than it is just to go sign up for a student loan. And then I'll take you a step further. Look at what's going on with the consumption into credit cards. It's obvious Americans have a problem with credit cards is that we're not paying it off. And nearly half of college students, that's 44%, aren't taught about credit cards before they even sign up to get that first credit card.

5:26Brian Preston:Yeah, you show up on campus. There's a booth set up. There's a table there that says, hey, come sign up, come get this, come this, without understanding how dangerous that can be, how swiping and living off of one swipe at a time and pushing that consumption into the future can be devastating because it gets worse and worse and worse and the hole gets deeper and deeper and deeper and deeper. Well, and then here's how the system's kind of stacked against you a little bit is that because of a lack of education, we know that credit scores are important. They impact your property and casualty insurance.

5:56They impact your house purchase, you know, the cars you drive and so forth. And then this is how bad the education is. 38 % of Americans falsely, I want to repeat, falsely believe that you have to keep a balance month to month to build better credit score. That is not true. You want to pay off the credit card every month.

6:15Brian Preston:Do not make the banks rich. A second study by Credit Karma found that two-thirds of people in credit card debt are still trying to maximize credit card rewards. Hey, no, no, I've got this debt. I know what's going on. I've got this going in the background, but I'm getting the points and I'm racking up. If you are doing that, if you're trying to maximize rewards and you are carrying a balance month over month and paying predatory interest rates, you are doing it wrong. You do not understand just how dangerous credit card debt can be. Yeah. Well, this is the part where I just don't think we understand how investing works.

6:52And let me give a little color to this, is that here we are running up debt, and we're not even taking advantage of getting our free money from our employer. You know, this is one of the reasons when we came up with the financial order of operations, beyond just having the basics to get your highest insurance deductible covered for the catastrophic stuff, the next thing we put on here is get that free money, get your employer match. and yet we find out that 34 % of employees don't contribute enough to get their 401k to even get the free money.

7:24Brian Preston:That's a huge mistake. I wanna say that again. One out of three. So 34 % of folks say, hey, I don't want free money. I'm going to choose to walk away from it and not take advantage of it. If you're doing that, you are leaving hundreds, if not thousands, if not tens of thousands of dollars on the table by not going out to get there. But not only that, not only are they not getting as much money into their 401ks as possible, 401ks are actually leaky. We know that right now for every$1 contributed to a 401k, every$1 that goes in, 40 cents of that comes out as a premature withdrawal on average. So not only are we not getting enough money into these accounts and growing these accounts to build for our future financial self, we're actually treating them like a piggy bank where we are pulling those soldiers in our army of dollar bills off of the field early, not letting them actually work for us.

8:19It could be distributions. It could be loans. It's just these things are way too leaky. The other thing I don't like is that people are actually putting money into these retirement plans, whether it's your 401k, your IRAs, and they're doing the hard part of actually living less than you make and putting the money into the accounts, but they're not actually investing it. They're just letting it sit in cash or stable reserves to the detriment of their army of dollars is actually compounding and growing upon itself and becoming the best version of itself.

8:47Brian Preston:Yeah, the numbers actually substantiate this. Vanguard found that 55 % of direct contribution investors stayed in cash for at least 12 months. I mean, they chose to defer the money out of their paycheck into their retirement account, but they did not get it invested. If you're doing that, you're not actually allowing your dollars to work as hard as they could be. So what do you do? How do you improve this? How do you do it better? Well, the first thing we think is you need to educate yourself. Yeah. I mean, on that part that you just brought, there's two parts to this. There's the funding and then there's the investment.

9:21Make sure you're not skipping out on that. But I definitely love the education yourself. This is what the whole money guy was built off of is that we saw there was a need in the marketplace. People just didn't understand personal finance. So we wanted to bring education to everyone.

9:36Brian Preston:And then we also think you should recognize, even though you educate yourself, there are going to be things that you don't know, things that you're not familiar with. So know when to ask for help. Don't assume that you have to go out there and figure out the entire financial world on your own. There are blogs, podcasts, YouTube channels, articles where you can educate yourself, but you can also reach out to professionals, reach out to providers, reach out to content creators and say, hey, what does this mean? How do I do this? What do I need to know about how this works? Rather than assuming you know how it works and ending up in a horrible financial situation.

10:13And then, you know, we kind of, this sounds like an echo of what we were just discussing. I want you to be scared of debt. If you're not chainsaw scared of debt, I think you're using debt wrong is because every time you have to go use this financial tool, and it is a tool. I don't want to just say like getting a mortgage, more than likely you're going to have to do that. And there's a chance even for paying for college, you might have to touch upon student loans. And like for me on my first car, I had to go get a car loan because I didn't have any money and I needed reliable transportation. But you should be scared when you go through that process.

10:46Hey, Bo, it's almost summer and people are wondering how they go pay for their vacations.

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12:10Brian Preston:All right, so we're talking about mistakes that are keeping Americans broke. We said the first is we don't know what we don't know. We just have this lack of information. The second one is a little bit different. We do the very financial things that we shouldn't do. There are things that we should completely avoid or try to avoid, and yet we go headlong into them. The first one, I think we see this all the time in the society in which we live. We spend way too much money on automobiles. Yeah, this is the ego. I mean, let's face it. How often do we sit around and think people around us care what car we drive?

12:50I mean, and I think this starts because maybe there is an ounce of truth, and this is why it catches on. In high school, the kids with the cool cars, a lot of times they get a little credit and it gives them a little more social credit or walking around campus. But I gotta tell you, in adulthood, I just don't know that I think that cars give you that pizzazz that we give it the credit. Meanwhile, here we are, the average car payment in the United States right now on new cars,$772 a month.

13:19Brian Preston:That's only telling part of the story. It's$772 a month. But do you recognize the average loan term for a new car purchased right now is 69 months? That's incredible. 69 months. That was six years. The average interest rate on a new car loan is 7%. So think about paying a 7 % loan over 69 months on a depreciable asset. If you're doing that, you are doing something that you should not be doing. And oftentimes, though, it doesn't just stop with cars, stop with automobiles. Another thing that we're doing that we should not do is we're buying way more housing than we can afford. Yeah. I mean, I think people are making this decision.

14:00Look, housing already is complicated. And we've seen post-pandemic it ran up in prices. We're not minimizing that. We're just saying we want to make sure that you're not house-rich, life-poor. We want to leave some margin in your life so that you can actually afford to not only live a life, but also to save and invest in your life as well.

14:21Brian Preston:We know right now, and again, do not mishears. We're not minimizing what housing affordability looks like, but we do know that right now, the average American is putting 33.4 % of their income towards their mortgage. That's a third of their income going towards a mortgage. If you have that much of your income going towards housing, it is really crowding out the other things in your life that you likely should be doing, like saving for the future, building towards financial independence, creating memories, and getting to enjoy life today. So when it comes to buying a home, we're not anti-home ownership.

14:55Brian Preston:We're not anti-buying. But if you're going to do it, we want to make sure that you do it the right way. Yeah. And the other thing we're doing that we shouldn't be doing is we're way too comfortable carrying on high-interest debt. That's right. And this is one of those things where I think it's just because everybody else around you or the society, the consumption society we live in makes it feel like this is normal, it doesn't mean that this is the way success is found. And look at this stat. This freaks me out a little bit. It's 35 % of Americans say they're carrying close to or at highest levels of debt ever.

15:29Brian Preston:That's a problem. And I think, you know, we came out of the pandemic and we saw debt levels decrease and we saw savings rates increase. We thought, okay, man, we're turning a corner. Things are getting better. Things are improving. But now post-pandemic, we have slingshotted right to the other side of the equation where now people are racking up more debt than they've ever had, a heavier financial burden than they've ever had. If you are doing that, if that's true of your financial situation, I believe that you are moving in the wrong direction, not towards financial independence, but actually further and further away from financial independence.

16:03Well, and also, look, it's easy to fall on this because the entire system, in a lot of ways, is encouraging you to fall into these traps. You realize the global marketing industry is now over a trillion dollars. So there's literally a trillion dollar empire that's out there trying to get you to spend more, live beyond your means, do the exact opposite of the discipline that's going to create wealth. You just need to be aware of that so you don't let that change or shape your behavior.

16:32Brian Preston:And what's super frightening is that for those that are in personal debt right now, those that report having personal debt on their balance sheet, they're saying that they're spending 30 % of their income on debt payments. I want you to think about the mathematics. We said that the average homeowner is spending 33 % on their mortgage. And then you think about all the other debt and that represents 30%. You can see that rapidly we are eating up an entire paycheck. Not only are we not saving for the future, not building for the future, we're actually oftentimes living beyond our means, borrowing from our future self to pay for today.

17:05Brian Preston:And we want you to see the contrast. Because if you could just take half of that amount, instead of 30 % going towards debt payments, if you could just save 15 % over a working career, and you just take the median household income in this country, so someone making$83 ,000,$84 ,000 as a household, saving 15 % over a 30-year working career, just doing that could turn that 15 % payment into over a million and a half dollars by the time that you retire, by the time that you get to financial independence. If all that 15 % is doing is going towards debt payments, you're paying for past financial decisions, not future financial decisions.

17:47I think it's a stark contrast in the fact that we cut in half. We took the 30 and made it 15, and it was still an over$1.5 million. So if you just stood that up and thought about what you just shared, that means the typical person, it's like$3 million is going to make the banks richer instead of for yourself. Guys, that's why we say little actions can create big results. So Bo, how should people think about this to do it better?

18:15Brian Preston:Yeah, we actually have some rules to keep you inside the guardrails when it comes to these huge purchases, like cars and like homes, we believe there's a better way to do money. When it comes to cars, we want you to follow 23-8. We want you to put 20 % down as a down payment. We want you to finance the car for no longer than three years or 36 months. And we want you to make sure that all of your car payments, not just one car payment, but all of your car payments do not exceed 8 % of your monthly gross income. If you can do that, if you can stay inside that framework, you're gonna prevent yourself from buying more car than you can afford.

18:51And here's why it's important, because this one covered cars. We're about to cover houses. The reason having a framework or a system, it takes out the emotions. That's right. Because everything we're about to discuss, the system already is trying to encourage more consumption. It's trying to get you to live the best and biggest life on paper, but they never tell you about what you're really trading off. Like I said, you're making the banks wealthy instead of for yourself. So follow these rules. 23.8 will let you keep yourself going to your job in a reliable way. It doesn't let your ego start pushing you into bigger and bigger consumption decisions.

19:28Same thing can be said about housing. 3.5.25 is gonna be your path forward because we look, we've been doing this for years and decades, actually decades, over two decades, where instead of telling everybody you had to just put down 20 % on houses, we're honest with you. We have a very transparent, non-hypocrisy way The way we communicate, we said, look, for our own first houses, we'll put down 3 % to 5%. So you too should only have to put down 3 % to 5 % on your first house. Now, when you upgrade, yes, you likely should use those proceeds and put down 20%, but 3 % to get in the first house, A-OK.