Things Aren’t Always What They Seem

A young relative recently expressed frustration to me about a gathering of friends she attended.

It appears that the other young women were discussing an expensive children’s clothing company that is in vogue right now; $60 dresses for little girls is the standard in their line. Then they began talking about women’s clothes and how easy it is to spend $500 or $600 a month just to look nice.

My relative and her husband are working toward becoming debt-free, but her decision to be a stay-at-home mom and the medical bills her family faced from their first child’s birth (their medical insurance didn’t cover all of it) have made it especially challenging to live on one income.

“We were sitting in this nice big house, and the couple who live there said it’s not big enough and they’re getting ready to buy another one. They’re our age! How do they do it?” she asked.

Being a bit older (ahem) and more experienced, I told her that things may not be what they seem. There’s the obvious answer, of course: that their friends have racked up credit card debt and mortgage debt and haven’t reached their limit yet, so they just keep piling it on.

But there’s another obvious-to-me answer: that many young people get a lot of help from their parents these days. Some families routinely finance their adult children so they can maintain the lifestyle to which they (and their parents) have been accustomed.

In their seminal book The Millionaire Next Door, Thomas Stanley and William Danko called this “economic outpatient care.” These young people can live quite well with their parents’ monthly assistance. It’s not until their parents run out of cash or die that the gravy train ends and the young people end up the proverbial creek without a paddle, unless their folks were independently wealthy and left them a nice chunk of change (which they’ll probably burn through before long).

So the young families who don’t get economic outpatient care from their parents are left to look at their peers who do (but don’t advertise the fact) and wonder why they’re doing so much better. The answer, of course, is that it’s all smoke and mirrors. Mummy and Daddy are financing the lifestyle, and probably calling a lot of the shots, too, because, as a wise person once said, “He who pays the piper, calls the tune.”

My young relative is fairly independent-minded; even if her parents could afford to float her a few grand every month, I doubt that she would like having them tell her what to do. Once she becomes debt-free, she and her spouse will enjoy calling their own shots, I’m sure. But in the meantime, if they can keep their eyes on their goal of financial freedom and avoid the green-eyed monster whenever it rears its ugly head, as it did at their friends’ house, they’ll be on their way to a much better life than their friends who are so dependent on their parents.

 

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How to Stiff the Banks

One of the best things about being debt-free is that you get to keep the money you would have given to the bank as interest if you still had debt. That money can go into savings, be spent to do what you like, or be given to charity. Personally, I love knowing that no banker is making money off of me each month!

If you don’t own a house, you just need to get your bills under control and refuse to borrow money unless you absolutely must. But if you have a house, you have to commit to paying off that mortgage. The sooner you start, the better. As this couple learned, there is tremendous savings to be had if you prepay your house loan.

Get and Stay Debt-Free While You’re Young

This 68-year-old woman had a good income and assets, but thought she was rich and lived like it, buying stuff like there was no tomorrow. She ended up in bankruptcy court. The native Californian ended up moving to the Midwest, where the cost of living was cheaper than it was on the west coast. Now, she finally has a handle on her finances, and sees hope for the first time.

But had she become debt-free back when she had decent money coming in, she could have had a much easier time of things as she approached her old age. This is why it’s so important to work toward debt freedom while you’re young.

We became debt-free at age 44 when we paid off our mortgage. A few years later, a failed business (our main source of income) forced us to sell our house. The proceeds paid for a small house in a cheaper area, and left us money to live off of while we figured out what we would do for a living in the future. I don’t like to think what would have happened to us if we were not debt-free before the business failed.