Chapter 2

Now let's look at the difference in spending and saving, or living on a budget. I'm going to use three men in my example but I assure you the math is the same for individuals, companies, or governments.

For this example we are going to make a couple of assumptions just to make it easier to follow. There is no inflation or deflation. Banks operate on a spread of 5%. In other words if they pay 3% interest, they charge 8% interest. In actuality the spread is usually much greater. One other rule is if you incur interest expense it must be paid in the year it is incurred.

My three men are all age 30, will work until age 65, and they will all earn $50,000 a year every year for 35 years. That means there is one constant, they all earn $1,750,000 in their working careers.

Mr. A spends his $50,000 each and every year. No more - No less. At age 65, he has spent his $1,750,000 and has no savings, but he also owes no one anything.

Mr. B decides that he can live off of $45,000 a year and will save the other $5,000. He opens a savings account that earns 3% and deposits the extra money each year. He spends the remaining $1,575,0000 but at age 65 he has a savings account with $175,000 he deposited, plus $136,000 in accrued interest, giving him a nest egg of $311,000.

Now we get to Mr.C, which by the way will describe almost 90% of the American population. Mr. C can't quite get by on $50,000 per year. He calculates that he will need an additional $5,000 per year to maintain the lifestyle he is entitled to live. He arranges for the bank to loan him the additional money each year at a rate of 8% interest. Now this is going to give Mr C. a total to spend of $1,925,000, the $1,750,000 he earns and the $175,000 he borrows. Of course there is one other small factor. Over the 35 year period, Mr. C has paid the bank $252,000 in interest expense and still owes them the $175,000 principal for all the $5,000 loans

Now Here is the part that really gets amazing and maybe even hard to believe. Now remember Mr B. saves $5,000 a year and spends $45,000. Mr C. borrows $5,000 a year and spends $55,000. By age 55, Mr C.'s annual interest cost is $10,000 per year, leaving him the same $45,000 per year disposable income as Mr. B.
By age 65, Mr C. annual interest cost is up to $14,000 per year, leaving him a disposable income that is only $41,000 per year, $4,000 LESS than Mr. B.

Ain't economics boring as H--L
Enjoy,
Nick

A couple minor flaws. I'm sure there's more, but it's past my bedtime.

A, B, & C, decide to retire at 65. A gets Social Security. B gets Social security plus the benefit of his nest egg. C can't retire. He's too deep in debt.

Anyway, his string ran out long before his annual interest expense exceeded the $5000 he borrowed each year. Not all banks are as stupid as the ones that contributed to the mess we're in.

quote:

Originally posted by Nick Cagle:
Did you realize that in 1959 only American Express existed?

I seem to remember Diners Club in the very early 50s, when Amex was still only travelers checks. The reason I am so sure about the date is that my dad went to Korea/Japan right away when war broke out, and left my mother with the card to use. I think the card was cardboard with a metal insert with the number stamped or embossed on it.

quote:

Now the average outstanding balance is approaching $10,000.00 per household.

Nick

Wow! I had no idea it was that high. With the interest charged, it must be an almost insurmountable burden for a lot of families.

I've kept quiet on this whole post and have just kept reading. Placing a title on ones belief structure causes a lot of problems in our country and further polarizes what starts out as a discussion.

Who is a "heartless right winged neocon" and who is a "liberal bias socialist lefty"? Yes, words hurt and we sometimes use these words to push an agenda along. Amazingly it seems that on our site we are more level headed, grounded and thoughtful to other belief structures and any little title that is given is not overblown to the point of hate mongering. This allows us to hold a civil debate and point-counterpoint type of discussion.

Thank you for that... now to my post...

I started delivering morning newspapers at age 10. I built up a paper route that went from 45 a day to 147 by the time it was turned over to my predecessor at the ripe old age of 15. This was accomplished with me hitting the development and expanding how far out I would walk while delivering and by getting up earlier to catch the early birds who would normally picked up the paper at a 7-11 convenience shop.

Anyone with drive and determination can improve on what you have if you have a long term philosophy of doing better. Today we seem to have a belief structure of short term gains at any expense. This is not conducive to long term viability and stability.

quote:

Originally posted by T&T&B:
Back in my day...if the company did well, then the CEO would do well... Gee, I still remember when you could fire someone for not "doing their job"

What became of my paper route? My corporate picked successor decided that he didn't want to walk that far. He also decided that 5am was too early and 7am was better because he could deliver the paper on his way to school. He gave half his route to another boy in the north side (within 3 weeks) while he took care of the south side.

The north side boy kept up the practice of early delivery while the south side kid didn't. In 8 months, the north side kid maintained what I had built while the south side kid lost half of his subscribers. He didn't care really because it was "Convenient For Him" to deliver at 7am and he only needed enough money to buy bubble gum and baseball cards.

The north side kid, like me, had a car when he turned 16. The south side kid didn't and he kept ridding a bicycle until he was 18. Hard work = rewards... translation... doing better gives you a bigger reward. Simple... but lost on the younger generation who sees easy credit as a means of getting something that the rest of us worked, saved and more importantly... planned long term for.

quote:

Originally posted by noble97monarch:
If I'm trying to make any point here, it's this - blaming "All" of anything is usually incorrect, insensitive and lacking in detailed knowledge.

quote:

Originally posted by Jack:
I'm constantly amazed at the information that is available to me as a member of this wonderful site. More info than I have read or seen or otherwise been exposed to in other media's.

I get up each morning to read this thread. I'm not kidding or being sarcastic, Nick, it's been fascinating and informative! Being school teachers for 35 years we have never been "investors" or entrepreneurs, just went to work every day and payed our bills and raised our kids.
The kid that lives in Phoenix bought a house 4 years ago. It's now worth about a $100k less than the mortgage. Fortunately they are both still working and making their payments. They have friends in the neighbourhood who have abandoned their house and moved to an apartment. We just try to reassure them, keep makin your payments, live within your means, eventually things will straighten out. We've lived in the same house for 36 years, they'ed like to "move up" to something bigger! Sorry kids but you like the place your in well enough. Get over the "movin on up" urge for now!
My long gone dad worked for GM for over 49 years. Started there in 1916 when he was 15 years old and they made cars outta wood! I worked summers at the assembly plants for 5 years, that paid for my college education. Sure made me want to do something else! We have two long-time friends who are retired GM workers who thought they might lose their pensions. With the bailout, maybe not. Talk about being worried!
Niagara was a major auto related economic area. GM, Ford TRW and numerous independent parts suppliers are/were here. We now have the second highest unemployment rate in Canada, next to Windsor which is right across the river from Detroit. It's a GM, Ford and Chrysler town. Patty is from Windsor and her dad worked for Ford all his life. Her mom is still living on his survivor's pension there and her brother works for Chrysler.
Needless to say it makes you want to stay tuned to what's going on in this recession.
It is very frightenng.
Can you imagine, the Chinese might buy Hummer!
Hope everyone comes outta his OK.
Don and Patty

Bill, your correct about Diners Club being around in the 1950's. I didn't include it because it was originally a "charge" card that had to be paid each month and was only good at restaurants. The following is from the history of Diners Club:

"In 1950, the Diners Club issued their credit card in the United States. The Diners Club credit card was invented by Diners' Club founder Frank McNamara and it was intended to pay restaurant bills. A customer could eat without cash at any restaurant that would accept Diners' Club credit cards. Diners' Club would pay the restaurant and the credit card holder would repay Diners' Club. The Diners Club card was at first technically a charge card rather than a credit card since the customer had to repay the entire amount when billed by Diners Club."

Nick

quote:

Originally posted by Nick Cagle:
Bill, your correct about Diners Club being around in the 1950's. I didn't include it because it was originally a "charge" card that had to be paid each month and was only good at restaurants.
Nick

I was just a kid, but I think I remember it being used for hotels and trains, as well. It certainly wasn't used every day like we use our cards now.

I seem to recall that Amex was at first pretty limited to restaurants, hotels, etc, as well, and also had to be paid off monthly, but I don't have any solid memory on that. I had one in the sixties for travel, and paid it off monthly, but I always pay off monthly, anyway.

In the 40s and 50s and 60s, the major department stores in Pittsburgh had "charge cards". Hornes, Gimbels, Boggs &Buhl, Kaufmans, are the ones that come to mind. They were metal plates, a little smaller than todays credit cards, with your name, account number and address stamped into the metal. It was for convenience only. At the end of the month, the entire amount "charged" was due, although without interest. But back then, most people didn't buy stuff they couldn't pay for right away. The one exception was houses and sometimes, but not always, cars. I bought my first house in 1965 with a $30000 mortgage @ 2 3/4%--might have been 3.

Just for kicks, let's say I always paid cash for everything, and never had a credit card or loan of any kind.
My credit rating would be in the toilet.
I couldn't rent a car.
I couldn't make a hotel reservation ANYWHERE.
I couldn't buy an airline ticket.
Doing any business on-line would be out.
Of course, I wouldn't be on-line in the first place because no one would hook me up without a credit card.
I would probably be arrested trying to buy a new car for cash.
If I have a place to live I'd better keep it, because I'll never be able to have utilities hooked up in my name.
If I decide to play the game and get a card, but never use it, I will be subject to fees and a negative rating.
The list could go on forever, but the point is WE didn't make the rules that we have to play by today, we're just the players.

Wonder what people did before there were credit cards? Since 'we' didn't make the rules, wonder who did? Or did they just sort of naturally evolve?

quote:

Originally posted by Jim and Tere:
Wonder what people did before there were credit cards?

I got paid on Friday, and immediately deposited the check. Sat down and wrote checks for bills due. Large purchases were made with a check, including mail order, of course.

I never did it, but a lot of stuff was sold on installment plans. Lay away, too. I never understood lay away. It was equally simple to lay away the money while the purchase was considered. Quite often, I reconsidered and saved myself from buyer's remorse.

We got rid of the credit cards 10 years ago. So far a debit card has worked fine for us. Have rented cars several times and just a couple of weeks ago spent a nite in a nice lodge.

Remember when banks had Christmas savings clubs? You deposited weekly and earned No Interest when you could have opened a regular account and earned interest............

quote:

Originally posted by bill h:
I never understood lay away. It was equally simple to lay away the money while the purchase was considered.

Lay away worked great at Christmas Time if the item in question might disappear before you had the chance to return and pick it up. I've used Lay Away during the holidays at Caldors in the 80's. Would you believe that my parents wouldn't co-sign a credit card for me when I was 16-18 yrs old?

Come to think of it, I believe my first Charge Card was a Caldors Charge Card.

Twenty years ago, after listening to a class taught by a guy named Ron Blue, who in turn had been mentored by Larry Burkett, Tere and I started treating our one credit card like a debit card. We use the credit card because we get frequent flyer miles that way. Every purchase is entered into our check book. It's an obvious reminder when to stop spending. When the bill comes in the mail from the credit card company, it's already "paid" for. Just write a check and don't subtract it from the balance. We've tried to teach our three kids to do the same. The one that does it is the one who has no financial problems. When we retired, we had no debt, nada, which is the only way we were able to retire. It's a little bit of a pain to keep track of stuff but has been worth it for us.