The Real Reason Americans Are Broke

Why Americans Are Broke: It’s Not What You Think (0:00)

Brian: Americans 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.

Bo: 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.

Brian: I’m Brian, he’s Bo, and we’re financial advisers here to show America there’s a better way to do money. With that, let’s dive right in.

Reason #1: We Don’t Know What We Don’t Know (0:32)

Bo: Right now, it’s really easy to put all the blame on our finances on factors that are working against us. 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 there’s something deeper going on that’s likely impacting the finances of most Americans.

Brian: We’re financial advisors. We’ve been doing this for decades. We know there’s more than just the economic stuff that’s the problem.

Bo: We really think there are three main reasons why a lot of Americans are broke. Number one, we don’t do what we should do. Number two, we do what we shouldn’t do. And number three, we don’t know what we don’t know.

Brian: Let’s go ahead and do that backwards. Let’s start with we don’t know what we don’t know. What do we mean by that?

Bo: This is a huge one. There are some basic financial principles that are necessary for you to understand in order to make wise financial decisions, but a vast majority of Americans just don’t understand or have never been taught those basic financial principles.

Brian: What’s crazy is that we’ve actually been tracking how much Americans understand basic core finances. For the last nine years, it’s stayed at the exact same level, right there at 49 to 50% of people who answer this survey having low financial literacy. This isn’t improving.

Bo: It’s no surprise that Americans struggle with financial decisions when they’ve never been taught how to make them. But there are some signs of improvement. 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.

Brian: And even if you’re taught, we don’t know the caliber of that or where the actual instruction is coming from. I even think about what happens on the home front. 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 those who were not, it was completely wrong. It wasn’t until I actually learned how money worked that I could see through the noise they had created.

Bo: What’s so sad is your parents had the hardest part figured out. You said they were great savers, diligent about living on less than they made, but they didn’t understand that they could take that and do something with it.

Brian: You’re exactly right. That’s why their idea of investing was CDs. It wasn’t until I started getting out there and learning how money worked that I learned there’s something much better, like investing in markets. In this economy, there are lots of opportunities.

Bo: So there are obviously foundational principles that we don’t know. But we’re also not taught and don’t really understand the true dangers of debt. Debt can take many forms. The one getting a lot of headlines right now is student loans. A lot of 17, 18, and 19-year-olds are being empowered to make gigantic life decisions at a very young age.

Brian: This one breaks my heart because I have such warm feelings about education. I really do believe education is the ladder that’s held for you to climb and become a better version of yourself. But the cost of education keeps going 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. Realize a lot of these people were getting dangerously close to six figures of debt, and they signed up without even knowing what they were getting into.

Bo: It’s wild to think about. It’s harder to borrow money to go buy a home, to make a huge asset purchase, than it is to take on student loan debt. At least if you want to go buy a home, you have to show income verification, you have to show that you have a job, you have to show you have assets. When you’re getting student loans, oftentimes that’s not required. You can rack up tens of thousands, if not hundreds of thousands, of debt. And when I was coming through school, Brian, you could go get a free t-shirt just for signing up.

Brian: These things exist to take advantage of young people without them really understanding what they’re getting themselves into. I’ll take you a step further. Look at what’s going on with consumption and credit cards. It’s obvious Americans have a problem with credit cards in that we’re not paying them off. Nearly half of college students, 44%, aren’t taught about credit cards before they even sign up for their first one.

Bo: You show up on campus, there’s a booth set up, a table that says, “Hey, come sign up.” 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 the hole gets deeper and deeper.

Brian: Here’s how the system is kind of stacked against you. Because of a lack of education, we know credit scores are important. They impact your property and casualty insurance. They impact your house purchase and the cars you drive. And here’s how bad the education is: 38% of Americans falsely, and I want to repeat, falsely believe that you have to keep a balance month to month to build a better credit score. That is false. You want to pay off the credit card every month. Do not make the banks rich.

Bo: A second study by Credit Karma found that two-thirds of people in credit card debt are still trying to maximize credit card rewards. If 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.

Brian: Here’s the part where I just don’t think we understand how investing works. Here we are running up debt, and we’re not even taking advantage of getting free money from our employer. 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 there is to get that free money, get your employer match. And yet we find out that 34% of employees don’t contribute enough to their 401(k) to even get the free money. That’s a huge mistake.

Bo: I want to say that again. One out of three, 34% of folks, are choosing to walk away from free money 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. Not only that, 401(k)s are actually leaky. For every $1 contributed to a 401(k), 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 them to build for our future financial self, we’re actually treating them like a piggy bank, pulling those soldiers in our army of dollar bills off the field early and not letting them work for us.

Brian: It could be distributions, it could be loans. These things are just way too leaky. The other thing I don’t like is that people are actually putting money into these retirement plans, whether it’s a 401(k) or an IRA, doing the hard part of living on less than they make and putting money into the accounts, but they’re not actually investing. They’re just letting it sit in cash or stable reserves to the detriment of their army of dollars compounding and growing upon itself.

Bo: The numbers actually substantiate this. Vanguard found that 55% of direct contribution investors stayed in cash for at least 12 months. They chose to defer 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.

How to Fix the Knowledge Gap (9:08)

Bo: So what do you do? How do you do it better? Well, the first thing is you need to educate yourself.

Brian: On that point you just made, there are two parts: the funding and then the investment. Make sure you’re not skipping out on that second step.This is what the whole Money Guy was built on. We saw there was a need in the marketplace. People just didn’t understand personal finance, and we wanted to bring education to everyone.

Bo: And even though you educate yourself, there are going to be things you don’t know or aren’t familiar with. So know when to ask for help. Don’t assume you have to figure out the entire financial world on your own. There are blogs, podcasts, YouTube channels, and articles where you can educate yourself. But you can also reach out to professionals, to providers, to content creators and say, “Hey, what does this mean? How do I do this?” Rather than assuming you know and ending up in a terrible financial situation.

Brian: And I want you to be scared of debt. If you’re not chainsaw scared of debt, I think you’re using it wrong. Every time you have to go use this financial tool, and it is a tool, you should feel the weight of that. I don’t want to just say getting a mortgage is fine, 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. For me with my first car, I had to go get a car loan because I didn’t have any money and needed reliable transportation. But you should be scared when you go through that process.

Sponsor: Monarch Money (10:47)

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Reason #2: We Do Things We Shouldn’t Do (12:11)

Bo: 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 reason is a little bit different. We do the very financial things that we shouldn’t do. There are things we should completely avoid, and yet we go headlong into them. The first one, and we see this all the time in the society we live in: we spend way too much money on automobiles.

Brian: This is the ego. Let’s face it. How often do we think people around us care what car we drive? I think this starts because there is maybe an ounce of truth to it, and that’s why it catches on. In high school, the kids with the cool cars a lot of times got a little more social credit. But in adulthood, I just don’t know that cars give you that pizzazz we give them credit for. Meanwhile, the average car payment in the United States right now on new cars is $772 a month. That’s only telling part of the story. The average loan term for a new car purchase right now is 69 months.

Bo: That’s incredible. 69 months. 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 you should not be doing. And oftentimes it doesn’t just stop with automobiles. Another thing we’re doing that we should not do is buying way more housing than we can afford.

Brian: I think people are making this decision. Look, 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 you’re not house rich and life poor. You want to leave some margin in your life so you can afford not only to live but also to save and invest as well.

Bo: We 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 that much of your income is going towards housing, it’s crowding out the other things you should be doing, like saving for the future, building towards financial independence, creating memories, and getting to enjoy life today. When it comes to buying a home, we’re not anti-homeownership, but if you’re going to do it, we want to make sure you do it the right way.

Brian: And the other thing we’re doing that we shouldn’t is we’re way too comfortable carrying high-interest debt. Just because everybody else around you or the consumption society we live in makes it feel like this is normal, it doesn’t mean this is the way success is found. Look at this stat: 35% of Americans say they’re carrying close to or at their highest levels of debt ever. That’s a problem.

Bo: We came out of the pandemic and saw debt levels decrease and savings rates increase. We thought, okay, we’re turning a corner. But now, post-pandemic, we have slingshot right to the other side of the equation. People are racking up more debt than they’ve ever had, a heavier financial burden than they’ve ever had. If that’s true of your financial situation, you are moving in the wrong direction, not toward financial independence, but further and further away from it.

Brian: And look, it’s easy to fall into this because the entire system is encouraging you to. The global marketing industry is now over a trillion dollars. It is literally a trillion-dollar empire out there trying to get you to spend more, live beyond your means, and 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 it shape your behavior.

Bo: And what’s super frightening is that for those reporting personal debt right now, they’re saying they’re spending 30% of their income on debt payments. The average homeowner is spending 33% on their mortgage, and then you add all the other debt at 30%. You can see that rapidly we are eating up an entire paycheck. Not only are we not saving for the future, we’re actually living beyond our means and borrowing from our future self to pay for today. We want you to see the contrast. If you could just take half of that amount, instead of 30% going towards debt payments, if you could save 15% over a working career, just taking the median household income of around $83,000 to $84,000 and saving 15% over a 30-year career, you could turn that into over $1.5 million by the time you reach financial independence. If all that 15% is doing is going towards debt payments, you’re paying for past financial decisions, not future ones.

Brian: It’s a stark contrast. We cut the 30 in half and made it 15, and it was still over $1.5 million. Which means the typical person, it’s like $3 million going to make the banks richer instead of themselves. Little actions can create big results.

Guard Rails for Big Purchases: 20/3/8 and 3/5/25 (18:16)

Bo: We actually have rules to keep you inside the guard rails when it comes to huge purchases like cars and homes. We believe there’s a better way to do money when it comes to cars. We want you to follow the 20/3/8 rule. We want you to put 20% down as a down payment. We want you to finance the car for no longer than 3 years or 36 months. And we want you to make sure that all of your car payments, not just one, do not exceed 8% of your monthly gross income. If you can stay inside that framework, you’re going to prevent yourself from buying more car than you can afford.

Brian: Here’s why having a framework is so important: it takes out the emotions. Everything we’ve been discussing is part of a system designed to encourage more consumption. It’s trying to get you to live the biggest life on paper, but it never tells you what you’re really trading off. You’re making the banks wealthy instead of yourself. So follow these rules. The 20/3/8 rule will let you keep yourself going to your job in a reliable way without letting your ego push you into bigger and bigger consumption decisions. The same thing can be said about housing. 3/5/25 is going to be your path forward. We’ve been doing this for over two decades. Instead of telling everybody to just put down 20% on houses, we’re honest with you. For our own first houses, we 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 on the first house is okay. You also need to be honest with yourself. If you can’t be in the house for at least 5 years, you’re probably not going to have a long enough horizon to absorb the friction costs of closing, real estate agents, and everything else. And we want you to keep your monthly payment below 25% because we don’t want you to be house rich and life poor.

Bo: And when it comes to all the other debt in your life, whether it be consumer debt, student loan debt, or any other kind, we want you to treat it like a chainsaw. Debt can be useful and valuable. It can be very helpful in certain situations, but if used carelessly and recklessly, it can be unbelievably dangerous. That’s why in step three of the Financial Order of Operations, after you have your deductibles covered and after you’ve gotten that free employer money, we want all of your effort going towards knocking out that high-interest debt. We want compounding interest working for you, not against you.

Brian: A lot of you are asking, what is high-interest debt? We actually have a great deliverable. If you go to moneyguy.com/resources, you can download this. For student loans, our guideline is to try not to run up more student loan debt than you’re going to make in your first year out of school. If you’re in your 20s, we don’t want you to exceed 6%. For car loans, we ideally want you paying cash for cars, but maybe you’re broke like I was when I graduated college and needed reliable transportation. We’ve tried to give you grace. Since cars are going to be paid off within 3 years and you need reliable transportation, it’s okay if a car loan is 10% in your 20s, 9% in your 30s, or 8% in your 40s, because we know you need to use your time to start building wealth by getting to that job. And then credit cards: 0%. We want you paying off credit cards month to month and carrying zero interest. If you’re not paying your credit cards off monthly, you might not be a credit card type of person.

Bo: How do you prevent yourself from getting into this situation? If you have an emergency fund in place, 3 to 6 months of living expenses in your savings account, then when the unknown unknown comes your way, you might not have to go rack up credit card debt. The emergency fund is the thing that keeps your financial life out of the ditch. And we’d like you to keep your total debt load below 35%, because that allows you to pay your taxes, pay your debts, and still have margin to live your life and start building your great big beautiful tomorrow.

Reason #3: We Don’t Do the Things We Should Do (23:33)

Bo: This is why Americans are staying broke. We don’t know what we don’t know. We do the things we shouldn’t do. And the third reason is we don’t do the things we should do. When we think about some of the things we don’t do that we ought to be doing, most people have no idea where their money is going. They get a paycheck, they spend the money, and they hope it gets them to the next paycheck, not actually understanding where their dollars are going.

Brian: I’m glad we saved this for last, because I think these are the things that are actually going to create change in your life. To even know where you’re going, you have to know where you are right now. So you have to track your spending. Nobody likes to budget. I’ll tell you straight up, it’s not fun. But if you’re not doing those types of behaviors, you’re putting yourself out there to the industries that are pushing consumption. Even among the people who do budgeting, 84% of them say they exceed their budget regularly. You have to actually show up and do it. You can write down a workout schedule for the whole week, but if you don’t actually show up and do the workout, it was not valuable. Set a budget you can actually stick to.

Bo: The 84% who are exceeding their budget are at least doing the hard work. They’re doing something. You get better by doing something, and practice makes you better. Just be part of that solution. And another thing that’s going to keep you safe is why it’s so important that cash reserves gets not one but two steps in the Financial Order of Operations: highest insurance deductible covered, and then 3 to 6 months in emergency reserves.

Brian:Don’t sleep on this, because this is the margin in your life that keeps you from making desperate decisions.

Bo: Why do we say most Americans aren’t doing this even though they should be? Right now, only 46%, almost one in two Americans, report having three months of expenses saved for emergencies. And I would argue that for most families, most single-income households, most folks with young children, three months is probably not enough. That means 50% of people have either no emergency fund or an underfunded one. It’s the thing you need to have in place to prevent your financial life from going off the rails.

Brian: And here’s another thing we don’t do that we should: we just don’t save and invest enough. Think about building your army of dollar bills so you don’t have to work so much with your time. What you want is to have enough money that you can start buying your time back. Unfortunately, most Americans just aren’t good at saving. The typical savings rate is a little under 5%. With employer matches and other things, we can hopefully push that over 10%, but the typical American between the ages of 55 to 64 ends up with $185,000. If you just use a safe withdrawal rate of 4%, that’s only $7,400 a year. Not a month. A year. You can quickly see we’re just not understanding this concept of deferred gratification and discipline early enough. That’s why we want you to start early and do it often so you can live your better life.

How to Turn It Around: Make a Plan and Automate (27:25)

Bo: So how do you do this better? Number one: make a plan and follow through with it. Financial success is not an accident. It is a very intentional endeavor. The earlier you figure it out and the more consistent and intentional you can be, the easier the path is going to be. The longer you wait or the less consistent you are, the harder it’s going to be. If you do the hard work today of putting a plan together and following through with it, it’s going to make life tomorrow easier, no matter where you are.

Brian: And look, we’ve tried to make this as easy as possible. We recognize that things are different for a 20-something versus a 40-something, which is why we do so much content by age. If you’re looking for a great starting place, we had a recent show on how to build a financial plan by age. If you’re a 40-something with nothing invested, we’ve got you covered. If you’re young and you’ve got the world by its tail, we’ve got you covered. Please go out and check out that content. Don’t make it more complicated than it has to be. Think about the goals you have, break them down into small achievable steps, and then get started. It’s not about hitting all the big goals right away. Maybe your goal this month is just to track your spending. Next month, build a budget. The month after, stick within it in these categories. It’s about doing a few things better today than you did them yesterday. And it’s worth repeating: emergency reserves are so important in your financial success so you don’t have to make desperate decisions. We actually gave it two steps in the Financial Order of Operations. If you don’t have enough money to cover your highest insurance deductible, get to work on that.

Bo: Once you’ve got that covered, your high-interest debt paid off, and your free money from your employer captured, let’s get you to 3 to 6 months of margin. So if you lose your job or something bad happens, you’re not stuck making desperate decisions. When it comes to personal finance, we know that 20% is mathematical. It’s knowledge, it’s education-based. But 80% of personal finance is behavioral. So if you can do things to prevent yourself from making bad behaviors and encourage good ones, you’re going to set yourself up for success.

Brian: That’s why another thing you can do is automate your saving and investing: auto contributions to your 401(k), auto contributions to your Roth IRA, auto transfers monthly from your checking account to your savings account. If you can do it automatically, pay yourself first. Have that money leave your checking account before you even have a chance to see it, and you’re going to have a much higher likelihood of sticking to your plan over the long term. Automation makes the good habits that much easier. Saving for the future and paying yourself first is definitely going to be something your future self will get super excited about. And automation also makes the bad habits that much harder. If you don’t have discipline and you have money in your pocket, you spend it. An automated savings and investment plan changes that equation.

Bo: You may be asking, how much should I save? We actually have a great deliverable for you. Go out to moneyguy.com/resources. This is the new and improved “How Much Should You Save?” resource. All you do is pick the age you are today and the age at which you want to retire or build financial independence, and we will show you what you’d need to save of your income today to be able to replace 80% of your income in retirement. Perhaps you are not as far behind as you thought. Or perhaps you’re not quite as far ahead. Go out, download it, and let it be your motivation to start building towards the future you ultimately want to live. Be honest with yourself. If you learned something today and know you could do better, go to moneyguy.com/resources. There are literally tons of free resources to help you become better with money. You don’t have to have been raised with it. You don’t have to come from money. There is definitely a better way to do money.

Brian: But maybe you’re watching this and thinking, “I knew a lot of this. I’ve already figured this out. But what I’m struggling with now is that everything these guys are talking about was the early part of the journey when it was simple. I’m now in a place where things are so much more complicated.” Guys, we’re going to leave the porch light on for you too. That’s one of the things this channel started as: a platform for education. I wanted people to live their best life and understand how money worked. And I quickly realized that even though I can do that very well, you’re going to find out you need personalized advice because your situation is different, whether because you’re so successful you don’t have the time, or you don’t know where your blind spots are, or you want to make sure your spouse who’s the non-financial person has a backup plan. Come become a client. We work with clients all across the country, and we really do believe there’s a better way to do money, sitting out there waiting for you. I’m your host Brian joined by Mr. Bo. Money Guy Team, out!