State budget troubles

I don't think there is any state in the US with a budget surplus or even a reasonable plan for covering current costs. How did this happen? How can one administration after another pass on a growing debt and deficit to the next? We all watched this happen on the federal level, but states and towns have done the same thing. Here is one reason: http://www.rep-am.com/news/local/483428.txt unfunded pension plans. Compensation packages for state workers were designed at a time when most people lived into their 60's and maybe early 70's. Not so any more. The majority of people are living well into their 80's and even 90's. The private sector has been abandoning defined benefit pension plans in recent years for this very reason. Longer lifespans have rendered defined benefits unaffordable. The car industry demonstrates how unreasonably generous retirement packages can jeopardize the entire operation. If GMC goes bye-bye, so do the jobs and the retirement benefits. What will we do when our governments run out of money?

'Wealth' or 'stability'?

So much personal finance advice uses the term 'wealth' to describe the stated goal. You want to 'build wealth'. The word 'wealth' implies an ability to spend money freely without deliberation. Most people cannot, and should not, realistically aspire to such a lifestyle. This expectation of 'wealth' leads to spending on what we think 'wealth' looks and feels like, rather than on things that we really need and want. Advertisers have infiltrated every aspect of our lives with this message to subordinate our own tastes, values and priorities for those of an imaginary 'successful' and 'happy' version of ourselves. It has taken me 40 years to figure this out, but there is no purchase which will transform your life and make you happier, healthier or more fulfilled. Sadly, most purchases will have the opposite effect on your life.

Don't get me wrong. Driving off the lot with the brand new car of your dreams is very exhilarating. It sure feels like happiness and fulfillment! That is, until those monthly loan or lease bills start rolling in. Standing back and admiring your beautiful new house, bigger and nicer than anything you ever wished for, is a very exciting moment! But if that house has too big of a mortgage for you to comfortably handle, and you are doing without necessities and hitting credit cards to pay regular expenses, that beautiful house starts to feel like a trap. What you wouldn't give to be renting a place and driving a reliable used car! But you are upside down on both purchases and would have to pay the car company money to get out of your car and show up at the closing with a check, so you are, for the foreseeable future, stuck. You are working to pay those bills, not to build that elusive 'wealth' or to get ahead or even to do things that you, the real you, enjoy.

But what if, instead of building 'wealth', your financial goals are organized around building 'financial stability'? What does the ideal financially stable person or family 'look' like? The answer is, they don't look like any one thing. The car they drive is the one that meets their needs and that they can afford, their home is the same. They do not feel pressure to buy things that they may not really want or need in order to project an image. They may not be perfect. They might go a little over the top with Christmas purchasing, take a vaca they can't really afford or buy a house or car that is too expensive. But the difference is that they sober up afterwards and make sound financial decisions to fix the situation. I.e., they pay down the Christmas credit card balance or pay back the savings account before making any more purchases. Financially stable people have a budget which runs securely, they have necessary insurance, they have concrete and realistic financial goals, and, in the case of couples or families, they engage in transparent and productive communication about finances.

Building financial stability requires us to develop a healthy relationship with money, possessions, education and work. We have to examine our true priorities and goals in life, rather than the ones we perceive others expect from us. If you truly want something, you are willing to wait for it. If you want it because you feel that not having it reflects poorly on you, then you might do unwise things to get it quickly.

Some obvious observations about money

Money. Who else is sick of it? All we hear about lately is money, debt, deficits. Towns, cities, states and the entire country are all being crushed under the weight of inconceivable amounts of debt. The national and now global financial crisis is just a macro version of what has been going on in millions of American households for years. Borrowing instead of making hard choices or obtaining money from non-debt sources has become the American way.

The government decided that every American needed to own a house, so they created incentives for lenders to provide mortgages in unaffordable amounts to almost anyone who applied. You could borrow 100% of the purchase price, refinance up to 110% of the fair market value and get many mortgages without income verification!There was even an evil instrument called a negative amortization loan where the borrower would pay part of the interest on the mortgage and none of the principal for a period of time, and the unpaid portion of the interest would be tacked on to an ever-increasing principal balance. I just spent 4 years foreclosing on houses in Connecticut and I can tell you - these people really could NOT afford these mortgages!! What's worse is that real estate prices are now based on what can be borrowed rather than what the property is really 'worth.' Same with cars. Why is a relatively decent car now over $30,000? Is it really 'worth' that much money? Should people be spending what is close to half or more of their annual salary on their CAR just because they can squeeze themselves into a 5 year loan or into a lease which will bite them in the ass later?

So listen up, America! There is no shame in renting. Being a tenant is a beautiful arrangement! You can pay for what you need and no more, you don't have to pay for the broken water heater, new roof, plumbing debacle, or real property taxes and, if you don't like where you are living any more or you have to move for work or school, you don't have to wait for your place to sell! Do not buy a home unless you can put down at least 20%, you are going to live there for at least 5 years and you can comfortably afford your mortgage, property tax and insurance payments. And saving money to buy a car you can actually afford without burdening yourself with a monthly liability is not something to be ashamed of, either. Do you really need a brand new car when the market is full of used cars at a fraction of the cost?