Book Notes: Financially Stupid People Are Everywhere (4 Rules to Follow to Be Financially Smart)
“They sit mesmerized before advertising campaigns telling them to buy trifles they don’t need using debt they can’t repay.”
In “Financially Stupid People are Everywhere: Don’t Be One of Them,” Jason Kelly opens your eyes to the debt driven world we live in and what you’re up against in society. He posits the only way to truly safeguard your own well being is to look after yourself. Provide security and ensure your freedom by following the 4 financial rules that will keep you from being financially stupid. My summary of Kelly’s book is below.
1. Wake Up to the Trap
The government and corporations have built the system in their favor. The average person is enticed into spending all, if not more, of what they earn. The Three C’s: credit cards, cars and castles are the largest drains in people’s financial lives. Even if people don’t have the money to spend on things, they still upgrade to the latest model (see new iPhone Upgrade Plan). As long as they can make the minimum payments, then the banks will happily extend credit and keep collecting the interest on the debt. In turn, the average consumer keeps working to service those debt payments. It becomes an endless cycle of consumption and debt. Debt is control. If you continue to be in debt you don’t have control of your own life.
“They fail to see the money-trap society around them. They live in a world controlled by corporations seeking to extract as much of their wealth as possible, and the moronic masses open wide for every lure. They trust false promises of bought-off politicians. They sit mesmerized before advertising campaigns telling them to buy trifles they don’t need using debt they can’t repay. They stumble down the path paved by big business that transfers their income to corporate coffers. They don’t realize that the way of the world is not the way they want to live, then they wonder what happened when they end up broke and hopeless. What happened is that they fell for the pattern, the easy route, the stairway to serfdom. They did not take control of their own financial future. They did not guard their wealth-building efforts against the flim-flammery of a debt-based culture concocted by corporate boardrooms and made into law by puppeteered politicians.”
2. Financially Stupid People are Amongst Us
(Side note: I’m not a fan of calling anyone stupid but for now let’s just go with it since “severely uninformed” or ignorant just wouldn’t have the same attention grabbing title.)
According to Mr. Kelly, “Financially Stupid People” (FSPs) are everywhere. One of the more recent and significant cautionary tales involving FSPs is the financial crisis of 2007-2008. We can look back on it in hindsight and lay the blame on lack of regulations and corporate greed, but there was a role that was often overlooked in the media. It was that of FSPs. The bankers were antagonized for their predatory lending practices. The borrowers were portrayed as the victims who were conned into signing bad loans. But these borrowers missed all the red flags before signing the loan. They didn’t question why it required little or no income verification or no down payment. They didn’t even question if they could afford the payment if the interest were to go up on an adjustable rate mortgage or what would happen if the real estate market were to go down. How many people signed these loans without fully understanding what they were getting themselves into? Worst yet, how many people signed without reading what they were signing? A lot. Obviously we now know there were enough FSPs to throw the world financial markets into a tailspin when they started defaulting en masse on their subprime loans.
And sadly this isn’t the first time borrowers have caused a financial collapse. In 1929, Americans got themselves into trouble my borrowing money to invest in the stock market.
“Hundreds of thousands of Americans were drawn to the stock market, and many borrowed money to buy even more stock than they could afford with cash alone. The borrowed money sent prices even higher, which attracted more people, who borrowed more money, which sent prices higher still.”
Replace stock market with housing market and it sounds oddly familiar to the financial crisis.
Moral of the story: “Buyer beware, borrower beware, and overall just be aware.
3. The Government and Corporations Are in Bed Together
The relationship between government and corporations is best described here:
“The Center for Responsive Politics counts almost 25 lobbyists for every member of Congress. Each lobbyist helps various lawmakers raise campaign money, which puts the lawmakers in debt to the lobbyist, and that debt is repaid with the right to vote or signature at the right time. The path of the money isn’t hard to figure out; corporate interest to lobbying firm to lawmaker. That translates into whatever big business wants from government, big business gets from government.”
There are three social issues highlighted in this book: health care, oil dependency and military spending. Ideally the government should be looking after the interest of its people but in the US corporations’ influence is so deeply entrenched in the political system that it doesn’t matter which president or representative is in office. In the end, the corporation that pays the most gets what they want. In health care, the industry has successfully resisted any viable form of government sponsored universal health care since it would decrease profits for healthcare companies. For the oil industry, it continues to be the most profitable business in the world in part because it has disregarded the environmental and social impact of oil extraction and consumption. The federal government has failed to clearly steer a direction towards alternative energy sources due to the ramifications it could have on the oil industry. As for the military industrial complex, the US has entered into numerous conflicts in the last 60 years, many of them with very questionable motives. The beneficiaries of this continuous military spending aren’t the third world countries that we are claiming to spread democracy to. It is mainly the defense contractors who see their revenues and profits increase year after year as weapons programs are vamped up to fight enemies that may never come to pass. Not only is it costing billions of taxpayer dollars every year, we are risking the future of this country by sending the lives of an endless number of Americans into winless wars.
“Sadly, defense spending has become enshrined in our political system as a totem to be worshiped rather than a policy program to be critically examined”.
4. “Guarantee Your Own Well-Being”
In summary, the world is stacked against you. As Kelly notes “every aspect of society is aligned to take your wealth.” The government has become so ineffective at protecting people because special interests have them in a choke hold. Don’t look at government to save you. As for corporations, self-preservation is the main driver in their actions. Businesses won’t ever stop trying to trick you into buying more of their products. Don’t rely on government or corporations to do the right thing.
So who is supposed to look after your interest? YOU!
Your lifetime income can be separated into three categories: The 1st third will be taxes you pay for bank bailouts, wars and corporate welfare. The 2nd third will be for needs not paid by taxes including health insurance, higher education and car insurance. The last third is the only portion that you have control over. Don’t screw up managing the only part that you control. Instead of allowing it to be snatched up by everyone and everything else, follow a basic set of financial rules, one where saving and controlling your spending is the cornerstone. The responsibility of guaranteeing your own well-being and that of your family lies with you. Don’t let debt control your life. Live within your means and control your Three Cs.
The financial rules provided are as follows.
1. Spend no more than 80% of your take-home pay. Save the rest! (I know FIers maximize their savings rate.)
2. Credit cards: Never carry a balance.
3. Cars: Don’t finance. Pay cash for your vehicles.
4. Castles: Put at least 20% down on your house, and keep the mortgage payment below 40% of your take-home pay.
“When you want to make a change in your life, take a risk, or simply take advantage of an opportunity, debt is an anchor that weighs you down and limits your options.” Free yourself from the shackles of debt. End the cycle of consumption. Follow the first rule of finance and control your Three C’s and you are well on your way to being free.