The adages of old are just one of the casualties of rising costs and stagnant wages.
Table of Contents
- For many Americans, the only way to afford higher education is through debt.
- Inflating expenses are changing how Americans buy everything from real estate to automobiles.
When it comes to personal finances, many people rely on rules of thumb. But when the economic environment changes, sometimes those guidelines should too. Make sure you aren’t holding fast to these four financial rules.
1. Avoid debt at all costs
Fans of Dave Ramsey will be familiar with the guru’s loathing for debt and anyone who carries it. However, the debt avoidance strategy which was popular in the early 2000s and 2010s is no longer feasible for many.
In an economic environment where tuition fees are jumping at five times the rate of inflation, the prospect of working your way through college is nothing more than a myth. Instead, more and more college students are forced to take on student loans to subsidize their education. In 2020, a majority of bachelor’s degree recipients took out student loans, and about 14% of parents took out loans for their children’s education in 2019.
The United States currently carries $1.75 trillion in student loan debt, outpacing all categories of consumer debt in 2021. When it comes to funding higher education, the idea of avoiding all debt is neither sound nor possible for many students.
2. A house is always a good investment
For generations gone by, a house with a white picket fence was more than just part of the American dream — it was an investment. Decades later, many Americans hold real estate in the form of a family home. However, in an environment where entry prices are difficult to justify, the family home may no longer be a sure bet.
Two words used to describe the housing market: red hot. With only one month’s supply of housing demand, the average house is on the market for only 25 days. Against that background, consumers are finding it more difficult to make a competitive offer. Buyers are electing to up their down payment to get into a home quicker, with 47% of homes sold above asking price in the past year.
When it comes to investing in real estate through the family home, high barriers to entry may be negating the benefits.
3. Spend no more than 30% of your income on housing
The housing market and renting market have moved nearly in tandem when it comes to affordability. Monthly mortgage payments are up 30% from last year’s Coronavirus rate drop, and the average price of rent in the United States is at an all time high. Whether carrying a balance on a mortgage or paying monthly rent, Americans are facing a very difficult housing market.
Today, just over 37 million, or 30%, of all US households are considered to be “housing costs burdened.” This means that they are violating the thumb rule of spending no more than 30% of income on housing. Renters fare worse than homeowners, with 46% being burdened. And one in seven US households reportedly spend over half of their income on housing.
When nearly one-third of households no longer meet a rule of thumb, it is arguably outdated.
4. All you need is a reliable old car
When it comes to buying that first car, many parents fear the price tag of a new car straight off the dealer’s lot. Today, however, Americans are becoming increasingly wary of the price of a used car off of Craigslist, and rightfully so.
According to Kelley Blue Book, the average price of a used car exceeds $28,000. This price represents a 42% increase from late 2019. The auto shortage is the perfect storm of a pandemic, a microchip shortage, and even residual pains from 2008. And with the average price of a new car north of $47,000, the saying might as well go “All You Need is a Reliable Pair of Walking Shoes.”
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