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Today’s American Dream

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Source: CNN Money

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Growing up we were always taught that the American Dream was the opportunity to own property, and the standard image of the dream was a house with a white picket fence.  This year CNN Money came out with an article in response to a poll it hosted asking whether readers thought the American Dream was achievable.  The majority of respondents answered, “No”.

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Source: CNN Money

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The great recession was fueled by residential real estate in the first place.  Homeownership was considered an asset that served as the keystone of financial security.  The recession caused this idea to collapse on itself, leaving many Americans hesitant to participate in the (former) American Dream.

The CNN Money poll had almost 6 out of every 10 respondents answer that whatever they perceive the American Dream to be, it is out of reach for them.  “Young adults, age 18 to 34, are the most likely to feel the dream is unattainable, with 63% saying it’s impossible.  This age group has suffered in the wake of the Great Recession, finding it hard to get good jobs…Many respondents said they are worried about the next generation’s ability to prosper”.

The second portion of the poll asked respondents asked whether kids would be better off than parents.  Again, about 63% of the respondents said “no”.  The reason for this is that there are a few things stunting the growth of the next generation.  For those who have jobs, they are still getting by and doing OK, but, as CNN Money puts it, “their income is not translating into solid financial security”.  There are a lot of people living paycheck to paycheck, leaving their savings to fall on the backburner.  The savings rate for this generation is extremely low, and unemployment is still running too high.  As the young generation strives for better jobs, they get caught in the cycle of rising tuition rates and have no choice but to assume student loan debt, which has gotten so high on a national level that it is stunting the growth of certain aspects of the economy.

With all that being said, now it seems that the American Dream has changed collectively, and has taken a 180 degree turn.  There is a new American Dream: Eliminating Debt.

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Source: CNN Money

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CNN conducted a questionnaire to ask its reader what they thought the new American Dream is since the dream of home ownership with a white picket fence has seemed to go down the drain.  One of the more prevalent answers was to eliminate debt.

A survey conducted by Credit.com also received similar responses as the CNN poll.  25% of respondents stated that being debt free was their American Dream.  The main reason for this response was due to a more long-term goal: to be financially secure before and during retirement.  After all, the two go hand-in-hand.  A comfortable retirement would typically entail being debt free and thus financially secure.

It is apparent that this shift in the American Dream has affected the housing market dramatically.  A combination of population trends and increasing debt is the culprit of the shift.  The baby boom generation did wonders for the U.S. economy, but the generations following the boomers were more of a baby bust generation, so when baby boomers’ children were grown and they decided to sell their larger homes, there was a weak demand.  The echo boomers, following the boom generation, should have made up for the lack of demand.  However, there are a few things that are keeping this generation from buying.  Forbes came out with an article entitled, “Rebuilding the American Dream: What’s Really Holding Back U.S. Housing?”, the article stated,

“Members of the Echo Boom seem to prefer more frequent changes than some previous generations.  This cohort seems more likely to move frequently, which makes commitments to home ownership more costly…In addition, this age cohort has also had more trouble than some previous generations getting established.  It has been harder to find jobs in the last few years, and members of the Echo Boom often left school with sizable student loans.  Those factors have made it harder for potential buyers to qualify for the student loans they need to purchase a house.  Eventually, this age group will become established in their careers and will have the financial strength to qualify for home loans; but until that happens, the demand for single-family homes may be lackluster”.

The article painted a detailed picture of what exactly we are witnessing right now when it comes to the American Dream, and the author, Bruce McCain, also noted that it might be some time before things return to how they were.  Student debt aside, McCain notes that investment psychology may cause it to take about ten years to rebuild the demand for this asset after the bubble bursts.  “Eventually,” he says, “the psychology will turn, and people will become more enthusiastic about owning houses; but until people become convinced home prices offer at least some potential for appreciation, the overall demand for housing may remain suppressed”.  The savior could be inflation, driving up home prices, and proving that homeownership is worth the investment.

Until then, Americans must come up with a plan to combat this issue in the meantime.  In order to help Americans achieve their newly edited definition of the American Dream, Credit.com has created a checklist to help pay down debt because getting out of debt requires a plan.  Since this plan requires extra money to pay down each debt, it is important to note that without substantial saving, the plan might not be the best idea to start out with.  If that is the case it would be wise to build up a savings account and then focus on paying down debts after that emergency cushion has been established.

  1. Know Where You Stand – It is extremely important to know where you stand before embarking on any sort of financial project. This means checking your credit report and score. Any discrepancies need to be sorted out, and other outstanding balances (i.e. medical bills) need to be taken care of before beginning the project of paying down debts.
  2. Know Your Debts Like the Back of Your Hand – Make a list of all of your debts. Write down the name of the creditor, interest rate, balance, and minimum monthly payment.  Also list all monthly expenses, i.e. credit card payments, cell phone bill, food, gas, rent/mortgage payments, car insurance, health insurance, dental insurance, etc.. Food and gas expenses may be hard to gauge, so in order to do this take some time out and review monthly statements over the past three months on accounts that would have money spent on food and gas.  Add up the expenses and take the average of the three months.   When it comes to the credit card bill and mortgage payments, write down the creditor, interest rate, balance, and minimum monthly payment as well.  Write down your monthly income after taxes and deductions, and subtract all of your monthly payments from that number to see what is left over.  Circle the leftover number.
  3. It Doesn’t Hurt to Ask – Interest rates make overcoming loans and credit card debt sometimes seems like an insurmountable task. It seems as though interest pulls all in its path into a very difficult cycle to break – especially when interest rates on these debts are high.  However, there is still light at the end of the tunnel.  At times (but not always) when you ask a company for a lower interest rate on your loan or credit card, they will say yes.  It certainly helps your case if you have been paying back your debt on time for an extended period.  This could possibly entail refinancing a loan, and in order for this to be a good choice the math has to be done to determine whether a refinance would actually allow you to save money.  If math isn’t your thing, it would be wise to get together with a trusted financial advisor to help come to the right conclusion. Let’s say the credit card company says “no, we cannot grant you a lower interest rate”.  Well, that means it is time to start credit card shopping while paying special attention to credit card interest rates, APR, service charges, minimum spending requirements, and other hidden fees.  If there is a better credit card out there versus the one that you already have, apply for that card and once you have it, transfer your balance onto that card so that you will not have as much interest charged each month while you pay it down.  This method will help pay down credit card debt faster and with less money wasted on interest. For those out there with student debt, call up the loan servicing company and ask if they would be willing to consolidate the loan (provided that you have multiple loans) so that you will have one low interest rate rather than multiple interest rates ranging from low to high.  If that doesn’t work, it would be wise to consider an income-based repayment plan and explore which is best to suit your needs.  With these plans, it is extremely important to remember that although the monthly payment might be extremely low or even at zero balance owed per month, interest is still accruing on those loans.  Be sure that enough is being paid into the account to cover both the interest and the principal balance.
  1. Re-evaluate — If any of the payment amounts from step 2 have changed as a result of actions taken according to step 3, make sure that these changes are reflected on the list of debts and that the total monthly income after taxes, deductions, and expenses has changed accordingly as well.
  2. Plan a Strategy to Tackle the Debts, One at a Time – Assuming that there is money left over after expenses (and savings), pick a specific debt to focus on and pay down. A good practice is to pick the debt with either the highest rate, or one with the lowest balance.   Whichever you choose, let this debt be the main focus each month, the “target debt”.  Every time you receive a bonus or a tax refund, or just have extra disposable income in general, funnel that money into the “target debt” until it is fully paid down.  Once the balance is paid down in full, pick another debt account to be the “target debt” until all account balances stand at zero.
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