The old sayings are just one of the victims of rising costs and stagnating wages.
- For many Americans, the only way to afford higher education is to go into debt.
- Spending inflation is changing the way Americans buy everything from real estate to automobiles.
When it comes to personal finance, many people rely on rules of thumb. But when the economic environment changes, sometimes these guidelines change. Make sure you don’t stick to these four financial rules.
1. Avoid debt at all costs
Dave Ramsey fans know the guru’s distaste for debt and anyone who carries it. However, the debt avoidance strategy that was popular in the early 2000s and 2010s is no longer feasible for many.
In an economic environment where tuition fees are soaring 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 students are forced to take out student loans to finance their studies. In 2020, the majority of bachelor’s degree holders took out student loans and about 14% of parents took out loans for their children’s education in 2019.
The United States currently has $1.75 trillion in student loan debt, surpassing all categories of consumer debt in 2021. When it comes to funding higher education, the idea of avoiding any debt is neither wise nor possible for many students.
2. A house is always a good investment
For generations, a house with a white picket fence was more than just part of the American dream – it was an investment. Decades later, many Americans own 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 safe bet.
Two words used to describe the housing market: red hot. With only a month’s supply of housing demand, the average home is only on the market for 25 days. In this context, consumers find it more difficult to make a competitive offer. Buyers are choosing to increase their down payment to get into a home faster, with 47% of homes selling above asking price in the past year.
When it comes to investing in real estate through the family home, high barriers to entry can negate the benefits.
3. Don’t spend more than 30% of your income on housing
The housing market and the rental market have evolved almost in parallel when it comes to affordability. Monthly mortgage payments are up 30% from last year’s coronavirus rate drop, and the average US rental price is at an all-time high. Whether they are carrying a balance on a mortgage or paying monthly rent, Americans face a very difficult housing market.
Today, just over 37 million, or 30%, of all US households are considered “housing burdened”. This means they are breaking the golden rule of spending no more than 30% of their income on housing. Renters are faring worse than homeowners, with 46% being overwhelmed. And one in seven American households would spend more than half of their income on housing.
When nearly a third of households no longer respect a rule of thumb, it is probably outdated.
4. All you need is a reliable old car
When it comes to buying that first car, many parents fear the price of a new car straight from the dealer lot. Today, however, Americans are increasingly wary of the price of a used car off Craigslist, and rightly so.
According to Kelley Blue Book, the average price of a used car is over $28,000. This price represents a 42% increase from the end of 2019. The auto shortage is the perfect storm of a pandemic, a microchip shortage, and even residual pain from 2008. And with the price average new car north of $47,000, the saying might as well come on “All you need is a reliable pair of walking shoes.”
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