Why 5 out 4 Americans can’t do math in personal finance

Repossessed automobiles, foreclosed homes, and bankruptcies are extreme examples of why 5 out of 4 Americans can’t do math in personal finance.

Bad Math

Of course the statement “5 out of 4” doesn’t make sense, but the intent is to drive home an important point. Most Americans are broke, and the reason they are broke is because they do stupid things with money. If most Americans did math when it came to personal finance, then they would not be broke.

I define broke as living pay check to pay check, having a significant amount of consumer debt, and very little to no savings for emergencies or retirement. So how do we end up this way? If we paid attention to math, would it change our perspective?

Through my experience of providing financial coaching to singles and couples, I find that they ignore math in personal finance when it comes to engaging in these five activities/purchases:

  1. Car loans and car leases: A new car loses 70% of its value in four years. So lets say you bought a new car  with zero interest at $425/month (average car payment in America), you will have spent $25,500 at the end of year five (60 month loan) for a car that is now worth $7650. That sounds like a winning investment. Save up your $425 a month payment for a couple of years and buy a 2-3 year old used car, same model for about $13,000.  A car lease is just as bad as a car loan or maybe worse. Lets say you lease a car for 36 months at $425/month. At the end of the lease, you will have spent $15,300. If you want to buy out the lease at the residual value, it will be about 25% more than what the car is worth since it has lost more than half of its value. That is how dealerships make money on leases. USE MATH PEOPLE!
  2. Credit cards: This form of purchasing items is merely because we want it now. Some use the excuse that they earn points (air miles, cash back) or they pay them off every month. However, when you look at what you had to spend to get those points, you realize that you are just spending MORE money on crap you don’t need. Here is a concept, save up money and pay for items with CASH.
  3. Unreasonable mortgage payments: If your mortgage payment  is $2000/month but your monthly net income is $4000/month then you are HOUSE POOR. 50% of your take home pay is going towards your house. Your mortgage payment including taxes and insurance should never be more than 25% of your monthly take home pay. That leaves 75% to spend, save, and invest. More than 25% means you are in a house you can’t afford.
  4. No budget: If you don’t know where your money is going you most likely spend more than you make. This shows a lack of discipline, you are no better than congress (especially  liberals).
  5. Lack of Contentment: If you are never satisfied with what you have and don’t show spending restraint, then you are not content. Lack of contentment blocks math from your brain just like anger clouds the good side of the “Force” and turns good “Jedi” knights into “Sith” lords.

If you can’t use math when making financial decisions, then you will limit yourself from building wealth and GIVING to others.

Question(s): Are you ready to stop one of these bad habits? If so, which one?