Friday, February 13, 2015

Lots of Americans Have Debt Related Financial Problems --- Unfortunately,They Didn't Learn About the 'Magical' Mathematical Rule of 72 Soon Enough, If At All

The 'magical' mathematical Rule of 72 demonstrates that any number of years multiplied by the average annual percentage rate of return will double the initial investment when the result is 72. For example, 9 years times 8% will equal a double, as will 6 years multiplied by 12%, and so forth.

Thus, it's as simple as 1-2-3. (1) Time invested is one of the three important factors in determining how much we have 'socked away' when our earning days are over. (2) And how we invest our savings during those earning years is of critical importance as well. That's why I have long invested in a portfolio of blue chip dividend paying stocks. (3) And having a habit of spending less than we earn is the final crucial piece. Otherwise we won't have savings that we can invest for the long haul.

Today gas prices are low, and Americans are enjoying these savings at the pump. In addition, many consumers aren't spending all of that 'windfall' but instead are wisely paying down debt and increasing savings. In the end, that's a good thing, even though it will cause our economy to perform at a lower than historically normal pace for now. See U.S. Retail Sales Fell 0.8% in January which is subtitled 'Shoppers Show Restraint in Spending Gas Savings.'

Meanwhile, 70% of American families walk a 'financial tightrope' has this to say about the unfortunate plight of far too many heavily indebted American families:

"The Great Recession may be officially over, but American families’ finances have not recovered.

The majority of American households (70%) face “financial strains” on income, expenditure and/or wealth, while 55% of families are “savings-limited,” meaning they can replace less than one month of their income through liquid savings, according to The Precarious State of Family Finances ....

And while employment earnings grew 22% for the typical worker between 1979 and 1999, it’s changed little in the past decade, and between 2010 and 2013 stock ownership fell for all but the top 10% of earners. . . .

Despite household spending falling back to levels not seen since 1990, fewer than half of American families still report being “income-constrained,” which means they reported household spending greater than or equal to their monthly income.

Debt is also a growing problem. Some 8% of households are “debt-challenged,” facing monthly payments equal to 41% or more of their gross monthly income . . . . And the percentage of households with problematic debt levels — typically measured as greater than 40% of their gross monthly income — hit 9.2% in 2013 for households headed by people 55 or older, up from 8.5% in 2010 . . . . Their debt levels reached 65.4% of gross monthly income in 2013, up from 63% in 2010 and 54% two decades ago.

And many baby boomers are feeling the pressure of large mortgage repayments. . . . The debt levels among those with housing debt have obvious and serious implications for the future retirement security of these Americans . . . . Debt levels drop significantly for senior citizens who bought their homes before the housing boom.

Summing Up

Too many adult Americans of various ages have too much debt.

This is true for both young people with burdensome student loans and old people who still carry burdensome home mortgages.

And it's true for the 'in-betweeners' as well, in the form of still outstanding student loans, heavy credit card balances, underwater auto loans, home equity loans and underwater home mortgages.

This will take a few years to work itself out. In the meantime, our economy will be slower than otherwise and employment levels will be lower as well.

It's a good thing energy prices are relatively low. Why our 'Dear Leader' won't approve the Keystone pipeline and wholeheartedly support a domestic 'Drill, Baby, Drill' policy leading to energy independence and a stronger economy is simply beyond my ability to comprehend -- except for politics, of course.

That's my take.

Thanks. Bob.

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