I have been watching the British series Downton Abby. After surviving WWI, the family has now discovered that bad investments and overspending have left them unable to maintain their standard of living. Sound familiar? Many of us are living next door to such folks (or were until the bank foreclosed on them). Others reading this ARE them.
After surviving the depression and WWII, that generation (parents and grandparents of baby boomers) used the technology incubated by the War to build a thriving, inclusive society where poverty dropped and both incomes and assets (as a percent of the total) shot up for the “middle class”. More importantly, that generation, not baby boomers, enacted civil rights and affirmative action legislation that led to a black president and a female house speaker. People over 75 lived thru and participated in this blossoming of America that did, indeed, lead to affluence for baby boomers. So, when they tell you there are things worth conserving, you had better listen. Baby boomers haven’t even been able to maintain the standard of living their elders left them, let alone build on that legacy. Ninety-five (95%) percent of Americans have lost ground in the last 30 years. “If the median household income had kept pace with the economy since 1970, it would now be nearly $92,000, not $50,000.” [Mother Jones, 2011] Even those who are at $92K have lost ground to inflation. What did these elders do differently?
It seems to be an axiom that many of the people who earn wealth understand how to manage their assets. Those we admire most, such as Warren Buffett, recognize how important it is to resist the urge to squander assets on bling, baubles and toys and instead to use what they have as a basis to build an even better future. Contrast that attitude to super athletes and rock stars whose ability to spend more than they make astounds normal people. Do you know of any lottery winners who’ve actually invested their gains into growing a successful enterprise? So too with large numbers of baby boomers whose affluent parents provided a childhood with too few no’s, a top tier college education and introductions to influential power brokers at work. We could sum it up to say that the vast majority of humans give in to the tendency to use unearned wealth for the instant gratification of more consumption. Wealth-builders, on the other hand, always dedicate a significant portion of their assets to growing the future.
So, one might ask, what is it that our working class elders who have not squandered the assets they worked so hard to build have to tell us? Like Buffett, they live in modest homes and drive practical cars. Yuppies in their McMansions and luxury SUVs (with the accompanying debt) should be embarrassed to know that the net worth of these modest, working class elders is several times theirs. Why? Because they never spent it on things they didn’t need. We, their children and grandchildren, will probably be grateful that they can’t take it with them.
Not to worry boomers; we are punishing these prudent savers. With interest rates significantly below inflation, they will soon be as poor as the rest of us. Buffett suggests they should [have] put their assets in the stock market using dollar cost averaging. Unfortunately, Wall Street manipulators have made the risk much too high for this to be practical advice for anyone over 50. All the upside goes to the manipulators and all the risk to small investors. Stocks, too, are losing ground to inflation. From 1950 to 1970, our elders created wealth with minimal inflation. When boomers began to influence the economy in the 70’s, demand-induced inflation ate every gain and in 1980 Dow and S&P stocks were worth about the same as they were in 1950. Regan introduced an artificial bubble with two decades of supply-side economics (read using debt to splurge on low-quality, low value bling). In the last decade, stocks have not kept up with inflation. In addition, real dollar volatility has been increasing since 2000. The next generation, even more prone than boomers to spend instead of save, is not doing better.
The next time you buy something, ask yourself – Am I increasing value here or just indulging in mindless consumption? Buy only the highest quality (NOT the most prestigious) asset you can afford. Invest in your future with energy conservation in your personal environment. Live more simply and take the excess to the nearest thrift shop where you can invite others less affluent to purchase what they actually need at the lowest cost. Set a better example for your kids and grandkids. Deferred gratification is the missing ingredient. Start practicing it now!