Watch out. That may be your affluent lifestyle going down the drain.
By Adrian Spitters and Win Wachsmann.
‘Daddy! Daddy! Jenny’s family just got a new van.
’Uh huh.
’They’re going to take it to Disneyland for a two week holiday.
‘Daddy, when are we going to Disneyland? Can we get a new van too.’
Just what you wanted to hear, right?
And didn’t he just get a new ski boat as well?
And he has been bragging about his new 62 inch HiDef TV that shows the pimples on the hockey stars’ faces..
He works as a truck driver and his wife works in a daycare.
They’ve got about the same expenses you have.
How can they seem to be doing so much better than you?
Did they just get an inheritance?
Or is the difference really just a matter of perception and priorities?
Do they have an active savings program like you do?
Are they putting money aside for retirement?
If they are like most Canadians, their credit cards are maxed and their line-of-credit at the bank is nearing its maximum.
And their retirement plans? Very small, perhaps company based and earning less than the rate of inflation every year.
Why? … Priorities!
Instant gratification. I want to have fun now! Tomorrow will take care of itself, right?
And debt? We ‘ll get around to paying it off … eventually.
Don’t you feel like a stick-in-the-mud? You would like to go on nice vacations with your kids. Birch Bay is nice but six people in a small cabin in the rain just doesn’t compare to Anaheim or the Santa Monica pier in July.
Someday sweetie, we’ll go for a trip to Disneyland and Universal Studios. Yeah! Right!
As Dr. Thomas J. Stanley, author of The Millionaire Next Door and Robert Kiyosaki, author of Rich Dad, Poor Dad point out, people who spend on lifestyle goods such as expensive new cars, nice homes, fashionable clothes, expensive and frequent vacations and material things are living a rented lifestyle. Instead of building wealth, your neighbours are building liabilities, and that is a dangerous mindset to have.
Did they buy their home with a minimum down payment and are they carrying a very large mortgage? Did they buy their cars, electronics and recreational toys on a payment plan, their vacations and clothes on credit? How much interest are they paying each month on their cards?
Affluent Lifestyles
Even though your neighbours’ incomes may have remained relatively flat, over the past decade you know their cost of living has increased dramatically. How are they keeping up with their affluent lifestyle? To maintain their lifestyle, many of your neighbours have been borrowing against the rising equity value in their homes, at increasingly cheaper interest rates. This allows them to carry greater and greater debt without significantly increasing their monthly payments.
In reality, many of your neighbours are now probably tapped out, carrying historically high levels of debt. Canadian household debt now stands at 163.4% of disposable income. This is significantly higher than Americans carried just before their housing market collapsed in 2006. Your neighbours have become payment focused instead of debt focused and believe as long as they can maintain their payments they will be fine.
With interest rates at all-time lows, housing prices at all-time highs and Canadian household debt at all-time highs, your neighbours may not be prepared for an unstable future. As interest rates begin their climb back to their historical average of 6% - 8%, house prices and values will decline.
Will we avoid the American experience? (so far we have)
I believe that we are no different from the Americans. With Canadian household debt now exceeding American household debt and Canadian home values exceeding American home values that peaked in 2006, Canadians may be repeating the American experience.
Your neighbours may experience a dramatic decline in their home values as more and more boomers try to sell their homes. The phantom equity against which they borrowed in order to maintain their rented lifestyle will be reduced significantly resulting in the destruction of their perceived wealth and affluent lifestyle.
If not and they have been prudent or they did receive an inheritance then great! If not, they may well be forced to downsize and retire much later than planned, because they lived for the moment and did not prepare for a secure retirement.
By Adrian Spitters and Win Wachsmann
Adrian Spitters, FSCI, CFP, FMA
As a Certified Financial Planner (CFP), Adrian Spitters offers financial advice that focuses on investments, retirement, business succession, estate and tax planning in cooperation with his clients own legal and accounting professionals.
He can be found at www.theretiringboomer.ca
Win Wachsmann
Win Wachsmann has been helping businesses improve their marketing and helping them get ready to sell their business. He doubles as an author, journalist, syndicated columnist, filmmaker and businessman who makes his home in the Fraser Valley of British Columbia. His articles and columns can be found in some of the finest offline and online magazines, journals and media properties.
He can be reached at win@wachsmanncommunications.com.