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The Absolute Worst Money Decision Millions Of Americans Are Making
A Juice reader sent us a message this week that provides the perfect segue to today’s going concern. One of the worst money decisions millions of people are making, often out of desperation. Sometimes out of necessity or perception of necessity.
Here’s what the reader, Bob, said:
Just out of college and working in Oil/IT for 3 years, my wife and I bought a starter 1800 sq ft house for $30+K with 20% down and 7.5% interest. In those years there were very few credit cards and most young working folks did not have a credit card. Big difference then and now. We bought a burger and coke with cash instead of going to the bank.
Those working for BOA had no or little clue of money back in 1971.
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Bob’s story shows how everything we cover in this little newsletter of ours ties together. In case you missed Tuesday’s email — Exciting News About Where The Juice Is Headed — here’s a summary of “everything we cover.”
So, let’s take parts of these elements, relate them to Bob’s story and tie them to the aforementioned worst money decision.
There’s a housing crisis affecting younger people and wannabe homeowners, as we have established. Long gone are the days of relatively affordable home ownership even when mortgage interest rates are high. Also long gone are the days of people paying cash instead of routinely using credit cards.
Adjacent to the housing crisis, we also track the consumer debt crisis:
Particularly data on ever increasing credit card debt. As of Q2, it hit $1.02 trillion, an all-time record. Of course, the delinquencies and charge-offs could only lag the debt number for so long.
Amid increased cost of living across the board, record high home ownership costs and mounting credit card debt, many Americans struggle to make ends meet. The lucky ones — depending on how you view these things — have or had a good job where they keep/kept a 401(k) or have money in an Individual Retirement Account (IRA). When we do our series on retirement, we dive deep into these two primary ways to save for retirement.
Except many of these people impacted by rising costs can’t let the stock market work its long-term magic. They have no choice — or at least they think they have no choice — but to dip into this tempting nest egg.
Consider some data:
In the T Rowe Price report, workers blamed increasing credit card debt as well as mortgage and car payments for their savings’ struggles. Fidelity’s data reveals that 80% of people claim “inflation and cost of living are causing them stress, and half of those say it’s causing them to be distracted at work.”
As The Fixx (not INXS!) said, one thing leads to another.
Housing is expensive. So is everything else due to inflation. You blew through pandemic savings. You’re turning to credit cards. Things have never felt more tight. But there’s that retirement account. A load of money that can provide months’ worth of personal financial breathing room while you get your ducks back in a quack-free row.
Except there’s an obvious problem with the last link in this chain of events.
Unless you qualify for an exception, you’ll likely pay income tax, plus a 10% penalty on your 401(k) distribution. Basically the same rules apply for traditional IRAs. Similar rules apply for Roth IRAs, however you can always access your original Roth contributions, though not accumulated earnings, tax- and penalty-free.
However you slice it, hitting up a tax-advantageous retirement account to help fund day-to-day life is rarely, if ever a good idea. But neither is maxing out credit cards.
A little bit of planning — such as building a formidable emergency fund when you’re financially strong — can go a long way.
The Bottom Line: Little bonus for our bottom line today.
Speaking of T Rowe Price. The company ranks third in our Trackstar database of the asset management stocks investors are searching for most.
TROW stock hasn’t done so well in recent times. It’s down -17% YTD, -15% over the last year and nearly -7% over the last five years. Even a decent earnings report did nothing for the stock last week. The company beat estimates thanks primarily to an increase in advisory fee-based income. While it’s receiving money from investors for fixed income, multi-asset and alternative products, these inflows have not offset outflows from equities.
Of course, some of this has to do with profit taking and potentially shifting investor sentiment in an uncertain environment. But we also have to think some of it has to do with what we discussed today. People taking money out of the market for cash security and, worst case, to help make ends meet.
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