This is part 2 in a series that playfully examines several financial lifestyles commonly observed by the Cash Cow Couple. Read the first part here – Part 1 (The Borrows).
On Wednesday, we looked at Bob and Bianca Borrow’s story. You may recall how the Borrows treated credit cards like free money, charging everything to the max. You may have thought to yourself – “I’m not like them! I live within my means and only buy what I can afford!”
Fair enough, let’s consider an alternative…
“We spend less than we earn!”
– Carl Consumer
It is true that most folks are more responsible than the Borrows. Perhaps your lifestyle more closely parallels that of Carl and Connie Consumer. While the Borrows clung to their credit cards, the Consumers can’t get a big enough paycheck. Instead of borrowing to the max, Carl and Connie spend almost every penny of their combined net incomes. They look at their take-home pay, commit that number to memory, and make sure not to spend more than what they earn! The Consumers think they are doing quite well, “living within their means.”
Like “everyone else” they know, Carl and Connie can’t afford to pay cash for major purchases such as a home, a new car, or that new pool they’ve been wanting for years. I mean, they’ve worked hard and saved up a down payment. What else can be expected?
When discussing these major purchases, the buying decision usually boils down to the magic question: “Can we safely afford the monthly payment?” As long as money earned exceeds money spent, why worry about the details?
They never stop to consider how much they’ll pay in interest on top of the purchase price or worry about how quickly they can pay off the loan in full. Such details are boring and best left to nerds and financial professionals. If they can comfortably swing the payments, they’re buying the goods. Of course, they don’t need a payment plan for necessities like food or clothing. They pay for those in cash! “Remember,” says Carl, “we don’t spend more than we earn and we’re doing just fine.”
Both of their employers have 401(k) plans in which the employer provides a 5% company match on any money that they are willing to invest on a tax-deferred basis. Carl and Connie have also thought about contributing to a Roth IRA, which allow after-tax earnings to compound tax-free for retirement. But the timing isn’t quite right so they pass up the free company match and the opportunity to build wealth and minimize taxes.
Of course, they would like to save and invest, but there are far too many things they need right now:
A newer car (because that 2007 model has too many miles at 60k and is likely to break down soon – plus it looks ugly!),
That new LED TV (The 3-year old LCD doesn’t have wifi to stream Netflix and the picture isn’t quite what it once was…),
A new iPad (That retina display just tickles the eyes, don’t it?)
The latest iPhone (How can I use that old 3GS,4, 4S model? The camera is blurry and it refuses to run more than 5 apps at a time!)
A family cruise (It’s time to reward the children for excellent grades and the adults for working so hard).
Unfortunately, the Consumers are working for their dollars instead of letting their dollars work for them. Although Carl and Connie believe they own their finances, the truth is that they are slaves. Like the Borrows, a job loss, accident, or illness could lead to a complete financial meltdown. Without a cash cushion and a long-term plan for achieving financial freedom, they will be unable to successfully retire until a very late age. In fact, they may never be able to retire if Social Security goes poof. The Consumer’s are slaves to a full time job or a government bureaucracy.