It is going to be a long chapter because u won't be able to get what the author wants to tell just by the main line . So here u go...
How the Quest for a Financial Dream Turns into a Financial Nightmare.
The classic story of hardworking people has a set pattern. Recently married, the happy, highly educated young couple moves into one of their cramped rented apartments. Immediately, they realize that they are saving money because two can live as cheaply as one.The problem is the apartment is cramped. They decide to save money to buy their dream home so they can have kids. They now have two incomes, and they begin to focus on their careers. Their incomes begin to increase.
As their incomes go up, their expenses go up as well.
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T
he number-one expense for most people is taxes. Many people think it’s income tax, but for most Americans, their highest tax is Social Security. As an employee, it appears as if the Social Security tax combined with the Medicare tax rate is roughly 7.5 percent, but it’s really 15 percent since the employer must match the Social Security amount. In essence, it is money the employer can’t pay you. On top of that, you still have to pay income tax on the amount deducted from your wages for Social Security tax, income you never received because it went directly to Social Security through withholding.
Going back to the young couple, as a result of their incomes increasing, they decide to buy the house of their dreams. Once in their house, they have a new tax, called property tax. Then they buy
a new car, new furniture, and new appliances to match their new house. All of a sudden, they wake up and their liabilities column is full of mortgage and credit-card debt. Their liabilities go up.
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They’re now trapped in the Rat Race. Pretty soon a baby comes along and they work harder. The process repeats itself: Higher incomes cause higher taxes, also called “bracket creep.” A credit card comes in the mail. They use it and max it out. A loan company
calls and says their greatest “asset,” their home, has appreciated in value. Because their credit is so good, the company offers a bill-consolidation loan and tells them the intelligent thing to do is clear off the high-interest consumer debt by paying off their credit card. And besides, interest on their home is a tax deduction. They go for it, and pay off those high-interest credit cards. They breathe a sigh of relief. Their credit cards are paid off. They’ve now folded their consumer debt into their home mortgage. Their payments go down because they extend their debt over 30 years. It is the smart thing to do.
Their neighbor calls to invite them to go shopping. The Memorial Day sale is on. They promise themselves they’ll just window shop, but they take a credit card, just in case.
They don’t understand that their trouble is really how they choose to spend the money they do have. It is caused by financial illiteracy and not understanding the difference between an asset and a liability.
