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By mjuarez
June 23, 2003

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

After my first post on this board,

I was thinking about some fundamental differences in the way Americans manage their finances, at least compared to Latin Americans, and the way in which this affects their life and standard of living.

Generally speaking, the United States is a rich country. By rich, I mean the average American doesn't have to worry about what he will eat tomorrow. They usually have a roof above their heads, they're usually healthy (obesity and smoking notwithstanding), and have a reasonably tranquil lifestyle.

Over the years, and partly because of the country's prosperity, the US has slowly transformed itself into a consumer society. This has created some rampant traits among the American population, mostly the young (20-35 years old), which run counter to the principles extolled in this board.

I'll detail these traits below, along with comparison on the way Latin Americans see it. I don't pretend to have a general understanding of the American and Latin American ways of living, so this is in no way authoritative. However, I think that I can look at these topics from a different perspective than most.


Cars:

There is a fascination with cars. New cars, mostly. In a way, in America, a car is an indicator of social status. The job you have, the town you live in, even your acquaintances' way of life affect directly the car you will drive. And, the fact that credit facilities are so freely available to any adult usually leads people to buy new cars. As I read in Kiplinger's a few years back, "in America the only thing you need to buy a car is to be able to fog a mirror."

Further, old cars are usually treated with disdain. I was amazed when reading some comments a couple of years back, when a woman was referring to her 1996 Honda Civic as an "old car". A couple of mechanical problems are usually enough for most people to start looking for a new car. They think that the car is getting "too expensive to maintain", so, instead of spending $500 once to fix the problem, they prefer to trade up to a new car, usually losing anywhere from $5,000 to $20,000 or more in the process, between depreciation and new car expenses. And they do this every few years. A high percentage of middle and high class Americans buy new cars, routinely, every two or three years.

Most modern cars, even the cheap ones, are designed to last for at least 10 years, with proper maintenance and occasional repair of worn-out parts. I know this, because in Guatemala, you can often see cars between 20 and 30 years old on the streets. They may not have the latest gadgets or most powerful engines, but they work. In fact, most of our "new cars" are imported from the United States. They are the cars somebody crashed in the US, and were sold for $500 as junk, or perfectly good cars which are 5 or 6 years old, and sell for as low as $2,500. There is a whole industry sprouting around these cars, which are usually sent via ship to Guatemala, repaired if needed, and sold for a significant profit.


Homes:

A home is a necessity. I think we can all agree on that. No one wants to live forever on rented property, subject to landlord whims and ever increasing monthly payments. Having a home, which no one can take away from you, even if you don't have a job, gives one great peace of mind. It's a place for you to relax, your very own corner in the world, where you know you and your family will be safe. (By the way, the notion that the government can take your house away if you don't pay property taxes is just plain wrong, IMHO. In Guatemala we do have property taxes, but if you don't pay them, they simply accumulate, probably along with fines, until you want to sell your home. No one can take your house away once you've paid for it. But, I digress.)

The place where Americans think differently is on the fact that they look at their home as their own personal bank. Even before fully paying for their homes, they look to "home equity loans" for additional cash when they decide they just need to buy something. Again, this is usually caused by the consumer society they live in. Home ownership is, effectively, given to the bank until they repay the loan. So, they still live in it, but it's not their home anymore. At least, not until they've paid every last cent they owe to the bank.

And whenever property values go up, people usually apply again for another "home equity" loan, to (get this) "take advantage of their home equity and low interest rates". Usually, it is the bank that will take advantage of them! Granted, tax rates are at their lowest in 40 years, and will be like that for the foreseeable future, but this should not be a reason for getting a mortgage.

Finally, the tax break the government gives for mortgage payments, which is one of the main reasons for taking out mortgages, is illusory. Can somebody explain to me why is it better to pay $1,000 to the bank for mortgage payments, instead of paying $400 to the government for taxes on those $1,000?

By the way, that $1,000 you're paying to the bank only gave you about $500 in money to spend, once you take all interest and expenses into account. (After 30 years, a typical $100,000, 30 year, 5% mortgage loan ends up costing $195,000, ignoring inflation).

On top of this, most Americans do not usually stay still after buying a home. According to US banks, the average American buys a house every 7 years. Usually, trading their old home for a bigger/better one. They also see it as normal. The practical effect of this, which many might not even notice, is that they're paying all their lives for their house! They follow, unconsciously, the original etymology of mortgage, which means "pledge to death".

As a means of comparison, the average Latin American sees their home as sacred. It's one of their major objectives in life. The first house a Latin American buys is typically their last. With interest rates starting at 12%, going all the way to 30%, and average annual salaries below $2,000, it's a one-in-a-lifetime purchase, even at an average price of $30,000 (way below the average of $235,000 in the US). By the way, Guatemala doesn't have such a thing as a "tax break" on mortgage payments.

After going to great lengths to pay it in full, a house is never seen as a way to obtain money. It is always regarded as one's only real, tangible property, and the only inheritance most parents leave to their children when they pass away. As such, it is not something to risk, even when there is great need. Most of the time, people sell their cars or other belongings before even thinking about mortgaging their house. There is no equivalent to a financial market in most of Latin America, so a house is probably the only "investment" they ever make. And, as such, it is not to be risked.

Credit Cards:

This is one of the most interesting contrasts, in my opinion. It seems the average American has between 4 and 5 credit cards. They also owe, on average, $6,000 to credit card companies, if you can believe the statistics. It's incredible how easy it is to get a credit card in the US. Americans are constantly bombarded by new credit card offers, or even new credit cards in the mail out of the blue. And, the ones they already have are constantly raising their credit limit, to entice them to continue spending. It's not uncommon for people to have over $25,000 in credit limit on their credit cards, combined.

Having all this credit at their disposal, the average American starts to charge all their expenses on the cards. Figuring they'll be able to pay it off later, they don't stop to think if they really need what they're buying. TV, magazines, and advertisements everywhere, enticing them to purchase and spend, along with their unchecked desire for "a better lifestyle" only worsen the problem. To top it all off, when the credit card statement arrives 1 month later, they take a look and it says clearly "Minimum payment: $60". So guess what? That's exactly what they do: Pay the minimum. Ignorant of the fact that that's exactly what the credit card companies want them to do.

They continue spending away. After six months of shopping, they get a notice from the credit card company, telling them that because they are such an "exceptional customer", they have given them another $1,000 in credit. So, they continue spending even more. And paying only the minimum, which starts to slowly creep upwards.

Life is good. Time passes. Years later, when they have a financial emergency (lose their job, unexpected illness, other expenses) they suddenly don't know what happened. They have $40,000 in credit card debt, which coupled with their mortgage (which they probably also have), makes them suddenly faced the possibility of defaulting on their credit card debt and losing their home.

The sad part is, they look around them, and usually have little or nothing to show for their $40,000 in credit card debt. Probably most of it was spent on useless stuff, which did nothing to enhance their long-term financial well-being. It is only then, however, that it finally hits them. They've been over-leveraging themselves all these years. They were living "on the edge", so to speak. Just one paycheck away from financial disaster. At this stage, however, few options are available, short of bankruptcy.

As a culture, in general, Latin Americans dislike debt. They don't feel comfortable with owing money. Most normal transactions are done with cash. It is only in recent years that people have started using credit cards. Debit cards, which are much more recent, are overwhelmingly popular, when compared to credit cards. As a general rule, people like to pay with cash. Even the ones who use their credit cards tend to pay the full amount at the end of the month. It is only a minority which carry balances on their credit cards.

Interest rates for credit cards range from 24% all the way to 60% on some cases. This may be unheard-of in the US, but is normal in Latin America. Of course, credit card companies don't go around touting their "low" 24% interest rate, they advertise a 2% rate, which is the monthly rate. They're not lying, just not telling the complete truth.

Finally, getting a credit card is not easy. A normal credit card application always requires coming up with a co-signer, who has to earn as much, or better, than one does. You also need to have been working for at least 1 complete year for your current employer. An income certification from your employer is required, along with your 3 most recent bank statements. And all details of your bank accounts, including balances. After getting your credit card, any additional credit limit you may need requires filling a completely new application again. Credit limits are very rarely increased by the credit company automatically.

All of the above makes it very difficult for the average Latin American to get their own credit card. Even if possible, most people simply don't want to go through all the paperwork required. Of course, there is not as much pressure to consume as in the US, so this makes credit cards less "necessary".

Finally, most Latin Americans are wary of giving out too much personal information, since kidnappings, extortion and white-collar crimes are so common. They prefer to stay "out of the radar" of these criminals, reducing the possibility of becoming a victim.

One very interesting side note is that there is no "bankruptcy" equivalent in Guatemala. I was surprised when I learned there was a possibility to "pardon your debts" in the US, and give you a fresh start. Yes, it's a huge hassle if you do it, but it's possible. In Guatemala, and probably most of Central America, there is no way to get out of your debts. Once you ring up debt, it's yours forever. Until you pay it somehow. Or you end up in jail, whichever comes first. And believe me, you do not want to end up in jail in Guatemala!


Final Words

Not much to add really. I hope I didn't bore you to death. Along the way, maybe you gained some insight and perspective into some of the "unhealthy" attitudes to financial management that are so common nowadays in America.

Marcos


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