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The High Cost of Our Part-Time, Ownerless Society

  November 5, 2014  |    #Eliminate Debt

Everything today is temporary, nothing is permanent.

The Throw Away Economy

Currently, in Denver CO, over 30,000 apartments are being built. Many who unloaded or had their homes repossessed during the housing crisis are now renting those same homes or similar from investors who swept them up at a fraction of their original costs.

Car sales in the US have skyrocketed to near all time highs; due to increased demand for leases.  Demand for car leases is up 26 percent to be exact. With services such as Spotify, Pandora and Apple Radio, many would-be music buyers now “rent” songs rather than own hard copies or digital versions of them.

Throw on top of all that the need to get a new smart phone every year or two, whether the old phone works or not, and almost nothing of monetary value lasts. Plan providers now offer the option to rent phones and upgrade them, as desired.

This is not surprising. The temporary is now a more valuable commodity than the long-term. Millennials have turned away from buying long-term home and instead seek temporary residence. At the same time, Millennials have turned away from car ownership and seek alternative transportation.

Much has been made of our “throw-away society”. This mentality is not new. We believe it’s exacerbated by a combination of the 2008 housing must, the Great Recession, the barely recognizable economic recovery and growing distrust of political and institutional leaders.

Why does this matter? Let’s visit Mr. and Mrs. Temporary and Mr. and Mrs. Permanent to compare the temporary mindset’s affect on buying power and financial stability.

Mr. and Mrs. Temporary

Mr. and Mrs. Temporary are in the market for a place to live. They want a small place that’s downtown. They don’t want to commit to buying a home, so they look for rentals. What only a few years ago in Denver cost $900 to rent now costs $1,300. Rental units that target recent college graduates, such as The Temporarys, are $2,000 a month. This means The Temporarys must earn $32,000 annually before taxes to cover rent.

The Temporarys need two new cars to get them from their downtown apartment to their new jobs in The Denver Tech Center. They quickly get bored of cars, so they each decide to lease one. They both just landed new jobs straight out of college and need something to show for their score. The average 2013 lease payment was $408; double that to $816 for two cars. This costs $13,000 annually of pretax income for two leased cars.

Where do The Temporarys now stand financially? This young, hip couple now spends $45,000 annually of pretax income on just their home and cars. This does not include utilities, insurance, gas and maintenance expenses.

The Temporarys don’t work in the same office and need to stay connected to each other and their friends all day. They both need new smart phones every couple of years to stay cool. We now add rental phone expenses to their budget. AT&T’s Next Plan lets The Temporarys get 16 GB Apple iPhone 6s for $27 a month with a two-year contract. This costs The Temporarys $648 over two years, not including data plans. If The Temporarys bought their phones instead of “rented” them, they’d pay $200 with a two year contract and own them outright. Additionally, they could trade-in, (sell back) their phones, and lower their overall phone-ownership costs. The Temporarys chose to rent rather than own because the smaller month payments seem more intriguing than one large payment. They spend an additional $225 annually, bringing their annual costs to $600. This may not sound bad, but what could they do with an extra $50 a month?

All totaled, The Temporarys are now spending nearly $46,000 of pretax income renting their life. This is almost equivalent to America’s $51,939 median (half above, half below) household income.

Do you see the consequence of the temporary mentality of The Temporarys? With roughly 88 percent of their income being spent on temporary goods, they are stealing from their ability to accumulate and reduce their future costs.

Mr. and Mrs. Permanent

Now consider Mr. and Mrs. Permanent. The Permanents also just graduated college and both have jobs in The Denver Tech Center. They rent a cheaper apartment than The Temporarys; $1,200 per month, because they want to save for a down payment on a house. Their apartment is just outside of downtown and requires a shorter drive to work. The Permanents buy slightly cheaper cars than The Temporarys lease with the same down payment and make the same $408 monthly car payment six years. True, they did have to purchase slightly less expensive cars, but The Permanents own their cars after their payments are complete. All cars sit in the same parking lots and garage spaces most of the day. In addition, The Permanents buy their iPhones after saving $200 each rather than “rent” them.

Remember, the goal of the Permanents is to save for a down payment on a home. They save all the money they don’t spend in just these three categories. What’s the difference?

The Results Are In

Let’s use a six year time horizon. For one, it works well with car leases that are typically 36 months. Additionally, it works well with two year phone plans. Take a look at the below chart.

As you can see, The Permanents are better off. Not only do they have $65,000 that they can use for a 20 down payment on a $320,000 home, but they also fully own two cars. The Temporarys are now ready to lease their third round of cars.

Not only are The Permanents in a better financial situation, they’re also better supporting the economy. When individuals and couples buy homes, they add value to the economy. They can take more risks, such as accepting better paying job offers, and purchase more durable goods, such as dishwashers and stoves. Without permanency, the money current and future generations earn will continue to be siphoned to investors who build more apartments, loan leased cars and invest in the AT&Ts of the world. This keeps Americans in a cycle of temporariness and never lets them truly get ahead.

6 responses to “The High Cost of Our Part-Time, Ownerless Society

  1. Glad you guys tweeted this one out from the archives! Love this whole set-up, and understanding the way that people’s decisions are changing — not for the better!

    In defense of Spotify, though — for us, as rabid music fans, we save TONS of money using Spotify instead of buying music. For $10 a month, we can listen as much as we want, on all of our advices. We used to spend more like $100 a month on CDs and iTunes. This is a case of renting that we think makes a lot of sense, and we still buy the few albums that we know we’ll always want access to. We’re also big fan of the types of rentals that are share-based: car sharing, bike sharing, etc. Those services reduce the overall need for new stuff to be produced, which is definitely a positive thing, and spares people from having to buy something they might only need once in a while.

    1. Our Next Wallet, thank you for the perspective. It is good see another side of the argument that we are not necessarily thinking about. I see more an more people using car share services. I think it all depends on your lifestyle. Living in the urban core it may make sense. Living in the suburbs or exurbs it may not.

      I am tempted to check out Spotify, but I guess for now I am OK with podcasts by DJs I really like or buying the occasional song. There are so many options out there now. Just have to find the right one for you.

  2. Good Post. If we just attempt to modify a behavior it can yield better results. By owning more things in this example it helps save more and allows a sense of ownership.

    1. We agree with you. The sense of ownership does two things. It helps give evidence of our hard work and it also prevents us from needing to constantly recycle the things we have “purchased” through renting.

  3. Great article and very straight forward analysis. It is funny, you sometimes forget about the long term consequences short-term transactions such as leases and renting. Especially if you cannot strike a great deal that gives you enough of a benefit upfront . For me, I’m lucky enough to know my landlord and it pays to rent at my age versus buying. However, without the connection, it wouldn’t pay to rent.

    Thanks for putting this together and tweeting it at us!

    Bert, One of the Dividend Diplomats

    1. All of our situations are unique. We need to take a pragmatic look at them and make sure we’re doing what’s best for us in the long-term, not short-term or temporarily. Thanks for reading and commenting!

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