By: Rick Newman
January 6, 2012
How to reclaim the American dream
Elusive prosperity will be the dominant theme in this year's elections. President Obama maintains that his policies have helped a badly wounded economy start to heal, and that re-electing him will continue the rehabilitation. His Republican opponent is sure to argue that Obama's medicine has been ineffective, with more drastic measures needed. With many voters still reeling from a brutal recession and a decade of sliding incomes, the debate will be personal and intense.
The best proxy for prosperity is the so-called American Dream, which many commentators declare to be dead, dying, decaying, or simply imaginary. There's no arguing that over the next few years, many Americans will have a harder time getting ahead and providing the middle-class comforts they've come to take for granted. But it's premature, if not silly, to claim that Americans have lost the ability to improve their fortunes, move up in the world, or purchase a comfortable home, which is often considered the cornerstone of the American Dream. The United States still provides more economic opportunity than almost any place else in the world, even if the bar for success has gotten higher.
What's different is that the economy changes quickly and dramatically these days, and how well you adjust to those changes is one of the key factors that will determine who gets ahead in the future. Planning on one long career in a single field, for instance, is wishful thinking. Staying in one place for 30 years may severely limit your opportunities. The 40-hour workweek is probably a thing of the past, at least for ambitious people. Workers expecting easy promotions and automatic advancement aren't entitled to nearly as much booty as they think. But strivers who hunger for success can still attain it, as Americans have all throughout the nation's history, in lean times as well as flush. Here's how to reclaim the American Dream:
Redefine it. There's no fixed definition for the American Dream. The concept clearly evokes the "unalienable rights" of "life, liberty and the pursuit of happiness" outlined in the Declaration of Independence, along with subsidiary rights such as fairness, opportunity, and self-determination. Since the phrase became commonplace in the 1930s, "American Dream" has come to connote homeownership and the materialistic possessions that typically reflect prosperity. But there are plenty of ways to be successful without owning a home or impressive things. So make prosperity, not homeownership, the focus of your dream, and define it in a way that's both satisfying and attainable.
Focus on financial security, not material things. In polls conducted by the Pew Charitable Trusts, more than 80 percent of Americans said that financial stability is more important than being "wealthy" or "rich." The housing bust and recent recession also made clear that millions of American were living on borrowed money that supported a lifestyle they couldn't really afford. So spend money only on what you really need, while saving as much as possible. Anybody who has lived with onerous debts knows that peace of mind is worth a lot more than nearly any amount of stuff.
Know your vulnerabilities. More than 20 percent of Americans experience a major economic loss every year, according to an "economic security index" developed by Jacob Hacker of Yale University. That's up from about 14 percent in the mid-1980s. The two biggest causes of financial stress are a sudden job loss and a medical emergency not covered by insurance. Anticipating what can go wrong can help prevent make-or-break events that are often hard to recover from. Excessive optimism, by contrast, might keep your spirits up temporarily, but it can backfire if you foolishly assume that everything will work out, without any special effort.
Stop counting on government. Far too many Americans depend on the government for a paycheck, a subsidy, or healthcare, and the government won't be able to afford all of that largesse much longer. Politicians in Washington will most likely protect key programs like Medicare and Social Security. But basic accounting dictates that benefits must be reined in, and overall government spending must shrink. Taxes are likely to rise, too--for most Americans, not just the wealthy--with fewer deductions. With luck, these sorts of changes will be phased in slowly. But Americans should prepare for a less-generous government, and most of all they shouldn't count on Washington to create or guarantee jobs. One way or another, self-sufficiency will be far more important in the future.
Invest in education...One thing that hasn't changed is the value of education, which is still strongly correlated with higher career earnings and more overall success. Well-educated parents also tend to have well-educated kids, who in turn end up more successful. But with many schools cutting back, parents need to get more involved in their kids' education by monitoring homework, researching scholarships and enrichment programs, exploiting online resources, and spotting problems early instead of relying on an overworked (or nonexistent) guidance counselor.
...But treat education like an investment. College pays, but with a thin job market for grads, it's smart to do cost-benefit analysis to estimate the best return on education dollars and make sure you don't end up saddled with an overwhelming amount of student-loan debt. For many students it might make sense to work while in school, to lower the amount of student loans you'll need, even if that means stretching out your coursework. Anybody interested in highly competitive or low-paying fields like the arts, teaching, or social work should limit loans to what they'll be able to pay back on a meager salary. Private schools may seem more prestigious, but it's worth analyzing whether the higher cost seems likely to lead to a better career than a cheaper public school. And students on a tight budget should consider community colleges or even trade schools, which sometimes offer tie-ins with local companies that can lead to jobs.
Learn constantly. This is a trite observation by now, but getting ahead is no longer a matter of getting a degree, landing a job, and then closing the books. The most successful people tend to be lifelong learners, which is more important than ever because fast-changing technology is a dominant factor in modern business. At the moment, companies are looking to hire people with a combination of traditional skills plus knowledge of social media, app development, or other types of trendy technology. In some fields, valuable skills include "soft" ones such as effective negotiation, salesmanship, and the ability to multitask, which can take years to learn and refine. If you keep learning and effectively apply your knowledge, eventually your skill set may evolve into leadership, one of the most valuable skills of all.
Save like you'll live to 110. The pressure to spend is enormous, but there's virtually no downside to saving as much money as possible. In business, companies with ready capital are the ones most able to survive ugly surprises and jump on unexpected opportunities. For ordinary folks, savings is the same as capital. Banking 10 percent or even 20 percent of your disposable income is a good habit, but if times are lean, saving anything on a regular basis is better than going into debt to fund everyday purchases. A few contrarians argue that with interest rates so low, it might make more sense to buy stuff now and save more later, when rates rise. But it's hard to break shopping habits once addicted to them, and a bigger nest egg will allow you to take prudent risks when it's smart to.
Stay healthy, or get healthy. Some illnesses and accidents are unavoidable, but more than 60 percent of Americans are overweight and many others smoke or do other risky things. There's no better way to jeopardize future prosperity than to gamble with your health. Medical emergencies are one of the leading causes of personal bankruptcy. Even for people with robust insurance, it's hard to get ahead if you're routinely sick and out of work, or laid up with a disability. Success these days requires energy and longevity, which are easier to muster the healthier you are. For those who can't get affordable insurance, it's even more important to safeguard your health.
Have fewer kids. It might sound draconian, since Americans value family very highly, but raising children is obviously expensive, especially when it comes to education. Some economists think that many families overspend on housing because of the need to live in a good school district where homes cost considerably more. That may have contributed to the housing boom and bust that has now left nearly 25 percent of all mortgage holders owing more than their properties are worth. And the cost of childcare can sometimes negate much of the income a second working parent pulls in. Parents often discover these strains while trying to juggle kids and work both. Better long-term planning might ease the burden.
Move. It's crucially important to be where there's opportunity, and these days, there are too many places with a surplus of me-too workers and a scarcity of good jobs. Moving can be daunting, especially if you're underwater on a mortgage and it would cost money to sell. But staying put can be worse, especially if it consigns you to a stagnant economy with little upside. To figure out where there might be more opportunity, research future trends in your field. New York Times columnist Tom Friedman argues that the economic "ecosystems" of the future will be places that "combine a university, an educated populace, a dynamic business community and the fastest broadband connections on earth." Some of those places will be overseas. If you're floundering but moving seems intimidating, keep in mind that America was built by pioneers willing to go wherever necessary to find their fortune. Many people are still willing.
Develop two careers. Yeah, it sounds exhausting. But businesses go in and out of favor faster than ever these days, and even a part-time hobby might help secure a bit of income if your first career choice goes poof. At a minimum, develop a backup plan in case your company becomes the next Blockbuster, Border's, or Kodak. Waiting until everybody else is jumping ship probably means you've missed the rescue boat.
Buy a home. For all the problems with housing, buying a home may once again be a sensible way to build wealth, since prices have fallen dramatically and interest rates are at record lows. Make sure you've learned all the vital lessons of the last few years: Buy for the long term, not for a quick profit. Buy less than you can afford and make sure you still have a rainy-day fund. Don't count on home equity to fund much of anything in the future. But don't be overly reluctant either, especially if you can afford to buy. And if you can't, keep saving and keep trying. Banks are gradually loosening their lending standards, and it's likely to be a buyer's market for a while.
Build wealth without owning a home. Many people have reconsidered the old wisdom about making a home the cornerstone of their wealth, and decided to rent instead (or had the banks decide that for them). There's nothing wrong with renting, but it may require a more deliberate strategy for building long-term wealth, since rent payments don't automatically earn equity in anything. If you're a renter, it might make sense to have a portion of your paycheck automatically deposited into an investment account, which you manage according to time-tested rules, such as diversifying, investing consistently over time, and not trying to time the market. And do your best to keep the rent down--perhaps by negotiating a discount in exchange for a bit of routine maintenance, for instance--to make saving a bit easier.
Embrace discomfort. Many people stagnate because they're unwilling to step out of their comfort zone. And financial stressors like unemployment or a heavy debt load can make a shallow rut deeper. But making comfort or convenience your top priority can be the deadliest move of all, because it induces complacency and provides an excuse to slow down. Many of the most successful people today work punishing hours, spend too much time away from home, and hustle all the time--because that's what opportunity demands. Millions around the world envy them.