Financial expert Jaspreet Singh recently posted a YouTube video explaining why “fake rich” Americans go bankrupt. He uses the term “fake rich” to describe people who bought luxury goods in 2020 and 2021. At that time, it was very difficult to purchase items such as Rolex watches and G-Wagons. The housing market was incredibly competitive as well.
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So, according to Singh, “fake rich” Americans were so obsessed with the scarcity of such luxuries that they paid a premium for them. Then, in March 2022, the value of these types of assets started to collapse. In his video, Singh explains the main reasons for these economic changes and offers helpful tips on how to manage your money going forward.
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Expenditures outpacing wage growth
Smart people cut back on spending to prepare for the increased costs associated with rising interest rates, but not everyone does. Singh said in the video that many people are still spending far more than they earn. He warns that this kind of unchecked spending will eventually lead to some breaking point. Eventually, people will no longer be able to spend at the current rate.
As more people start cutting back on spending, it will have a negative impact on businesses. Business profits begin to decline, impacting asset prices. This will be a harsh reality for “fake rich” Americans who have invested heavily in luxury assets believing they are good investments. It will be difficult for them to sell their products for the amount they purchased, let alone make a profit.
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interest rate hike
The Federal Reserve raised interest rates for the first time in three years in March 2022. Its purpose was to control inflation. Since then, the Fed has raised interest rates 11 times. The consequences of rising interest rates have a variety of economic impacts. First, it affects the demand and supply of money. When interest rates rise, the cost of borrowing money increases, so there is less money circulating throughout the economy.
Higher borrowing costs impact business owners and individual consumers. For example, if it becomes more expensive to get a mortgage, consumers may have to spend less or invest less in the market. The same goes for companies. If the cost of borrowing money to invest in your business is too high, it can slow down your business's growth. All of this affects the economy as a whole.
Lower return rate
Higher interest rates make it harder to make a profit. This could have a trickle-down effect across the economy. For example, commercial real estate investors focus on something called the cap rate. If the market is healthy and strong, investors could expect a he 10 cap rate. This means he expects a 10% return on the property. This is usually good news because in a healthy market he can borrow money for less than 10% and make a profit.
Well, the reality is a little different. Singh explains that cap rates for many properties are currently in the 3-6 range. Considering that it costs more than 6% to get a commercial loan, this is not a good rate of return. This may seem like an issue only for real estate investors, but it's important for everyone, as it affects rental rates for housing, office space, and even residences. When the cost of debt exceeds the return, it affects the value of the asset itself. This may be difficult for “fake rich” Americans who want to sell assets to improve cash flow.
What to watch in 2024
Singh concludes the video with predictions and tips for 2024. He stresses that 2024 is an election year, which brings economic uncertainty. Economic uncertainty generally tends to influence consumer behavior. Election results affect the economy in many ways, so it's important for consumers to stay informed.
Singh explains that consumers need to be patient, especially when it comes to investing. He urges listeners to make wise financial decisions. That way, you can withstand some ups and downs that may arise from future economic conditions.
“Fake rich” Americans had to deal with a harsh reality after interest rates rose and luxury goods prices fell. If viewers take Mr. Singh's advice, we hope they can survive 2024, be patient, and continue to make smart financial decisions.
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This article originally appeared on GOBankingRates.com: Jaspreet Singh: Why 'Fake Rich' Americans Are Going Bankrupt
