Jaspreet Singh: Why ‘Fake Rich’ Americans Are Going Bankrupt

bernardbodo / Getty Images/iStockphoto
bernardbodo / Getty Images/iStockphoto

Financial expert Jaspreet Singh recently posted a YouTube video explaining why “fake rich” Americans are going bankrupt. He’s using the term “fake rich” to describe people who bought high end luxury items in 2020 and 2021. During that time, it was extremely difficult to purchase items like Rolex watches and G Wagons. The housing market was incredibly competitive, as well.

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So, according to Singh, “fake rich” Americans — swept up in the scarcity of such luxury items — paid a premium for them. Then, in March 2022, the value of those types of assets started crashing. In his video, Singh explains the main reasons for those economic changes and gives useful tips on how to manage money moving forward.

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Spending Outpacing Wage Growth

While prudent people decrease their spending to make room for higher costs associated with higher interest rates, not everyone does. Singh mentions in his video that many people are still spending way above their means. He warns that this type of unrestrained spending will eventually lead to some type of breaking point. Eventually people will not be able to spend at the rate they currently are.

Once more people start to cool their spending, it’s going to have a negative effect on businesses. Business profits will start to go down, which will affect the price of assets. For the “fake rich” Americans who heavily invested in luxury assets they believed to be good investments, this will be a tough reality. It’ll be hard for them to sell their goods for what they purchased them for, let alone for a profit.

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Interest Rate Hikes

In March 2022, the Fed raised interest rates for the first time in three years. The goal of this was to curb inflation. Since then, the Fed has increased interest rates 11 times. The result of interest rate hikes has various effects on the economy. First, it impacts the supply and demand for money. When interest rates go up, there is less money circulating throughout the economy because the cost to borrow money goes up.

A higher cost to borrow money impacts business owners and individual consumers. When it costs more to get a mortgage, for example, consumers might have to decrease their spending or not invest as much in the market. The same is true for businesses. If the cost to borrow money and invest in their businesses is too high, they might slow down business growth. All of this affects the economy as a whole.

Lower Rate of Returns

When interest rates are high, it gets harder to make money in terms of profits. This can have a trickle down effect throughout the economy. For example, commercial property investors look at something called a cap rate. When the market is healthy and going strong, investors might be able to expect a 10-cap rate, which means they expect a 10% return on a property. This is typically good news, since in a healthy market they can borrow money for less than 10% and make a profit.

Now, the reality is a bit different. Singh explains that many properties now range from a 3-6 cap rate. That’s not a good rate of return when it costs more than 6% to take out a commercial loan. While that might seem like a problem only for real estate investors, it matters for everyone because it will affect the cost for housing, office space and even residential rentals. When the cost of debt outweighs returns, it will impact the value of the asset itself. This might be challenging for “fake rich” Americans who want to sell assets to improve their cash flow.

What To look Out For in 2024

Singh ends his video with some predictions and tips for 2024. He highlights that since 2024 is an election year, it brings economic uncertainty. Economic uncertainty in general tends to impact consumer behavior. The results of the election will impact the economy in a variety of ways, and it’s a good idea for consumers to stay informed.

Singh explains that most of all, consumers need to have patience — especially when investing. He urges his listeners to make prudent financial decisions. That way, they can withstand some of the ups and downs that might come from the economic landscape in the future.

“Fake rich” Americans had to deal with some harsh realities after interest rates went up and their luxury good prices went down. Hopefully, if viewers take Singh’s advice, they can weather 2024, stay patient and make prudent financial decisions moving forward.

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This article originally appeared on GOBankingRates.com: Jaspreet Singh: Why ‘Fake Rich’ Americans Are Going Bankrupt