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Carrying Consumer Debt Is The American Way.

In case no one noticed, there is a continually growing debt problem here in this country, especially with the economy the way it is. Americans are putting themselves further into a hole that while it seemed shallow at first, continues to get deeper and deeper the longer unpaid debt racks up interest. There is approximately $2.5 TRILLION in outstanding consumer debt on mortgages, credit cards, auto loans and student loans. That number almost seems fake and I think that is what contributes to the American attitude towards debt; the “we can handle it” syndrome. Well, guess what…we can’t anymore! Here are some of the reasons I think why we are in this sinking hole and how all this debt is going to hurt even more in this economy.

CREDIT CARDS

The average credit card balance in this country is between $6,000 to $9,000, which is normally carried over from month to month, with only minimum payments being made. I think most credit card debt comes from two things….the first one being the “keeping up with the Joneses” routine that is fed into by television, celebrities, movies, music or those glossy magazines on your coffee table, and the second being the high unemployment rate we are facing right now. While the latter cannot be necessarily helped, the former can be. Too many people just say “I will pay with credit! We can pay for them over the next 10 years! I needed the plasma television because my neighbor got one!” Credit cards are great if they give you a reward for using them and you pay off the balance every month. Otherwise they can be a world of trouble, and they might not even be useful as an emergency backup anymore, with credit lines being slashed.

MORTGAGES

I lived in Los Angeles, home of the $850,000 1 bedroom fixer-upper, and yet people were still buying houses when I left. Of course, they were getting interest-only loans for 5 years or ARM mortgages and helped contribute to the decline in the housing market, but hey – “look at my house!”. Just being able to BUY a house does not mean you can AFFORD a house. Overextending yourself just to say “I bought a house” is not the smartest thing in the world, and while you might have a roof over your head today, tomorrow morning you may wake up outside in a tent because the bank came calling and they want their money. Honestly, $850,000 for a fixer? Renting looks more and more attractive every day, and you can just pack up and walk away if need be. I hope this collapse of the market fixes some of these problems, and banks do their job and stop loaning money to people who cannot pay it back.

AUTO LOANS

This one is a tough one, because car prices themselves have gone WAY up in relation to our salaries. I remember when I bought a Volkswagon GTI in 1992..it was $12,000 dollars. And that seemed like a lot back then! But now, a new GTI will cost you about $20,000 – $25,000 depending on options. So, less and less people can actually afford a new car…yet they still buy them. Six year loans, 7 year loans, no money down. Auto dealers and manufacturers are always coming up with new ways to “Get you into that new car today!”…and then you are paying $500 a month for a car that lost $10,000 in value the minute you drove it off the lot. You now are going to have to pay for 6 years in order to pay it off. That being said, its also the consumer that decides that he or she needs the BMW or Mercedes when a Honda or Toyota does the same thing. Its that “Joneses” mentality again. And as for those 0% interest offers that American manufacturers are offering? Most people will not have a high-enough credit score to qualify; they are just advertised to get you on the lot and looking.

STUDENT LOANS

Education is expensive. Very expensive. And in the last 8 years, the government actually took away some low interest loans and grants so that students and their families had to pick up the entire tab. Although I think that a college education is worth the money and debt, I do think that the government should help out those that cannot pay for it all themselves, so they don’t leave newly graduated 20-somethings saddled with $50,000 – $100,000 in student loan debt.

SAVINGS

The savings rate in this country was in the negative and is only now starting to show signs of improvement. So, when an emergency comes along, people have no other choice then to reach for their credit cards, making that emergency even worse! I cannot think of anything more dangerous to your finances then not having any money saved up for that rainy day. I wrote about my brother and how his emergency fund got him through two layoffs, if you need some inspiration as to why you need one too!

What Can Be Done – I think there are several things that can be done to make sure you don’t end up owing a debtor your first born child, the first of which is to try to stay out of credit card debt. You don’t need a plasma TV, you don’t need a 2 week vacation in Australia, you don’t need a new Ipod…those are all wants. If you cannot afford to buy them with the cash you have in the bank, then you cannot afford them. Period. Concentrate spending your money on the things you need like food, heat, shelter, clothes, gasoline. Your money will go a lot further when you use it for the needs in life, rather than the wants. Live somewhere you can afford, whether that is an apartment or house in whatever city you choose to live in. There is nothing wrong with living in an apartment…if nothing else, think of the money you save on insurance and repairs. If you can actually afford a house, good for you! As for cars, again, buy what you can afford. If you are having trouble paying the bills at home, you might want to consider the Honda and put down the BMW brochure. Also, another thing to keep in mind is your car’s MPG…the more miles per gallon your car gets, the less money you have to spend to keep it running! I saw more people in LA with Hummers, living in really bad areas of town, run-down houses, etc…but yet they need their $50,000 gas-guzzling SUV. And lastly, save your money. I wrote a post a while back about paying off our debt and saving money at the same time….give it a read if you are interested in doing the same thing, it worked for us, and it could work for you.

If I can give one last piece of advice, after this long winded diatribe, it is to teach personal finance to your kids. Approximately 75% of college students have credit cards, and most of them have an outstanding balance every month. Don’t force your kids into that debt spiral that so many people get trapped in…give them the tools and advice to keep themselves level and above ground!


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Comments (8)

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  1. Wow David! This is a great post- I have to totally agree. I have noticed a difference since moving to France 8 years ago- that France is becoming more like the American consumer culture, spending and spending, needing to have the latest and best.

    I am one of those people who graduated with a ton of student debt- I do hope we figure out a way to change things before my own kids get to college age.

  2. david says:

    You moved to France 8 years ago? Lucky you! I hope they don’t become like America, there is something so very charming about their way of life. I used to travel to Nice and Cannes a few times a year for business, and thoroughly enjoyed their “way”!

  3. Austin says:

    Great post! I get flak from coworkers about buying a house- I try to explain to them we’re saving up for a downpayment, and they look at me like I’m crazy.

    A word on college: Yes, its expensive, but it doesn’t have to be ridiculous. Will the expense of a private college REALLY pay off? For most cases, the answer is no. The other thing is, many kids go to college for the party (especially for the first few years), and live off of student loans and credit cards. Working a job and applying for every scholarship you can find can make a big difference in your student loan balance when you finish.

  4. norbert says:

    agree with Austin on the Student Loan thing…

    It’s my only (non-mortgage) debt and it is very real. I wish that I had an understanding of how much it would affect my life when I took it out to begin with. I’m relatively lucky, i went to state schools and had great scholarships, but i still finished my masters degree with ~$45,000 in debt – i probably could have lived on less, had i known how much debt that REALLY is.

    Everyone always says student loan debt isn’t “bad” debt, but it still stops me from being able to do/have the things i’d like right now (like kids) without taking on some of that “bad” debt (like credit cards or car payment).

    So i’m waiting (hoping to have it all paid off in 2 years, though!).

  5. Consumer debt is a huge number, but it’s dwarfed by our Federal government’s debt of $10 trillion+ and that is expected to jump to unprecedented levels in the next few years. Maybe Americans are just following the Fed’s lead? I’m still having a problem with the line that a $450 billion deficit in 2009 is “bad” but a $1.8 trillion deficit in 2010 is “necessary.”

  6. David says:

    When Bush took office, the national debt was $5.73 trillion. When he left, it was $10.7 trillion. He doubled it in just 8 years. And not only did he double our debt, but he left our economy in shambles. Although I dont agree with everything Obama does, far from it, I think we obviously need to do something drastic and VERY different than what we did in the last 8 years. So I am willing to give him that shot.

    With these kind of dollar figures being thrown around, it’s all imaginary, printed money anyway. No matter who is in charge, we are all screwed…

  7. zach says:

    I think you touched on a lot of important points in American culture. We definitely need to tone down our consumption.

    The reason so many college kids have credit cards, is because those companies spend millions of dollars advertising on campuses. People aged 16-25 are the biggest spenders when it comes to frivolous shopping.

    Your last bit is more of a statement than advice. I think it is really easy to say, “teach your kids about finance” but you do not discuss how to teach them. What qualifies them to even teach finance? The fact that so many Americans are in debt, tells me most people are not qualified in this subject.

    Same would apply to teaching monetary theory in schools. Easy to say, but how about finding teachers qualified in the subject matter.

  8. zach says:

    David, in your comment about Bush, and our National Debt. I am by no means shrugging it off as something to be ignored or that is unimportant. I am curious what you and as well as others have stated, that we are screwed. Will America declare bankruptcy like Iceland? Will we no longer have grocery stores or hospitals?

    In the last 8 years while the Bush administration has doubled the debt, I have gotten my drivers license, graduated from university. Gone to Europe 5 times for Vacation and or to spend 6 months on a work visa etc…I have taken trips to New York City, to Vancouver, BC-CA, as well as Hawaii. I love traveling, that is where I spend. However, I digress, I am not in debt and at 24 have just opened my Roth IRA.

    My end point is that, and probably due to my young age, I do not see how such things effect me. And of course it is bad for the individual to be in debt, the issue for the country, seems rather trivial.

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