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.
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.
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.
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.
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.
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!