Consumer Debt Can’t Buy Lasting Prosperity
Posted on May 18, 2007
During the past 50 years, the United States has achieved an unprecedented prosperity that has made it the envy of the world. Homes have doubled in size; the number of two and three car families with second homes, swimming pools, boats, recreational vehicles, multiple televisions, computers, video games, riding mowers and more has exploded. So has consumer debt! The problem is prosperity acquired with debt is only borrowed.
Whether it’s the national debt or your individual personal debt, prosperity gained with borrowed funds comes with severe consequences. During these 50 years of growing prosperity, the national debt has grown by more than $8,000,000,000,000 and individual debt, minus loans secured by real estate, better known as consumer debt, has grown by more than $2,000,000,000,000. Wow, that’s a lot of zeros! No wonder we’ve experienced unprecedented growth in prosperity. With an economy that has had more than $10 trillion dollars of borrowed money poured into it, is there any wonder we look so prosperous to the rest of the world?
What’s not so obvious is the negative effect this escalating debt is going to have on our children and their future. Just this increase in debt, not the total debt, amounts to more than $33,000 for every man woman and child in America. What do you think might happen if parents were required to give an explanation as to why they chose a lifestyle that will leave their children burdened with massive debt?
But wait, you say. Look at how much better our standard of living is than the rest of the world. That may be true now, but what about in the future. This year the interest on the national debt is projected to exceed the annual deficit. At more than $500 billion, as a nation, we are plunging deeper into debt just to pay the interest on what we’ve already spent. How long can this continue? When will younger generations realize the severity of the problem and say enough is enough?
Let’s look at a hypothetical situation. Imagine that you earn $36,000 per year, which is about the national average. Assume that your lifestyle requires $46,000 per year to support, which means you have to borrow $10,000 to make up the difference. At the end of the first year, if you only paid interest on the debt at a 10% rate, it would add $1,000 to your yearly expenses.
If you did this a second year, you would need to borrow $11,000 to cover the $10,000 shortfall for the current year plus $1,000 to pay interest on the $10,000 you borrowed last year. This increases your total debt to $21,000. Now the yearly interest would be $2,100 instead of $1,000. If you did this for three more consecutive years, your total debt would balloon to more than $61,000 and you would have to borrow over $16,100 to continue living the same lifestyle for another year. Can you see why this can’t go on forever?
I realize that this example may be an oversimplification of what has been occurring for the past 50 years, but it clearly shows how living above your means can be done for a while, but each year you do it puts you further and further in the hole. Eventually you will have to earn more, spend less, go bankrupt or your selfish excesses will leave your heirs in a predictable mess.
Here’s a tip! As an individual there’s not a lot you can do to curb the mounting national debt, but you can control the consumer debt of your own family. If you’re one of the millions of people with credit card or other consumer debts, there’s a three step approach to getting rid of it. The first step is to identify exactly what you owe, the total amount. A good way to do this is to set up a spreadsheet at the beginning of the month and list all the things on which you’re making payments with exception of your home. Make a separate column for the due date, the interest rate you’re paying, the monthly interest amount, the monthly payment and one for the total amount you owe. At the end of the month, total each column. This will give you a current picture of the size of the problem.
Secondly, make a commitment not to increase the debt the next month. You can do this by earning more, spending less or a combination of the two. If you’ve been accustomed to living above your means, this step will be difficult, but necessary. Each month keep a separate spreadsheet to track your progress. Unless you can make this lifestyle change, and keep good records, there’s no need to even think about getting out of debt. It may take several months of fighting the urge to overspend before you are able to stop the debt from growing and have some extra cash left over, but when you do, you can fix the problem.
Finally, once you’ve adjusted your lifestyle, here’s how to shift your focus to paying off the debts. Look at your spreadsheets. Make minimum payments on everything except the debt with the highest interest rate and apply all your extra cash to that one account. Keep doing this each month until it is paid off, and then start working on the account with the next highest interest rate. Keep doing this and you will eventually get all your debts paid. Once you experience how difficult it is to get out of debt, you’ll think twice about doing it again.
Once it’s paid off, all that money you were paying on your debts can be used to start a savings plan and increase your standard of living. Plus you’ll have the satisfaction of knowing you are no longer contributing to the consumer debt problem.
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