Tuesday, May 6, 2014

The Great American Debt Trap

Well the good news is that America is starting to pay down its mountain of household debt. The only category on the increase is student loans. The savings rate (of disposable income) has risen to a paltry 3%. In 2005 it went negative! In a wild spending binge we almost doubled our household debt in five years. Now we have to pay. Don’t look for the American consumer to fuel a great economic boom. They are pretty well tapped out.

I don’t have to tell you, debt is bad. The question now becomes how badly do you want to escape the great American consumer debt trap. What price are you willing to pay for your freedom? As the song says, “Freedom is never free.”

Believe it or not, the first step consists of understanding your plight. People have a way of ignoring or minimizing their financial problems. The technical term is denial. Go ahead, rack ‘em and stack ‘em. Find out how much you owe, what rate of interest you are paying, and how much you will have paid the banks if you continue to make those minimum payments for the next 20 years.

The next step is swearing to the stars, the skies, and the universe that as God is your witness, you will not only be debt free but that you will achieve financial independence. This step really starts when you are tempted to take out just one more loan, to use that credit card instead of an emergency fund, just this one time. That is when you must put your foot down hard saying, “I can’t get out of a hole by digging a deeper hole.” That will be difficult. If you fail on the first try, don’t beat yourself up. Get up off the ground and try harder.

Now comes the boring stuff. You have to live on a budget. You must make sure that your income exceeds your outflow or your upkeep will be your downfall. It is that simple. Doing it your way isn’t working. Live on a formal budget. Account for every penny that comes in and every penny that goes out. Rigorously! Religiously! Without exception! Nobody wants to live on a formal budget. Imagine writing down the cost of every latte you drink for the rest of your life. Who wants to live like that? Once you have things under control there are less rigorous options available such as the 70% budget (live on 70% of your income, allocate 10% for giving, 10% for saving, and 10% for contingencies). You may even reach a point where all you need do is track the monthly increase in your net worth. However, when you are in a deep hole, don’t look for shortcuts. You will regret it.

Cut your spending to the bone. You can live without it. If you have two cars ask yourself if you can live with only one car. The answer is probably yes. We did that for a couple of years. It wasn’t fun but it helped us buy our first house. My favorite rant is reoccurring expenses cell phones, cable, gym memberships and the like. Be especially vicious in your efforts to cut these expenses to the bone. I recently finished taking a personal finance course at our church. Most of the people in that class were already doing the right things. They are a pretty frugal bunch. I was not the only person in the class who reuses paper towels if they are not really dirty. By far the biggest problem was the monthly fast food and restaurant bill. I thought I was the only person who had that problem. I am not alone.

By the way, the only way you can be certain that you are cutting your spending to the bone is bone is by living on a budget. In fact for problem areas, like restaurants, use the envelope system. Put a weekly allocation of actual factual cash money in the restaurant envelope. When that money is gone, it is gone; no more hamburgers; no more coffee; no more restaurant food of any kind until next week.

If we are not talking about mortgage debt, young single folks can find ways to lower housing expenses by sharing an apartment with friends or even doing the boomerang thing for a couple of years until that student debt disappears. Personally, once I left home at 18 for college, I would have rather lived in a cave with a family of bears than return to my parents home, but then I didn’t graduate with any student debt hanging around my neck.

Find some extra money. Sell the motorcycle you are keeping in your parents’ garage. Sell the extra TV, the camera you use three times a year, your collection Transformer toys, and anything else that is likely to generate so extra cash. I know a couple who take this a step further. They buy stuff at local charity stores, such as Goodwill. Then they clean it up and sell it on eBay. Unlike me, they have a pretty good idea of what this stuff is worth, so they are pretty certain to make a profit. If you aren’t that clever, take a second part time, temporary job waiting tables or delivering pizzas. While you are doing a little yard work on the side, don’t stop thinking about the better job in your future. Right now you are digging your way out of the prison fortress, Ch√Ęteau d'If. Every spoonful of dirt counts.

By all means track your progress. I had a Lotus 123 spread sheet for DOS to track the effect of my extra payments to principal on my mortgage. I would shout for joy every time I saw an extra $1,000 sent to the bank today peel off multiple thousands off the backside of the loan. It helped give me the incentive to save another $1,000 when that was a very hard thing to do. If you don’t have a spreadsheet program just do the calculations once a month. I wouldn’t be opposed to graphing the results. You could post that visual aid on your refrigerator. Seeing your progress might just help.

You can do this. Others in your situation, or worse, have done it. The road you have to travel is pretty well understood. There are options. You can focus more effort on bringing more money in or controlling what goes out, but at the end of the day you have to satisfy the money equation.

Money In = Money Stored + Money Spent

That equation integrated over the course of your lifetime will determine whether you will remain a debt slave or if by a combination of hard work and the Grace of God you find the financial freedom that I believe is your birthright as a child of God.

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