Carrying consumer debt hurts your mind as well as your wallet.


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n case no one noticed, there is a growing debt problem here in this country. Americans are putting themselves further into a hole that while it seems shallow at first, continues to get deeper and deeper the longer unpaid debt racks up interest. There is approximately $2.17 TRILLION in outstanding debt on mortgages, credit cards, auto loans and student loans. That number almost seems fake, like it cant be real, because we cannot even imagine that much money being owed to someone, 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, and eventually its going to hurt. Bad. Here are the reasons I came up with as to why we are in this sinking hole, and how all this debt piling up is going to hurt.

CREDIT CARDS – There are SO many credit cards available today, and we even see stories on the news about a dog or a baby being approved for card and receiving it in the mail..without even applying for it. The average credit card balance in this country is between $6,000 to $8,000, 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 and the other being the low minimum wage in this country. Whether you want to blame it on television, celebrities, movies, music or those glossy magazines on your coffee table, people feel like they have to have the best this, the newest that. 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! The second reason is that people just are not making enough money to live on. If you made minimum wage (about $5.50 per hour), you would make $11,440 per year, which is not nearly enough for one person to live on, never mind an entire family. So because a family has to eat, has to get to work, has to go to the doctor, the credit card comes in handy. Until the day when the bills come in, and you are paying 20% interest or more. 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.

MORTGAGES – I live in Los Angeles, home of the $850,000 2 bedroom fixer-upper, and yet people are still buying houses. Of course, they are getting interest only loans for 5 years or ARM mortgages, and they are going to be in for a rude shock come “principal” time. 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.

AUTO LOANS – This one is a tough one, because car prices themselves have gone WAY up in relation to our pay. I remember when I bought a Volkswagon GTI in was $12,000 dollars. And that seemed like a lot back then! But now, a new GTI will cost you $20,000 – $25,000 depending on options, and its only 14 years later. Mind you 14 years sounds like a long time, but the minimum wage was same then as it is now. 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 for your car to actually be worth something. 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.

STUDENT LOANS – Education is expensive. Very expensive. And the government is actually taking away low interest loans and grants so that students and their families have 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 dont leave newly graduated 20-somethings saddled with $50,000 in student loan debt.

SAVINGS – No one is saving money anymore, because living the “American” way costs too much money, as noted above. 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.

What Can Be Done
– I think there are several things that can be done to make sure you dont end up owing a debtor your first born child, the first of which is to try to stay out of credit card debt. You dont need a plasma tv, you dont need a 2 week vacation in Australia, you dont 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 alot 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 see more people here in LA with Hummers, living in really bad areas of town, run-down houses, etc…but yet they need their $40,000 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 worked for the people who left comments at the post. You can find the post How we paid down our debt and saved money at the same time.

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!

technorati tags:finance debt mortage money auto loan education

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  1. I agree completely! Could not have said it better myself. One point of contention though – in some cities buying a house is a smarter investment than renting an apartment. For instance, where I live you can get a 2 bedroom fixer-upper for around $100,000, which you can configure to have a monthly loan payment that is the same or only slightly higher than renting an apartment and in the end you actually own something that can be sold later at a higher price. Also, I’d add another money saving tip – Do not eat out regularly if you can’t afford it. Buy potatoes, meats, spices, vegetables, etc when their on sale and be creative. Not only will it save you money, but it is healthier!

  2. Absolutely Jason…buying a house is always a good thing, as long as you live somewhere where renting is not thousands of dollars cheaper (like Los Angeles).

    And eating out eats up a LOT of money if you arent careful!

  3. Thanks Merle for your comment. However, I must take exception with your idea that a doubling of the minimum wage would have no effect on debt issues. I did not say that because someone makes minimum wage is the reason someone cannot afford a house. I dont make minimum wage, far from it, but I cannot afford a house either. Minimum wage keeps many things from many people…a house, food, medical care, education, transportation, or even a job search.

    Thus, if you are making minimum wage, it does create more debt because the only way you can afford to pay for anything might be with a credit card or a loan. And although it is hard to believe, here in Los Angeles many people do support their families on minimum wage (which is $6.75 here). I dont know how they do it, but it is being done. So I am sure it is happening in other major cities as well.

    Also, whether one is 25 or 65, $5.15 per hour is not enough to live on, whether by oneself or within the confines of a family. So if you cannot make ends meet, you turn to a credit card..which creates more debt.

  4. You make some good points. I think debt is generally bad. Credit card debt is the worst.

    You cited the static minimum wage as a debt creator. I disagree. According to labor deparment statistics, about 2% of wage earners make minimum wage. Three fifths work parttime and a majority are under 25. The breadwinner supporting a family on minimum wage is a rarity. If the mnimum wage were to be double tomorrow it would only result in a
    $23000 annual salary. Not enough to buy a home in any state.

    In the matter of student loans, they allow colleges to constantly raise tuition. It is the classic inflationary cycle. More dollars chasing the same amount of services. In my opinion, most students would be better off taking longer to get an education, rather than financing it through loans. I did.

    I think the real reason for the explosion in credit being extended has to do with certain states raising the cap on the credit card interest rates allowed to be charged in order to lure credit card operations to their states (South Dakota and Deleware, for instance). The higher rates made the operations so profitable that the companies could make credit largely available to everyone because they could accept more risk.

    Best wishes,

  5. I agree with most of what you have said, especially “keeping up with the Jones” Our biggest problem is we don’t live within our means or save (as you mentioned) for unexpected events and bigger wants (vacations and the like) Instant gratification is what we are about.

    Making more money doesn’t necessarily fix the debt problem. In my life (before changing our habits) and others it seems the more money you make the more you spend. Debt stays proportionaly the same. Most people are broke no matter how much money they make. So I am not sure that raising minimum wage would fix anything.

    The other thing about raising min wage is this. If the grocery store has to pay their clerk a “livable wage” that is double the current where do they find that money? By raising their prices. So we and the clerk have to pay more for food so does she still have a “livable wage?” Over simplified I know, but rasing min wage is only a short term fix that leads to higher prices.

  6. Hi Stephanie

    Thanks for the comment. Though we disagree on certain things, I agree that our main problem is our lack of control when it comes to spending money. This needs to change.

    But on the flip side, the minimum wage is way too low for any job. I cannot imagine putting in a weeks work and only getting $200; its just not a fair wage for people to be paid for their time and effort. You raise a valid point about where the extra money is going to come from…but many companies make HUGE profits nowadays, and they keep it all to themselves. And Mom and Pop stores would get better, more motivated employees if they paid them better. If raising the cost of an apple by a nickel gets someone an extra dollar per hour, than I am all for it.

  7. David, I like how some of your ads are green-living ads. How did you manage that? I’m thinking about starting a second blog with ads and would love some non-traditional ones on there.

    My email address is sally.parrott at gmail if you can take the time to let me know. 🙂

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