Saturday, May 25, 2019

Personal Debt

Americans have accumulated $4 trillion dollars of personal debt. This much debt is a dangerous trend. There is no evidence that personal debt will decrease. Student loan debt, alone, is $1.5 trillion dollars. This debt is akin to home mortgages because they often require lifetime payments. Credit card debt is more than a trillion dollars. This is maybe the worst debt of them all.

We have to look at each type of debt independently. Housing and college debt are, at least, an investment in the future. A home can often be sold for more than its purchase price. Student debt often leads to higher incomes in he future. This doesn't mean either are always good choices. If you buy a house larger than you can truly afford, odds are good that you will, someday, face foreclosure. If you borrow $100,000 for a women's study degree, chances are you will end up working in fast food. No matter the type of debt, we must make wise choices.

My mom grew up poor and she was terrified of any type of debt. She passed that fear onto me, but I still fell into the debt trap. I got into the habit of buying on credit at the local mom and pop store. This was common in the area. They didn't charge any interest. When you got paid, you go there to cash your check and they clear your your tab. Stores did this because it was a way to gain more customers.

One day I handed them my paycheck and received only $10 back. On top of that, I owed a friend $20 because I had run short that week. I had to borrow from the friend again that week because $10 wouldn't buy gas that week for my to drive to work. That is when my mother's preaching in my early life hit home. That day I swore to break the the debt trend. It took a few months of penny pinching to end buying on credit and borrowing from friends.

This is why Americans have so much credit card debt. Once you fall into the trap of living on debt, it's hard to climb out. Sure, there are times when there is an illness or other unexpected expenses where you have to use a credit card, but there are still other choices. You can always take out a personal loan at a bank—preferably a credit union because those are non-profits with cheaper rates. I'm in my 60's and never owned a credit card. This doesn't mean I've lived debt free, it just means I've used smart debt.

I have friends who are excited to tell me about their new television or computer. I ask them how much it cost. They excitedly say, “I don't know, but the payment is only $25 a week.” I never have the heart to tell them they are paying double the regular price. Recently, I talked about poor people spending $1000 for a phone. A guy laughed at me and said a smartphone is only $25. He truly believed he got a smartphone for that price. Sure, you can buy a phone for $300 dollars, but those aren't the ones I see people using. That's what my 4 year old phone cost (I got the phone for free because I was forced to switch carriers.). The phone before that one was $700, but I used it for 10 years.

Right now the left is promoting a strike against McDonald's restaurants so workers can make a minimum of $15 an hour. Everyone knows a forced increase of wages will mean less people being employed. The push for the strike appears to be part of the living wage movement, but the politicians promoting this don't really care about the workers, it's just an election time ploy.

Those same people are complaining about interest rates. These politicians want to place limits on interest rates. They are even tossing around the “usury” word. This is simply an ancient word for illegal interest rates. The rates they're complaining about aren't illegal. Sure, some of the rates are exuberant, but they are legal.

There's a reason interest rates on overdue credit card debt and payday loans are high—this is because people who find themselves in either position are likely high risk customers. It costs companies a lot of money to go after customers who default. Too often, they sell that debt to a collection agency for about 40% of it's worth. New debtors must pay a high interest rate to help cover the cost of those who default. You would think high interest rates would be a deterrent, but apparently it isn't.

Let's look a little closer at student loans. Student loan debt has increased 150% over the past decade. We saw much of that increase begin when the government took over student loans. This government takeover also created a rise in college tuition and other charges. Colleges realized they could charge more because student loans were easier to get, which meant more students were using them. Now we're finding students who will spend the rest of their life paying off student loans because they made poor career choices. It's hard to know at 18-20 years of age what you want to do for the rest of your life. It's nice to follow your dreams, but dreams rarely pay well. The best way to avoid this problem is to find something you like and pays well. Maybe later in life you can seek your true passion.

Dr Duke Pesta says 40 percent of his students can't do the work. Most of his students couldn't keep up, or they were just lazy. He said that if not for government student loans, they wouldn't be in his class. When banks were giving student loans, they would only loan to those who had a background of working hard for grades.
Even buying a house can lead to a downfall. People often buy their dream home in their dream neighborhood. Even if you plan every step, there can be stumbling blocks such as illness or job loss. You have to try and plan for those things. Many people go with what's called starter houses. Those are typically small and located in lower income areas. If you choose wisely, you can later sell that house at a profit and upgrade. Do this several times and you might have that dream home with little debt. More and more areas are allowing tiny houses. That is a good beginning for a childless couple.

I see a lot of people who make car payments all their life. Unless you have to travel a lot for work, this is a waste of money. I stopped buying new vehicles when they reached $10,000. My last new car was in 1977. You can find some really good used vehicles out there because so many people feel they must have a new car the moment they pay off their old one, and sometimes before. A used car is even better if you can save and pay cash. If you drive your old one long enough, you can set aside enough money each week to avoid those interest payments in the future.

Whatever you do, avoid payday loans and any store whose primary goal is to sell items on a payment system. This small debt can be the most crippling. If you are envious of your neighbor's 60 inch television, sit closer to your 30 inch and you won't noticed the difference. Owning the best isn't always the best for you.

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