Thursday, May 26, 2011

Debt is Not a Natural Condition

Debt is not a natural condition!

It is funny, but it was driven home again to me today how many Americans truly believe that being in debt for your entire life is not only inevitable, but a natural part of life.

When I was young, I was debt-free, which is the way we come into the world and leave it.  But it was not too long before I had a job and was making pretty good money and decided to alter this.  Why be content with what I had (which was pretty darn good) when I could have more and have it now in low, low monthly payments?

And before long, I started accumulating debt - first car loans, then a mortgage, then student loans, then credit card debt, consumer debt - all the usual debts your average middle-class American has.

Today, the process is jump-started.  Kids, when they turn 18, are showered with credit card offers and expect to take on at least five-figures of student loan debt to go to college.  Learning to live with less or live on what you have, just isn't in the cards.

But debt has to be repaid.  That seems elementary, but it is a basic fact.  And debt has to be repaid with interest, which thanks to our friend compound interest, can amount to an awful lot of money, over time.

How much?  It can easily account for 1/4 to 1/3 of your lifetime income - perhaps more.  Long-term debts, like mortgage interest or student loan interest, really eat into your income.  And no, the tax deduction doesn't make it advantageous.  And refinancing debts over time (a move the debt industry loves you to make) adds even more interest onto the pile.

So you think, "I have to have this new car NOW!" and you sign loan papers to buy a shiny new car - paying 1.5 times the sticker price, with interest (not to mention insurance).  Your neighbor can buy two  of such cars, secondhand, lightly used, for the same amount.

It seems pretty simple and basic.  And yet, this basic math eludes most of us.

Most of us work a lifetime and struggle to get ahead and save a little for retirement.  The bankers, on the other hand, don't have to work nearly as hard, and yet can skim a third of your wealth, right off the top.

And the punchline is that you will hand over this dough to them with your blubbering thanks, thinking that you were "lucky" to get a loan, and that the bank is doing you favors by lending you money and collecting interest payments from you.

Can we all really be that stupid?  Apparently so.

Once you are out of debt, it is far easier to see this, of course.  Once you have been in debt for a decade or more, you become used to the yoke of debt, and settle down to bear the load, like a dumb oxen.  You start to think of debt as normal, perhaps even good.  And you even become fond of your debt-masters, becoming fans of the credit card companies and bankers for "giving you a good deal" or perhaps a few airline miles thrown your way, the same way the wagon master gives a sugar cube to his oxen once in a while.

In fact, you start to think of life in terms of debt itself - you value yourself based on your credit score, which you treat as the holy grail and an almighty index of your self-worth.  And you kid yourself that you are "wealthy" not because you have money in the bank, but because you can afford more shiny things than your neighbors.  The debt lifestyle becomes all that you can see, after a while.

And so many of us bought into this - an overwhelming majority of Americans.  And yes, even our government, which lives as a perpetual debtor.

A friend of mine who is in her 60's asked me what our mortgage payment was, compared to a nearby island.  It was hard to explain to her that we don't have one.  And odder still, it was hard to comprehend how someone in their 60's could still have one - and have car payments as well.  Once you are retired, where does the money come from?

Debt is not a natural condition. You do not have to be in debt, and going into debt does, by definition, not make you wealthier, but poorer.

If all you have is two dollars to your name, borrowing five dollars more doesn't make you five dollars richer, but two dollars poorer, once you are done paying back the five dollars, plus interest.  If all you have to live on is "not much" - then borrowing more is just turning "not much" into "even less".