Thursday, January 5, 2017

The Debt Culture

It is possible for anyone to get out of debt?  It is a lot easier just not to get into it.

A reader writes that it seems that a family of four making less than $50,000 can "never get out of debt" in their lifetime.  This is an interesting observation, but presupposes that debt is a natural condition.   As I have noted in earlier posts, to figure out how to "get out of debt" you first have to figure out how you got into it.

Debt is an interesting beast, in that in effect, it decreases your overall net worth.   Unless you are borrowing money to make money, debt merely takes what little income you have and makes it less.  So any personal debt for anything other than a worthwhile and appropriately priced college education or for a reasonably sized  and appropriately priced house is just going to take what little you have and make it less.  Debt has to be paid back, with interest.

And yet so many look at debt as a "lifeline" - we live in a debt culture, swim in a sea of debt, view our lives in terms of debts, view our self-worth in terms of a credit score or how much we can borrow.

This is not a natural condition.  We are born without debt and we die the same way.  Somewhere along the way, we lose direction and decide that being perpetually indebted is a "normal" way of living.   How did this happen to us?  One problem with our debt culture is that so many people believe that debt is normal that they simply give up on the idea of ever being debt-free.   In order to get out of debt, you first have to decide you want to.  Once you accept debt as a natural condition in life (and it is not) you will never be debt-free.

One of the mythologies of debt is that poor people have to go into debt because they have no money.   This is probably the most illogical statement of all time.   How does borrowing money, when you  have none, make your life better or make you not poor?   Since this money has to be "paid back" with interest, for every dollar you borrow, you are more than a dollar poorer - particularly at the onerous interest rates the poor pay.

When we scratch the surface of these arguments, we find out that the debts incurred were really for wants not needs.   People expect a certain level of "lifestyle" and will borrow money to live it - not all in one chunk labeled "living beyond my means" on a credit card bill, but in hundreds, if not thousands, of small purchases and squandering that add up, over time to debt.

Yes, time, is the other half of the equation.   Time helps you when you are saving money, it hurts when you are borrowing it.  The longer you have a debt, the more expensive it is.   But not only that, debt accumulates in small amounts, so as to not be noticeable, over time, until one day, you look in the bilge of your rowboat, and realize you're pretty much sunk.

So what causes debt to accumulate?  It happens, one fast-food meal at a time.  One cable television bill at a time.  One cell phone bill at a time.   One night at the bar, one trip to the drug dealer.   Hundreds of "small" purchases, that add up to big bucks over a year, and enormous sums over a lifetime.  And I know this, as I used to live this way.

Some folks would like to write me off as "elitist" looking down on the poor and blaming them for their own problems.  "You don't know what it is like to be poor!" they say.   But I have lived in poverty and in the worst parts of town and seen how poverty works, firsthand.   And I was able to struggle my way out of poverty by changing my lifestyle and spending habits.

Along the way, I found myself elevated to a form of middle-class poverty - doing the same dumb things when I was "poor" but on a far larger scale.  The only difference between a poor person in debt and a rich person in debt is that the rich person has nicer shit - a fancier house and fancier cars and fancier clothes and whatnot.   Both are often insolvent and often in stress over their debts.   Both may be in debt for their lifetime, if they don't change their habits.   Both may face bankruptcy, one on a larger scale.

When I dropped out of school, I went to work for a hydraulics firm paying $4.75 an hour, the minimum wage of the time.   I had a car that was paid-for and a small one-room apartment that was more than adequate for a single guy.   I had no debts, and the only asset I had, a small payout on a retirement plan, I squandered on a motorcycle.   You see how this starts - wanting things instead of financial security.

When we are young and/or stupid, we are like kids at Chuck-E-Cheese who have a fist full of rewards tickets from playing skee-ball.  We go up to the nice man in the booth and say, "what can I get for this much?"  And we spend every last coupon to get a stuffed bear, not realizing that maybe keeping all those quarters we put in the skee-ball machine might have been a better bargain.

Even though I was working a minimum-wage job, I would go out to lunch every day with a buddy and we'd spend well over an hour's wages on a sandwich and beers.   And of course, some pot.  Not only was this an expensive lunch in terms of cost, you can see how it would affect your career.   You are not going to advance much in life getting stoned at work - and yet I knew an awful lot of people who did just that.

Not only that, I was not managing my money very well.  My friends would say, "let's party" and we'd go to the corner convenience store to buy beer, writing a check (that would bounce on Monday).   It was a pretty stupid way to live, and like most people in that situation, I blamed the bank for charging me a bounce fee, rather than blame myself for being fiscally irresponsible.

I managed to get a better job for nearly double the pay.  So what did I do?  Bank the difference?  Hell, no, I went out and bought a brand-new economy car.   What a dumbass!  Then I proceeded to drive it as fast as possible, racked up more than a couple of tickets (and two minor accidents) and jack my insurance rates through the roof, to the point where I was spending thousands a year just for basic liability insurance.   A lot of young people do this - not just me - and it was a pretty dumb thing to do.

But like most of the idiotic things I did, it was a choice not a mandate.
The only smart thing I did at that time was to go back to school at night and re-start my education.   I was also able to buy an affordable house with a government subsidized loan, in a neighborhood not too far from work.   But I also did dumb things like decide I needed cable television and paid over $30 a month (about $75 a month today).  I blew money on questionable "upgrades" to crappy cars.   I bought a waterbed on a "90 days same as cash" deal (and fortunately paid it off in time - most don't!).

I did all the same stupid shit that I did before, like most poor people.   Go to any poor neighborhood and see how many Jet Skis, Harleys, monster trucks, hobby cars, and other crap is parked outside their trailer.  Note the multiple satellite dishes screw-gunned to the side of said trailer.   The poor have money or more precisely, a lot flows through their lives.   The problem is that they spend it as fast as they make it.  I know this from experience.

At about this time, I guess I kind of got sick and tired of always wanting and not having, of always being a dollar short the day before payday.   Of always being broke and looking at a lifetime of broke-ness.  Of not having any control over my life or indeed any way of improving my lot.   I thought about what I could change to make things better.   I decided to give up the drugs and alcohol and see what that did.

Yes, poverty and drug use often go hand in hand.   In the movies, they like to show drug use either as completely grubby - homeless people shooting up heroin in an abandoned house - or as glamorous - high-rollers snorting coke off a call-girl's titties.  The reality is neither.   Drug users (and alcoholics) are all around us, and usually it affects their financial lives.  It certainly was affecting mine.   In addition to the cost of the drugs and beer, was the effect they have on your brain.   You stop thinking rationally (indeed, these are called "mind-altering drugs" for a reason) and stop managing your finances properly.  Booze is no better - people go to bars and cash their paycheck there, and wake up the next morning with a horrific hangover and only pennies in their pocket.   Yes, I even did that once.   I had a brother-in-law who did it regularly.

When I stopped, it was akin to taking the parking brake off your car, after revving the engine to redline.   I finished my Electrical Engineering degree in a year and found a new job with the Patent Office and was accepted into Law School.   Five years later, I had my own law practice, owned my own home, and even owned my own office building.  We started investing in Real Estate.   Life was quite a change from my impoverished past.

However, we fell back into the same old traps, only on a much grander scale.   We spent money without managing it.  We never looked at the price of things, but like kids in the candy store, just bought what looked colorful and fun.   We bought our groceries at a gourmet food store.  We bought weekend backyard project stuff at the "big box" lumber yard.   That sort of crap.  It wasn't long before our credit cards were creeping up - and we never bothered to check the interest rates or keep track of payment due dates.   We felt we were lucky to have credit - and they kept increasing our credit line, so we must be doing good!

Hard to believe we were so smart and yet so dumb.   I mean, I was a lawyer advising clients on complex legal matters, Mark was managing a gourmet food store with 100 employees.  Neither of us could balance our checkbook.    What's worse, I found out that most of the folks I knew in that income bracket were the same way.   I met one nattily attired young lawyer on a "legal education" cruise once.  She and her husband were both attorneys, likely making a combined income of $200,000 a year or more.   She admitted they were "serial refinancers" - refinancing their mini-mansion in Buckhead Georgia several times to pay off credit card debts and car loans.

As I told my reader, debt is a game anyone can play - at all income levels.   You move up the ladder in life and find that you are not getting ahead, just treating yourself to nicer shit and adding another zero to the debt figure.   The poor stay up all night worrying about how to pay off a $5,000 credit card bill.  The upper middle-class stay up all night worrying about how to pay off a $50,000 credit card bill.

And it is tempting to think these are trivial amounts of money, compared to their incomes.  The guy making $20,000 a year should surely be able to pay off $5000 in a year, right?  But since he has to pay taxes (Social Security and Medicare being the biggest chunk) and pay for living expenses, it leaves maybe $100 a month to apply to that debt.   It can takes years, particularly at high interest rates, to chisel away at even $5000.

For my lawyer friend in Buckhead, the same is true, but people have less sympathy.   What with the Mercedes payments, the mortgage on the mini-mansion (and the home equity line of credit) and the tuition for the kid's private schools and what not, well, they are finding it hard-pressed to find $1000 extra a month to apply toward that $50,000 debt.  And since they missed a payment, the interest rate is now 25%!

Sounds far-fetched, I know, but it happens all the time.   It happened to me - more than once.   We ran up credit cards when we lived in Northern Virginia and then refinanced our home to pay them off.  Then we ran up more debt and got more loans.  Wash.  Rinse.  Repeat.   It turned out that the only difference I had made in my life since leaving my minimum-wage job was to just squander money on a grander scale.

The only thing that "saved" us was that we cashed out of the Real estate game at the height of the market.  This was a one-time "reset" in the game of life that left us debt-free for the first time in decades.  And we were debt-free for, oh, about six months.  Sad, ain't it?

Yup, once again, into the breech!   We bought a vacation home that "needed nothing" and then decided it needed a whole lot.   We easily spend $150,000 improving a house that cost $340,000.   Years later, we sold it for $400,000.   In addition to the money lost in improvements, was the staggering carrying costs of owning two homes and not renting out either of them when not in use.  It might have worked if we bought a more modest vacation cottage.  It might have worked if we were aggressive about  renting out the place.

But as it was, it was an expensive luxury.   Compounding this was the staggering tax bill I received when we sold our office building - 100% capital gains after depreciating the place for so many years.  I foolishly put the bill ($40,000) on a credit card and missed a payment which jacked the rate to 25%.   Once again in life, I found myself in intractable credit card debt with no way to pay it.   I was able to roll it over to a zero percent offer (with a low fixed rate after that), but even then, the debt never seemed to go down by much.   It was about that time I started this blog - wondering, like a deer in the headlights, where all my money went.  Hint:  I spent it.

We had fun, for about eight years.  We then sold the house and paid off all our debts.  And this time, I made a resolution to stay that way.  It was a lot easier this time.  With age, you realize that having stuff is fun, but there is a "been there done that" aspect to so many things.   And yet even old people squander money - hanging on to motorhomes, boats, motorcycles, and crap that is languishing in a driveway or back yard, unused, for years or even decades, slowly depreciating.  "Pride of ownership" one oldster told me was the reason he kept an unused boat for a decade - paying $30,000 in storage fees.

Maybe living on retirement island is what woke me up - seeing older folks who kept living the debt lifestyle and not carefully tracking their money and ending up broke and struggling to get by on Social Security (and having to leave retirement island as a result).   Or "well off" people with good pensions still worrying about debts, because even in retirement they still have a mortgage payment, a car payment, and credit card debts that never seem to get paid down.

The temptation, now that I have "reset" my life for at least the fourth time, is to indulge and spend more and let the reins go slack.   That is how it starts.   We thought briefly about getting another boat, but realized that the costs of keeping a boat would run well over $10,000 a year, just for storage and insurance.   There is a reason they call it a hole in the water to throw money into.  

And we still may get a boat - but a much smaller one (30 foot or less) that we can trailer and maintain ourselves.   But it will be one that we can pay cash for, and not have to borrow money to own.   And we will resist the temptation to spend money on accessories for it, as you can easily spend tens of thousands of dollars trying to "upgrade" a boat.

The siren song of debt is hard to resist.  It is baited with nice eye-candy - shiny new cars, fancy motorcycles, fast boats.   It is also baited with thousands of smaller pieces of candy - a fast-food meal or new shoes at the mall.  It is not hard to get into debt, buying things.  It is damn hard to get out.

And that is the pernicious nature of debt.   It is like a Casino - very easy to get into, damn near impossible to get out of.   Just a stroke of the pen signs you up for massive amounts of debt.   Getting out takes years of patient clawing and digging through solid rock.

And very damn few of us are educated as to how this works - or have the moral turpitude to avoid the temptation for shiny things and treating ourselves.

Worse yet, our society is chock full of bad advice and poor normative cues.  "Leasing makes sense!" my friends say, unwittingly shilling for the finance companies, "You only buy the part of the car you want!" - and other nonsense.   Most of my friends and acquaintances tout miles cards or rewards cards, or other financial trickery.  Almost everyone believes that having a home mortgage is a "good thing" as you get a tax deduction.  And so on and so forth.   What little financial knowledge we have is horrifically bad and basically crap the finance companies and banks want us to believe in.  

They say things to us like, "Everyone has debts, right?"   Think about that for a minute and what a horribly poor normative cue that is.  Normalizing perpetual indebtedness as if it were something we acquired at birth.

Well, maybe not yet.   But they're working on it, I'm sure.

In the meantime, the one and only defense you have is yourself.   All the consumer protection agencies, new regulations, class-action lawsuits, and whatnot are not going to defend you from taking on unnecessary debt in life and being a perpetual debtor.

And I reject, outright, the notion that debt is inevitable for any class or group of people.   Debt is a voluntary thing that you have to take on willingly.  The easiest way to avoid it is, to leave your pen at home.