The Ugly Truth About Debt

Debt has come to be an accepted part of modern life.  But the reality is that debt is probably the single largest obstacle to your living the life you really want.  A look at the statistics for the United States tells the bleak story:

These are the averages:  $15,762 in credit cards; $168,614 in mortgages; $27,141 in auto loans; and $48,172 in student loans.  And none of that is counted in your part of the national debt, which now stands at over $154,000.

We’ve been pushed to consume, forever buying more and bigger and better.   For most, there is virtually no prospect of ever being debt free.  Their future is mortgaged, and current consumption leaves no room to allocate money for paying down the balances.

Even “investing” has been tainted with over-leveraging.  That’s debt-speak for borrowing too much to finance a purchase.  It’s sold as other people’s money (“OPM”}.  From the small investor to the biggest of corporations, making money with little of your own at risk remains as common as it was in the pre-great recession days.

The Real Cost of Debt

Unless you’ve been hiding your head in the sand, you’ve seen the warnings.  The real cost of using that credit card to enhance current consumption is huge.  One thousand on the card now means the real price of what you purchased will be around $1,600.  So the money you “saved” on that great deal doesn’t end up in your pocket.  It ends up on the banks balance sheet as profit.

From a leverage point of view, it’s even worse.  You survived the housing crisis of the last decade.  But did you learn the lessons it taught?  Take this example of having $50,000 to invest and using two different approaches.

• Scenario 1: You put $50,000 down on a house that costs $200,000.  You have $50,000 equity.  If prices drop, as they inevitably do in real estate cycles, your investment will be at risk.  Should they drop 10%, you’ll lose $20,000.  But you’ll still have $30,000 and  you’d still be the owner of the property.
• Scenario 2:  You’ve seen the reality shows and the product pitches and you’re in.  You decide to take your $50,000 and buy five houses, each costing $200,000.  In each one, you have $10,000 equity.  But now, if that same 10% drop in prices occurs, you’re entire investment is gone.  No equity, no money, and for all intents and purposes it’s now the banks property.

And Then Comes The Deceit

A recent study in the U.K. showed that 37% of Brits lie to their partner about their debts.  That’s more meaningful when you look at the following breakdown:

• The majority, 47%, stated they had no debt when in fact they did.
• 35% understated to their partners how much debt they had.
• 18% had overstated how much they owe to get out of paying joint bills.

It’s long been recognized that debt, especially when it’s accompanied by deceit, damages relationships.  The results are too frequently divorce, bankruptcy, or both. Chris Reilly  of My Voucher Codes, who sponsored the above research, gives the following advice:

“Getting in control of your finances is important, so don’t allow yourself to be swallowed up by debt. It’s always good to talk to someone, such as a debt or money management advice agency. However we would recommend talking to your partner and being honest with them, that way you’re not worrying alone.”

Choose Your Future

Of course, it’s not a matter of right or wrong.  It’s about being conscious of results.  More and more people are waking to the reality that more stuff doesn’t make you happy.   That it’s the experiences and relationships that bring happiness.

So it’s worth pondering the purchase of that big screen television you’ve been eyeing.  You can buy it, now, and pay interest for the next three to five years while you watch its technology go out of date.  Or you can skip it, and invest in yourself or in memories that will last a lifetime.  The choice is yours.

Images:

Debt openDemocracy debt shackle Chris Potter