The Ugly Truth About Debt

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. Weve 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.  Thats debt-speak for borrowing too much to finance a purchase.  Its sold as other peoples 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 youve been hiding your head in the sand, youve 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 doesnt end up in your pocket.  It ends up on the banks balance sheet as profit. From a leverage point of view, its 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%, youll lose $20,000.  But youll still have $30,000 and  youd still be the owner of the property. Scenario 2:  Youve seen the reality shows and the product pitches and youre 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, youre entire investment is gone.  No equity, no money, and for all intents and purposes its 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.  Thats 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. Its long been recognized that debt, especially when its 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, its not a matter of right or wrong.  Its about being conscious of results.  More and more people are waking to the reality that more stuff doesnt make you happy.   That its the experiences and relationships that bring happiness. So its worth pondering the purchase of that big screen television youve 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