8/2/2011 12:40 PM ET|
More in debt than Uncle Sam
As Americans ridicule their government for running up huge deficits, household balance sheets are in their worst shape in 80 years. But investment discipline can start to repair the damage.
You may remember J. Wellington Wimpy, more commonly known simply as Wimpy, Popeye's beloved friend from the iconic comic strip. Wimpy was soft-spoken and intelligent, but also cowardly, lazy, stingy and gluttonous. A true scam artist, Wimpy usually finagled his favorite meal, a hamburger, from some unsuspecting patron at the local diner. Wimpy's parsimonious ways included his famous con line, "I'll gladly pay you Tuesday for a hamburger today."
Decades later, this character, created in 1932 during the Great Depression, has become a symbol of fiscal irresponsibility.
Today, the United States is facing its own Wimpy-esque moment in the form of the debt ceiling. The free burgers have flowed for some time now, but the patrons have grown wise to the scam. The pitch of pushing off today's payment until some future Tuesday has become a bit haggard and worn thin for many in America.
Simply look to Greece, Portugal, Spain and other countries to see what it is like to have one's hamburgers taken away. The forced diet does not look pretty.
Strangely, as the U.S. citizenry passionately criticizes its government for running up a budget deficit, a greater irony is afoot: When it comes to debt management, Americans are, sadly, worse than their government.
While government debt sits at 94% of national revenue, U.S. household debt sits at a whopping 107% of personal income.
The household balance sheets of Americans are in worse condition than at any time since the Great Depression. The ratio of household debt to gross domestic product is greater than at any time since 1929. And while we all are trying to comprehend what life will be like as a poorer nation, many Americans have not yet comprehended their own personal poverty.
The point of saving
From the early 1940s through the late 1960s, an ethos of saving before spending ruled the roost. If you sought to buy a house, a 20% down payment was required. Similarly, substantial savings were required to buy a car. Home furnishings, clothing and more were purchased primarily with cash.
By the 1970s, however, rampant inflation helped form a debt culture that found footing and gained steam.
If you saved, inflation threatened to erode the value of your savings, while the price of your desired purchases continued to rise. What was the point of saving when you could buy with little to nothing down, deduct interest from your federal tax obligations and have those things you longed for?
Over the coming decades, American household debt ballooned, eventually doubling from $7 trillion to $14 trillion between 2001 and 2007. Debt fears, however, were assuaged by the rapidly growing value of real estate; homeowners used equity lines to buy more property and cars, as well as pay for vacations and toys. Burgers were flowing for all.
Then in 2008, the sudden and violent decline in home prices revealed just how bad the debt binge had been. Tuesday had finally arrived, and, like Wimpy, our wallets were a bit too thin to meet our obligations.
Wise and disciplined investors
A renewed focus on government fiscal irresponsibility should lead us to honest self-examination. At the heart of this audit should be confronting personal debt and embracing basic investing disciplines.
Each person must make a decision to feed the debt furnace or build a retirement engine.
Like Wimpy, we all experience the gnawing hunger to consume more than we need. Each time we reach out, through credit, for a burger today, we take our future dollars and throw them into the blazing furnace of consumption. The heat of the moment is delightful, but the result is the poverty that's unfolding before our nation.
When we behave like wise and disciplined investors, we resist our pulsing appetites, take our hard-earned dollars and direct a predetermined portion to smart, long-term investments. In doing so, such investors build an engine through the miraculous power of compounding interest.
Unlike Wimpy and other debtors, this interest works in your favor. Ben Franklin understood that for such savers, "money can beget money, and its offspring can beget more." Albert Einstein called compounding the "eighth wonder of the world."
Those who reject debt and invest wisely create a powerful engine, so that Tuesday's obligations can be fully met on time, leaving a few burgers to spare.
This article was reported by Steve Beck for U.S. News & World Report.
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The article points out that persoanl debt is 107% of personal income but compares that to the 94% number which is not comparing the same things.
I looked it up and for 2011 the total direct revenue for the federal government was 2.17 trillion(not sure if this number is correct) and the current national debt is 14.56 trillion. That means that while personal debt is 107% of income that the federal debt is 670% of federal income. Kinda sucks when you see the real numbers vs. the lies isn't it?
And this doesn't even get into the misuse of the trust fund and all the fun that will come to haunt us in the coming decades from SS and Health Care. And remember the deficit was over 1.5 trillion this year. Do you really think a few trillion "cut"(not really cut just slowing the growth of programs) will make a difference?
A few of us have been following this sound advice for most of our lives.
Sadly, thanks to the majority who haven't, compounding is no longer worth sh-- and "smart, long term investments" are a needle in a haystack.
It's interesting how politically everyone has sided up, with the Democrats using the same tag line that Republicans are bailing out the rich, and the Republicans calling out the unions and public employees, etc.
Well, you know, they are all right in a sense. GREED has permeated our society in every corner. Athletes make ungodly sums of money, but it is not enough. Bankers, investment firms, etc. give million dollar bonuses but it is not enough. Many times public unions "bargain" for more pay, cadillac insurance and other benefits, well above those in the private sector who pay for it, but it is not enough. It is considered a right, along with collective bargaining, that treats al employees the same, good or bad. Private firms pay their top people ungodly sums, so they can compete they say, but it is never enough.
My Father went bankrupt when I was seven. He rose out of it, did quite well, and then died broke at the young age of 58, He was much more of a risk-taker than I, but he taught me a great lesson. From early on I decided that my main goals were to be a good husbnd and father, and to be out of financial debt as soon as possible by being responsible. I did that, and today have no debt, even though my average pay over 30 years was probably $30,000.
Every American needs to stop pointing fingers, but instead, look in the mirror. We can blame greedy others, those who gave us mortgages, cars or toys we coudln't afford, the wealthy, the government who bailed out the "too big to fail" companies (which I feel was wrong) but really. Come on! We sign the papers, we buy beyond our means, we use the credit cards, and we vote in people who are there only to perpetuate their being. . Wake up people, we are all responsible for our own destiny ultimately.
If the Gov't had to spend only what they took in (fairly), they could leave the future generations with more than their assets just like the households you mention.
A flat tax on everyone and a national sales tax along with the elimination of the IRS would free up trillions of dollars and generate trillions per year for not only the Gov't (Fed and State), but also the taxpayer (personal and Corporate).
Less Gov't means more in the pockets of the American people. Those that really earn their keep.
Comparing GDP, which is the result of the work of others, others with a claim to those profits, to household income, which is the work of one family, is at best like comparing oranges, and cheetos.
Our government will leave debt to future generations, something that households really don't do, not in excess of their assets....
I hate unclear statistics like this one "U.S. household debt sits at a whopping 107% of personal income", which seems to be the basis of this article. Does this include mortgage debt? How does this relate to household net worth?
Take this hypothetical for example. Say someone makes an average $40K/yr. Say they owe $43K on a house that is worth $143K, have no other debt, and have $50K in their IRA. You could say their debt is 107% of of their personal income. Of course, you could also say that their net worth is $150K, or nearly 4 times their personal income. Both statements are true.
If the article is saying that most people have a negative net worth, that is a very serious problem. But, just saying people have a certain percentage of debt really isn't saying anything at all.
99 weeks of unemployment benefits, and a real unemployment number of around 22% could have something to do with it.
With 8.7% of Americans 12 and over that use Illegal drugs sending Mexico US $40 Billion annually. No wonder Mexico has only a 5.4% unemployment rate and an increase in their GNP of 4%.
The American People have 8.7% addicted to drugs and another 50% addicted to borrowing. Going COLD TURKEY for both is hard enough, but with the Turkeys in the White House and in Congress, it will be harder than ever to get out of debt. Like a drug addict, they are not favorable to being "right with society" and may just have to get their heads chopped off at the ballot box.
What's sad is the situation our young people are in, our culture is changed because of the poverty our young people are having to endure. You can't pay car payments (and $4 gas), utilities, food, clothing, let alone hobbies or entertainment, making $7 or $10 per hour. They don't have the FREEDOM, to work harder, take on more responsibility, and get better pay.
The same old mistakes are performed. The same old lies are told.
NAFTA did not undermine the American worker. The American worker who went to Wal-Mart to buy a $4 towel imported form India instead of buying a $8 towel made in Burlington, North Carolina undermined the other American workers. Everyone looked at price instead of what the price reflected.
I was born outside Norfolk, Virginia. I have had decades of experience watching drunken sailors waste money. We, the American people, have done the same thing for at least thirty years. The US government has done exactly the same thing. Now we have to pay the bills. The next few years will be painful as we pay the bills we have already run up. We will have to SAVE money for future needs. This will mean that we do not have money to spend on new cars, new house, vacation, "boob" job for wife, new wife, "boob" job for the new wife. Unemployment will remain high. Companies will not be hiring new employees when there is no increased demand.
For the construction workers, form your own company. Locally we cannot find enough people to do odd jobs. I have had to hunt for roofer, carpenter, cabinetmaker, finish carpenter, electrician, plumber, brick mason and stone mason during the past three years. This would be the same three years with 9-10 % unemployment. You can earn a good income if you can get the people who can ACTUALLY do the work.
We all will have to live within our means. That means families as well as the governments. Cities, counties and states will have to fund reasonable pensions for teachers, police, and other government workers. People who are not performing need to be fired. this is especially true for teachers where there is a huge pool of well trained teachers who want to work. Fire the incompetents and give another teacher a chance.
Federal government needs to freeze pay increases for everyone, military, pensions, social security. Veterans Administration must support the injured troops. This means eliminate the unlimited health care for every vet who has any health problem. If it is not listed on the DD-214, no coverage. Get your congressman to vote in the Boyles-Simpson report. Eliminate earmarks. Make the federal income tax fairer. Eliminate deductions for mortgages. Lower the income tax initial tax level. Raise the rate for the truly wealthy.
College students-Think about the debt you are taking on. You cannot possibly earn enough as an elementary school teacher to repay $100,000 in student loans to attend a private college. Go to community college and to state colleges and universities. Be realistic that a degree in many areas will not support any student loans.
College graduates need to know that they cannot afford to go to graduate school. I have two children who attended law school. My wife and I helped them. But one will be 40 years old before he can even think about buying a house or having a child.
For all of my fellow Americans. Think about it. Do you really have to have that item? Can you wait? Can you borrow it from your brother? Can you SAVE for it?
powerdonut, I get it. You are dumber than many of us.
I grew up poor, too. At one point, my parents pawned every asset they had to pay a mortgage that was probably 2/3 what the average person would make for a mortgage payment at the time. We grew up on pirated VHS tapes because no TV broadcasts could reach us and while the neighbors all got satellite, we did without. My parents still create too much debt and my sister lives the exact life she had growing up. I have take what I experienced and learned from it. I guarded my credit carefully. no T-shirt is worth risking bankruptcy over, no matter what the pretty girl pushing cards in from the the student union says. Shame on you for blaming the system. Being human means you have 2 abilities: to reason and to rationalize. Too bad you spent so much time rationalizing and not enough time reasoning. You can't blame someone else for your decision to choose one of those over the other.
If the competitive trend continues,
most of the jobs here in US will only pay about $ 10 / Hour.
Just try to support a family on this income.
Pay taxes - income is too low - I will probably get more $ than I paid in Fed Taxes.
Buy a home on this income ?
Buy a new car on this income ?
Send your children to college ?
Build any degree of security for my family ?
We must stop companies from outsourcing all these jobs that
could sustain our families, fund our government through income taxes,
support our infrastructure and ensure future competition in this global economy.
I'm fascinated by the people that believe the 'rich' don't pay enough taxes. 25 years ago (1986), the rich (top 10%) paid about 26% of all taxes. Now they pay over 70% of all taxes.Possibly this is due to the fact that the top 10% hold something like 90% of the wealth in America; seems they are still a little short on paying their fare share. Remember, these are the same people who offshore jobs, take huge tax incentives, and for the most part OWN CONGRESS.
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