Why debt is the perfect storm.

By Mike Aux-Tinee.

Since 2007, I have been sitting here, watching what is going on with our economy and the terrible things that have happened to people. So many have lost everything: jobs, homes, savings and worst of all their self-esteem and respect. I know some of the problems many of them have been going through. See, I lost my job in  August 2007 and it took me until August of 2008 to find full time employment.

At the time, I was in the process of buying a house and going about my business of living my life. I had the idea, that everything would be fine and it’s just a little bump in the road –  but keep going forward otherwise I would be viewed as a failure.

That’s a pretty powerful motivator! And I did not want to be viewed as a failure. We have been repeatedly told throughout our life that we are a winner. We are given medals for just showing up and participating, while the winners are given a large trophy. As if the medal is to make up for that empty feeling we are experiencing. It’s supposed to build up our self esteem and we are rewarded for mediocrity. We are given a pat on the back and told things like the score does not matter… in fact we are told a lot of things, by those who really should just sit there and be quiet.

I know… I was told a lot of things about life from people. How to live, what I absolutely just had to have to be happy and what I needed to do to be viewed as successful.

Looking back, there was really only one piece of advice that I wished I would have been given. That being, to be a success requires hard work, thriftiness and to protect yourself from things like losing a job.

It’s one of my beliefs that having debt is not a good thing, no matter what anyone says – no debt is good debt. I know, some people have said that there are two kinds of debt, good debt and bad debt. That you really want to take on good debt, like school loans and avoid the bad debt, such as credit cards. But what happens to you, when you take on all of that good debt, like we have been lead to believe and we lose our job?  There is no form to fill out, in some government program that looks at the kind of debt (good or bad) and then if it’s determined that we took on the good kind, that what we owe would be put on hold until we get back on our feet.

In the real world, reality comes along and wipes us out – lock, stock and barrel. I believe having debt is just like the perfect storm.

Alright, what do I mean when I say that debt is the perfect storm? Let me start off by giving a definition of a perfect storm and how it applies to debt. I checked Wikipedia for the definition of perfect storm and here is what it had to say:

A “perfect storm” is an expression that describes an event where a rare combination of circumstances will aggravate a situation drastically.The term is also used to describe an actual phenomenon that happens to occur in such a confluence, resulting in an event of unusual magnitude… The confluence of three different phenomena when combined create the “perfect situation” to generate such a storm.

So what are the three different phenomena when combined create the perfect storm?

It creates a false sense of security and prosperity.

When you use debt, instead of paying cash, you are able to have more things. We associate someone who has more as being prosperous. After all, they must have the money otherwise they would not be able to afford (and possess) all of those things. Having a line of credit (credit card, home equity line of credit etc…), you are in effect borrowing money, someone’s money, to make a purchase and obtain more things. The more you have around you, the more prosperous and the safer you feel. But what you are experiencing is an illusion. It is a trick that is designed to make you feel this way, in actuality, what you really have is less. I know. That did sound like I am trying to trick you. Your eyes can see the things you bought, you can touch them and so on. But, if you don’t make the payments… bye..bye..bye things. You are trading off your financial security for physical security when you used some form of debt – not cash to make a purchase. However, if you save your money and then make the purchase then I concede the point that you are rich and have both security and prosperity. But that does not happen. You will attempt to point and what you have and say… “Look and what I have.” and I will say, “Yes, and look at all of the debt you have too.” If something happens and you lose your job, then all of these things will go away and you will be left with nothing. Still don’t believe me? Then check into the home foreclosure rates around the country.

There is a lower rate of savings.

The Federal Reserve Bank keeps track of a lot of information about the U.S. banking sector (and what we do or don’t do). One tiny and very sad piece of information is the dismal savings rate of Americans. Which at this point is going down not up, meaning we are spending more of our money and saving less of it. I always wonder why this is? What happened between our grandparents generation and ours? Well, they grew up not having access to credit and believed they should save their money and then make a purchase or learn to live without it. Now, there were some forms of credit around but they shunned it. It was seen as a terrible, terrible thing. They were more self-reliant and had a completely different set of values and priorities. Now, it’s more important to have things, it’s alright to be in debt (because some pundit, politician or a commercial said so) and we compare what we have to what others have, if someone has something and we don’t, then we need to head out and get it just to keep up with the Joneses’.

Not saving your money exposes you and your family to unforeseen economic problems. You are putting their welfare at stake just so you or one of them can have the latest and greatest version of whatever fad item comes out. Imagine how you would feel if you were one of those individuals who lost everything during the 2007-2009 economic collapse?

Once you start using debt, it’s impossible to stop.

Using debt to fund your life is a lot like using drugs. Once you start using and become addicted, it’s down right impossible to quit. Here is just a little information that may make you uneasy. This information was obtained from http://www.creditcards.com.

Total cards in circulation in U.S.
(Through year-end 2011, unless otherwise noted)

  • American Express credit: 50.6 million — up from 48.9 million at year end 2010 (Source: American Express.com)
  • MasterCard credit: 176 million — up from 143 million at year end 2010 (Source: MasterCard) 
  • MasterCard debit: 129 million — up from 119 million at year end 2010 (Source: MasterCard)
  • Visa credit: 261 million as of Sept. 30, 2011 — down from 269 million, as of Sept. 30, 2010 (Source: Visa)
  • Visa debit: 392 million as of Sept. 30, 2011 — down from 399 million, as of Sept. 30, 2010 (Source: Visa)

Credit card debt

  • Average credit card debt per household with credit card debt: $15,799*
  • 76 percent of undergraduates have credit cards, and the average undergrad has $2,200 in credit card. Additionally, they will amass almost $20,000 in student debt. (Source: Nellie Mae, “Undergraduate Students and Credit Cards in 2004: An Analysis of Usage Rates and Trends”)
  • Total U.S. consumer revolving debt fell to $866 billion at the end of 2009, down from $958 billion at the end of 2008. About 98 percent of that debt was credit card debt. (Source: Federal Reserve’s G.19 report, March 2010)

Debt as percentage of income

  • The average credit card-indebted family in 2004 allocated 21 percent of its income to servicing monthly debt compared to the 13 percent dedicated to debt payments among all households. (Source: Demos.org, “Borrowing To Make Ends Meet,” November 2007)
  • In 2007, the average balance for those carrying a balance rose 30.4 percent, to $7,300. Meanwhile, the median balance — meaning half owe more and half owe less — for those carrying a balance rose 25.0 percent, to $3,000. These increases followed slower changes over the preceding three years, when the median increased 9.1 percent and the average climbed 16.7 percent. (Source: Federal Reserve Survey of Consumer Finances, February 2009)
  • Miami residents are the biggest over-spenders, one study says. The 50 largest U.S. metropolitan areas were ranked in terms of percent of median yearly household income owed to credit card companies and Miami residents owed 22.61 percent. Tampa (17.1 percent) and Los Angeles (16.81 percent) came in second and third, respectively. (Source: Forbes.com, Equifax and US Census Bureau, April 2009)
When you look at this information, it’s rather hard to argue the facts.These three points, all point to one thing and one thing only – that the continual use of debt is causing more harm than good. While you may say that you are different, it will not happen to you and so on… Many people who have lost everything very likely thought the same things. Reality check buddy! Do you really want to tell your family that the reason they have to pack up their things and move is because you would not stop and face reality?
Of course, you are going to tell me that having more and more things in your life are “necessities” and that you must have them. Yea… not buying that one. That is nothing more than your vanity rearing it’s ugly head and taking over.
It’s going to take some time to come to the realization that having debt in your life is not a good thing. That there is another way and you can get out from this perfect storm before it wrecks more of your life and destroys your future.
I cannot make you change. There is nothing that you can be forced to do against your will. But I have to ask you, why are you willing to risk losing everything if and when you lose your job? Then think about how your life is going to be in the future. Do you really think the safety social nets like Social Security will be there for you when you retire? Hummm… I think it’s a better play to protect yourself from financial ruin.
I wrote a book, Islands of Happiness, about my personal journey to pay off my debt, to start using cash for purchases and to never be put into a position where I lose everything if I lose my job. It does happen to people and maybe even to someone you know. But how about this, why not change your life so it does not happen to you. Because it’s a terrible feeling to be standing on the edge of financial Armageddon knowing it could have all been avoided.
Peace dudes!
Mike
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47 thoughts on “Why debt is the perfect storm.

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