What About The Crushing American Debt?

On August 16th CNBC reported that the average American has $38,000 in debt.  That doesn’t include a mortgage on a home or vacation home.  One-fourth of that debt is in credit cards and we all know what the interest rates are on those.  20%, 22%, or in some cases higher.  The balance of that debt is cars, boats, furniture, personal lines of credit and other consumer goods.  As of December of 2018 consumer debt passed the four trillion-dollar mark.  Many countries don’t carry that size debt.

Then there is the huge student loan debt.  At a recent commencement address, an alumnus announced that he was paying off all the student loans for the graduating class.  One could almost hear the mass sigh of relief.  However, as it turns out that wasn’t really such a boon for the graduates.  If the alumnus paid off a student loan of $100,000 that would be taxable income to the student.  Students with huge student loans can certainly not afford to pay a $30,000+  tax tab and the IRS has not had a history of waiting for their money until you can afford to pay them.

How is it that people, mostly intelligent, have gotten themselves into this mess?. The “me now” craze has certainly contributed to it.  Many people simply are not willing to wait and save the money needed to make a purchase.  They want what they want and they want it now and the devil takes the hindmost.

Another factor is the “use it and replace it” attitude.  We toss everything that we no longer need from plastic bottles and bags to a toaster with a bent plug and a recliner with a stain in the fabric.  The coffee pot died so we buy a new one.  Of course, a simple $49,00 one won’t do.  We need one with all kinds of bells and whistles it is likely to cost in the hundreds.  No problem, whip out the plastic.

One of life’s little ironies is that you credit score sags if you don’t owe money.  One would think that if you live within your means and have no debt your credit would be stellar.  Not.  But, that is only a problem if one is planning to borrow more money, and that probably isn’t what one should be doing right now.

A typical month sees over 600 government retirement plans either trashed or greatly reduced.  Most of these are local, state, county, the board of education, and agency plans.

With the mass of people now retiring or nearing retirement this debt and lack of financial strength will be devastating.  If the sole, or major retirement income is Social Security it won’t take long to understand that isn’t going to cut it.  Even the maximum SS income is barely subsistence if even that.  Financial advisors say that a retiring couple needs a balance sheet of between $1,000,000 and $1,700,000.  Of course, much depends on the lifestyle the retiree considers adequate.  It should also be noted that pension funds have become less than totally reliable, whether from government or private enterprise.  They are notoriously underfunded and most were never designed to handle the longer life spans of the participants.  A typical month sees over 600 government retirement plans either trashed or greatly reduced.  Most of these are local, state, county, the board of education, and agency plans.  Union-sponsored plans are not more reliable either.  The bottom line is that you need assets for retirement that you control.

So, how do you deal with this?  Well, that depends on a lot of factors, not the least of which is your age.  If nearing retirement the best advice seems to be to pay off all debt, beginning with the highest cost debt.  Downsize the home.  Alter your lifestyle and spending.  Okay, you may not like not going out to dinner twice a week and not going on cruises, but you will like it even less when 70 years old and having to decide whether to buy medication or food that month.  If younger then ditch the “me now” plan and pay off debt.  Save at least 10%, or better yet, 15% of your after-tax income.  Live on what is left.  Understand that retirement is not that far away and you will be there before you know it.  The reality is that you are not bulletproof and your actions or lack of actions now will greatly impact your future.

If you have further suggestions, this is a good time to share your wisdom.