Sixteen Tons of Debt
- Published: 06/04/2013
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When I was younger I bought into to the have-it-now, pay-later mentality. In college I found myself in what I thought was a tight financial spot and used my only credit card to buy a car (a car!). When I graduated I suddenly felt deserving of a gift for my awesome achievement. So, I got in my “still-unpaid-for-credit-card-car,” drove to the dealership, and traded it for a brand new, 100% financed (except for the $500 they gave me for the trade- in) vehicle. Unfortunately, I did not yet have a job to match the payments and struggled for years to pay off the debts.
Although I graduated from college nearly debt free except for the credit card and car loan, my story worsened when I started to pursue my MBA. In my finances classes I was taught that there was Good Debt and Bad Debt …and student loans were Good Debt. So, like any good student, I followed my professors’ advice. Even though I continued to work, I gave up the bootstrapping that got me through undergraduate school and took the easy road. It was not until payments for my edu-vacation came due six months after graduation that I realized how far I had traveled from financial un-common sense. Now, I had a still-unpaid-for credit-card-car bill, debt on a new car that exceeded the car’s value, and a student loan debt the size of a small-home mortgage.
Easy Road Illusion: The easy road was an illusion. I was actually digging myself into a financial hole. Each easily borrowed dollar was a scoop of future freedom pulled from beneath my feet. The prospect of growing my small business from the depths of this hole was five times as difficult as it would have been if I had followed my grandparent’s bootstrapping wisdom.
The Illusion Crumbles: My story is not uncommon. The cultural acceptance of the have-now-pay-later mentality started to take hold in the 1980’s. By the early 2000’s the mere thought that one should budget and save for things they want was decried as an irrelevant relic of those who survived the Great Depression. Debt was good! If you could make the payment you deserve to have it. For many, however, the easy-road illusion started to crumble in 2007 when the great recession revealed the depth of the financial hole we had dug.
Tax/Debt Counselor: Today, as an Enrolled Agent licensed by (…NOT working for…) the US Treasury, I spend a great deal of time working with folks in debt - taxpayers who find themselves debtors: Debtors to the IRS: They owe more in taxes than they are able to pay.
What many of these unfortunate taxpayers have in common, however, is not just owing back taxes. It’s debt! Their tax problem is actually a symptom of a much larger problem: Debt - credit card debt, car loan debt, student loan debt, Pay-Day loan debt, and mortgage debt – debt problems that finally became tax problems.
The fact that tax representation and debt counseling often go hand in hand should not be surprising. Middle class America has dug itself into a hole - a deep hole in the thick, red-clay of debt. It is a phenomenon which overtakes the lives of many, long before they have tax issues - robbing them of their peace of mind, health, and financial security. Debt’s victims often do not even realize how deep their hole is until the slightest bump - a layoff, a car repair, an illness – brings the walls caving in around them.
A growing number of Americans, however, have grown weary of digging simply to make themselves poorer and their creditors richer. Instead of digging deeper, they have decided to carve a staircase to financial freedom.
It is for this reason that I decided to devote some time to discuss debt. Today I will compare today’s debt-culture to the scrip system utilized by mining towns through the mid-1900s. I will also share some stunning statistics revealing how quickly debt has woven itself into the fabric of our daily lives. In future columns I will show readers how they too can carve a staircase out of their debt dungeon to financial freedom.
Sixteen Tons of Debt: In his famous 1946 song, Sixteen Tons, Tennessee Ernie Ford sang about the stranglehold debt has on debtors. Referring to the stranglehold the mining-town scrip system had on miners, he sang:
“You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don’t you call me ‘cause I can’t go
I owe my soul to the company store.”
Tennessee Ernie, actually named Merle Travis, was singing about the mining-town scrip system that existed in the first half of the twentieth century, thirty-four years before credit cards got a hold on American consumers. Now, roughly 34 years after credit cards weaved into mass-market appeal, it seems he might just as well have been singing about the financial enslavement of Americans by consumer debt today. The similarities are uncanny.
The Scrip System
The Scrip System presents an interesting parallel between miners’ debt and the debt Americans face today. Under the scrip system, miners were paid in scrip, an artificial currency, which was used to buy goods at a company-owned store. Company store prices were high but they offered credit to miners who could not afford the stores’ goods any other way. Because the mining company owned the stores, companies reaped revenues from the miners’ labor in three ways:
- As profit from the coal that the miners extracted from the ground,
- As profit from the inflated prices at the company store, and
- As a form of bondage that made miners de-facto slaves to the company.
Characteristics of Scrip-Bondage:
But, what was the true cost of the scrip system to the miners themselves? Here are three:
- Inflated Prices: Miners paid more for products, goods and services than they would have otherwise paid.
- Future Sacrifice: Because the company store offered credit, miners’ future earnings had to be used to pay for goods they had already consumed. This resulted in having less to spend on other necessary items.
- Indentured Servitude: Because the miners owed debt to the company store, a vicious cycle was created. Miners had to continue working in the mine to repay their debt. But, because store prices were so high, more debt was needed to buy more goods to survive. Debt that could only be repaid by continuing to mine. Quitting was simply not an option. They were enslaved by their debt and there was little possibility of breaking free from the cycle.
Scrip’s Progeny – Consumer Debt
Fortunately, the mining scrip system died in the 1950s, and one would have thought debt servitude died with it. However, a seemingly-kinder, gentler more subtle scrip was reborn, more than a generation later, in the form of Consumer Debt.
Consumer Debt Defined: What is consumer debt? Consumer debt is debt owed by consumers (households) as opposed to businesses or the government. It includes debt used to buy food, clothing, cars, computers, phones, etc. But, it also includes debt used to buy homes, and debt accumulated in student loans.
Recent History of Consumer Debt: Until the 1980s, the only significant debt held by most households was a home mortgage. Although credit was offered by many stores and a few credit card companies, it was not until the late 1970’s, when the industry’s on-line infrastructure had been established and a 1978 Supreme Court ruling effectively deregulated credit card interest rates, that consumer debt took root in our culture. Over the 35 years that followed, debt has enmeshed itself into American culture so deeply that it has almost become synonymous with the phrase Middle Class.
The Debt Culture Arrives: Here are a few examples of how debt has crept into so many American’s lives:
- Today, households that have at least one credit card owe an average $15,000 to credit card companies, about 30 times the amount they owed in the late 70’s.
- Today, 43% of Americans under age 25 have student loan debt, compared to 25% in 2003. The average loan debt has also increased, nearly doubling from $10,649 in 2003 to $20,326 today. Overall, the student loan debt balances of all borrowers increased by 70% from 2004 to 2012, with a meager 2% increase in Americans having Bachelor degrees.
- Americans now owe more in their student loans than they do on their credit cards. Over 17% of student loan borrowers are currently 90+ days delinquent in their payments.
- From1980 (when interest rates were 4-times as high as they are today) to 2008, the percentage of American take-home pay (disposable income) used to pay loans and minimum credit card payments increased by 36%. However, total household debt grew from 64% to over 120% of annual take home pay during the same period. For middle class earners, debt grew to over 150% of annual disposable income.
- Although household debt, which includes mortgages, has nearly doubled since 1980, home ownership rates remain virtually unchanged at roughly 65% of households living in their own homes, both mortgaged and owned outright.
- As a percentage of our Gross Domestic Product (GDP), the value of all goods and services produced in the US annually, household debt increased from 47.8% in 1980 to 89.9% in 2011 (It was over 100% a few years earlier but bankruptcies and related cancelled debt knocked it back a bit). This means that American families have borrowed the money to finance a full year of the entire economy. And, the government has done the same. Add the government’s debt to this amount and the United States has collectively mortgaged two years of our livelihood.
The Middle Class and the Debt Lifestyle: In his landmark book, Rich Dad, Poor Dad, Richard Kiyosaki made an insightful observation about spending habits of the poor, the rich, and the middle class:
- The poor use their money to buy products for survival (things they use up).
- The rich, and those who become rich, buy assets (things that generate money).
- The American middle class uses its income to purchase debt (to make debt payments).
Sadly, the characteristics of the debt lifestyle are eerily similar to those of scrip bondage. Consider how the Characteristics of the Debt Lifestyle compare to the “Characteristics of Scrip-Bondage:”
1. Inflated Prices: Any time debt is used to purchase something, the price of that item automatically increases. Why? Because interest must now be paid on that purchase. For example, a $1,000 stereo purchased with a credit card having a 10% interest rate actually costs $1,100 if you pay for it over two years. Or, a $23,000 new vehicle financed over five years actually costs $26,000. In each situation, having the item today ended up costing you more than if you had saved and paid for it outright!
Because we seldom realize the true price for things purchased with debt, let’s present this cost in real terms. Because of interest, having the stereo today costs a small stack of CDs that could have been played in it. To have the vehicle now, a family of four traded an additional 5-6 months worth of groceries.
2. Future Sacrifice: There is a large, often overlooked, risk associated with the act of have-now-pay-later – a gamble that can produce household stress, tax problems, and bankruptcy. Borrowing money to have something now means not having that money available later when you need it (and I said when, not if). Our parents’ and grandparents’ generation referred to this as “saving for a rainy day!” When we don’t and the hot water heater goes out, or the car breaks down – and they will - there is no savings to cover these costs without going further into debt.
3. Indentured Servitude: “The debtor is slave to the lender.” Dave Ramsey, financial advisor, speaker, and author, uses this proverb (from Proverbs 22:7) in his books Financial Peace and Total Money Make Over to succinctly illustrate the power debt has over our lives and relationships. Like miners who owe their souls to the company store, many Americans find themselves trapped in a noble, yet quietly desperate, struggle in which life-choices and day-to-day decisions are subservient to the fact that they have mounting debts to repay. Debts which, for most, will not go away without a change in thinking and a change in life-style.
The purpose of this article is to share the rise and unintended consequences of the have-it-now-pay-later lifestyle. It is also to note that there is hope and a way out. We are seeing some new trends emerging from the depths of our great recession. A growing number (now over 50%) of Americans now have more in savings than they do in credit card debt. Many more are taking proactive steps to stop digging deeper and, instead, start carving a staircase out of their financial hole to walk in financial freedom. Building this staircase, step by step, will be the topic of my next column, Buried in Debt? There’s a Way Out.