Now that the mortgage bubble has blown up in every American’s face, the blame game begins. Some people are fuming because we taxpayers are bailing out Bear Stearns, one of the most aggressive lenders of those nasty subprime loans. Some are pointing fingers at the Fed for not doing enough earlier to preempt the crisis. Some are upset with the Fed for intervening at all, thinking it better to let natural market forces work their magic. Some are angered by the greed and foolishness of bankers who made reckless loans for short term gains. Some are angered by the greed and foolishness of homeowners who signed up for these loans.
So who’s fault is it, anyway? I think we’re all to blame. To one degree or another, we’ve all been active and willing participants in America’s Culture of Debt. Here are some examples that come to mind.
- Sunday ad supplements are thicker than the Sunday paper itself. When you get to the store you’re encouraged to sign up for a store credit card.
- Christmas shopping begins a month before Thanksgiving, with people waiting in line to gobble up merchandise at 2:00 am.
- It’s not uncommon for people to carry three or four credit cards. A couple weeks ago I met a gentleman who had eight Visa cards in his wallet. That can’t lead to anything constructive.
- People snap up automobiles and furniture on credit, usually at low or no interest. In the case of furniture, buyers have as much as a year before the first payment is due.
- Young people rack up thousands of dollars of credit card debt, probably because they never learned the basics of personal finance.
- Banks mail offer upon offer for credit cards with teaser rates. Even now, with credit tight, the offers keep coming.
Until very recently, mortgage loans — subprime or otherwise — were routinely initiated with down payments of 5% or less. The subprime fiasco didn’t appear out of thin air, it was just the logical next step in a market environment where buyers and sellers were conditioned to highly leveraged transactions. And nothing is wrong with that, provided consumers keep earning more money and sellers keep closing more deals — without interruption until the end of time. Of course, in the real world things don’t work that way. Markets are cyclical, and the downside of a credit bubble is bad for almost every participant and disastrous for some.
How can we escape the Culture of Debt?
These actions ought to help immensely. What do you do to keep your head above water financially? Have you changed your approach to spending and saving?
- Pay cash whenever possible. I started doing that about a year ago and the difference was unbelievable. You become much more aware of what you are spending and consider purchases more carefully.
- Get a financial adviser. You don’t need to be close to retirement or have millions of dollars to need financial expertise. Financial advisers can show young married couples how to plan for their first home. They can help the young and middle aged build a sound retirement plan.
- Make a budget and stick to it. In the business world, companies without budgets are train wrecks. Don’t expect things to be different in terms of personal finance.
- Try to talk yourself out of every purchase. Maybe I don’t really need that third flat screen TV …
- Comparative shop. Impulse buying may be fun, but it’s expensive. Thanks to the Internet, we can really let our fingers do the walking and find the best deal on just about any consumer item. Products and services that are hard to compare online, such as insurance policies, usually merit the time required to do real research.
Amen and amen, Brad!
Mrs. MZM and I made the decision just prior to marriage (26 years ago this May – hoo-ah!) to live completely debt free. And by that I mean we never owed more than we could pay back at that moment (with one significant exception).
There’s been only two things we’ve ever borrowed money on, cars or houses. In the case of a car, we always paid at least half or more down, and always had more in the bank than was owed at any given time.
In the case of the house, well, not too many people can pay cash for a house unless they’ve built up one heckuvan equity over time. So we make sure we owe less than it’s worth. That’s the key. If a fast sale were ever needed, we wouldn’t be out of the house while still owing money on it!
We’ve always used one credit card for most purchases, simply because of the buyer’s protection it provides, and (this is vital!) we pay it off every single month, no exceptions.
These techniques helped us weather a four-year period of unemployment (yep; you read it right!), because our debts we so low we had enough to survive (and prosper).
You’ve been way ahead of the curve on this topic, Bob. I hope people read your comment here and follow your lead.
I think this consumption obsession is an off-shoot of the “I deserve it” mentality that so many of us grew up with. Why SHOULDN’T the bank give you credit when you’re so very deserving of having anything you like? Why SHOULDN’T you buy that third flatscreen if you want it? I think that’s part of what makes it so hard to reign in–we’re so much in the habit of wanting to get ourselves and our kids whatever our hearts desire and the banks make it so easy.
Oh, and about the internet? It makes comparison shopping effortless, but it also makes impulse-shopping sooooo much easier. It’s like playing with fire–a great tool to use, but easy to get burned!
That said, I do use my credit card because I do most of my shopping online these days and I haven’t figured out how to insert a dollar bill into my computer, but my card is paid off in full every month. I even paid cash for my car when I bought it six years ago.
Deb, that’s a good point about impulse shopping on the internet. Maybe we should all put little warning signs on our computer monitors. You mention the banks encouraging debt – do you notice even now, credit card junk mail from banks is alive and well.