Entries Tagged 'Debt' ↓

I am sort of a documentary junkie and I like watching them on Netflix’s instant play. Two documentaries I have reviewed on this blog include Maxed Out and The Business of Being Born. Today I heard about an interesting documentary called I.O.U.S.A. documenting the threat of America’s ever growing national debt. Yahoo has an article that talks about billionaires Warren Buffet and Pete Peterson endorsing this documentary and speaking out about how the government should work on borrowing less, and encourage the citizens to save more, but will anyone listen?

A few days ago I wrote an article called We Are Our Own Worst Enemy on Wise Bread and it was a comment on Knight Kiplinger’s article about how Americans themselves are the culprits for the nation’s economic problems. The American people like lower taxes, and more services. The politicians get elected by making expensive promises, and they fulfill their promises by borrowing money. This has been going on for quite a while. One of the commenters on my article wrote an extremely long comment that ended with,

“Fed a steady diet of corporate-controlled advertising which manipulates quirks of the human brain (read Jerry Mander’s “4 Arguments for the Elimination of Television“) to increase consumer spending and pro-corporate news, is it any wonder the average American is a mess? Sure, they’re stupid for continuing to stare at the boob-tube and not noticing that they get the urge to order out a pizza after the TV ad, but hey, most people just don’t have as high IQ’s as the average tightwad (read “The Bell Curve“), especially as many of today’s consumers are from the post-Reagan/cut-education-to-the-bone generation. It’s not that the more aware people aren’t writing to their Congressman demanding solutions, the problem is that those Congressmen aren’t listening because they’re beholden to their corporate sponsors.

STOP telling people they’re stupid and it’s all their own fault. A) it’s only 25%-30% their fault; B) the minute you tell someone it’s all their fault they stop listening to you; and C), the originator of this article is quoting a non-credible source. If you want to change things, take clueless consumers by the hand, gently explain the situation to them and what they can do to fix it in a non-blaming way, then unleash them on Congress to throw the bastards out of office. Educate people that they have been brainwashed and teach them there is another way to live.”

I think this commenter is pretty blunt and cuts to the heart of the problem. Most people don’t care or know enough to learn about the national debt. Most people keep on electing the officials that promise the most to them. How does a politician make “reduce the national debt” sound more sexy than “tax cuts for the middle class”? Sure, I.O.U.S.A may be a great documentary, but how many people will watch it? Now that billionaire endorsed it, I am sure that those in the government who love class warfare and spending all they can would dismiss it as another piece of propaganda from “the rich”.

Here is what I find absolutely fall-off-my-chair hilarious. China is one of the biggest creditors to the USA. Actually according to the Treasury, China currently holds around half a trillion dollars of US treasuries. So basically the $40 billion extravaganza of an Olympics could be just funded by the interest payments America is sending to China. I am sure some of you Americans might be calling China evil now, but if China didn’t loan the money to the United States then your lives may be a lot worse. Treasuries carry a fairly low yield, and that’s what kept inflation low in the United States for decades. However, if China stops buying so many treasuries from the United States sometime in the future or demand higher rates then that would affect government funds in a significant manner.

I really don’t know how Americans can fix this because there doesn’t seem to be a politician that doesn’t love to spend and get more debt. I guess they’re not spending their own money so it doesn’t matter to them. Young sensible professionals are not the majority in America, and most people who vote are baby boomers and seniors who love the government sponsored freebies so politicians pander to them. One prime example is that Obama is proposing no taxes for seniors making $50,000 a year and below. It makes sense for the more elderly because the debts incurred by the government will be paid by generations to come, so they’re not spending their money either. I’m not saying that all elderly people are leeches, but selfishness tend to lead people to vote a certain way especially when the incentives are so large.

Finally, here is another funny and ironic fact. When people who work in the government apply for Top Secret or Secret clearance they will be screened for the amount of debt they have. If they have too much debt they may not get clearance because they are more likely to be blackmailed or accept bribes. Right now, the United States Government’s national debt is so large and owned by so many foreign nations that it may not pass for its own security clearance if it applied. I think the Department of Homeland Security should probably get involved as soon as possible because the United States Government’s finances is a valid security risk.

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I read Laura Rowley’s Yahoo Finance column pretty regularly, and this week she wrote about college debt and how many young adults with large student loans and small wages are basically debt slaves doomed to pay for their education for decades. I have also written a little bit about college finance before. In “Not rich enough, not poor enough” I wrote about how many middle class families do not qualify for financial aid or even scholarships at expensive private colleges and that drew many different responses. Some say that kids should pay for their own college expenses and others say that the financial aid system needs to be reformed. Either way, most people agree that there is a problem with having to take out huge loans to fund college. Here are some things I think parents and college bound teens should consider before signing on to a generation of debt.

1. Consider attending a state public school with in state tuition- I went to the University of California at Berkeley and all four years of tuition plus room and board cost less than one year at any private university. My parents paid for it, but if I could have paid off the entire amount with less than a year of income after I graduated. Recently an article in Forbes ranked UC Berkeley as one of the top colleges for getting rich. The study was done by PayScale.com and the schools were ranked on the median salary of alumni with 10 to 20 years of experience. I think if they gathered data on the amount of student loans some of the private school alumni are still paying, then they will probably find that Berkeley grads keep more of what they earn and pay less to the loansharks. There are plenty of great state college in this country, and I think they are the best bang for the buck.

2. Consider graduating early - If you could shave one semester,term, or even year off your college education then you would save quite a bit of money. It involves a lot of hard work and creative class scheduling, but it is worth it. I took classes that could fulfill multiple graduation requirements and also took classes in the summer session and I finished about a year early. I used the year to work at a couple internships and took one class in my last semester of senior year.

3 . Try  going to a cheap school for the first couple years and then transfer – I know quite a few people that went to community colleges and then transferred to Berkeley or other schools during their junior year. Their final degree is still from the more expensive school and no one can tell that the first two years were spent in a cheaper school.

4. Work before college – I know some people who worked for a year or two before college to save money for college. Many colleges allow you to defer enrollment for a year so you can have the opportunity to do something. 

5. Start saving early in tax advantaged accounts  – Right now I do not have kids yet, but I am putting $100 a month into a 529 education savings plan under my name.  I don’t think parents and children could save too early for a college education.  A 529 allows you to withdraw the savings for education and any gains on the investments are tax free.

Finally, I totally agree with the advice given in the Yahoo Finance article that you shouldn’t borrow a lot more than what you would earn after college.  However,  it is hard to look at the financial impacts of college loans when you are a young idealistic teenager who wants to do the things you love regardless of money.  There needs to be a balance between idealism and practicality, and perhaps more high school counselors should teach students about the effect of massive student loans.

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The New York Times recently published an interactive calculator that allows you to compare your debt situation to a group of more than 360 American families that were surveyed in 2004. After playing with it for a little bit, it was pretty clear that this survey indicates that those with more income are more likely to have debt. This led to me to ask, why is that those with more means seem to borrow more?

The calculator allows you to input your mortgage debt, credit card debt, automobile debt, and educational debt.  Then you can choose your income and age group on the bottom and it tells you how many percent of the families they surveyed are like you. So I put in $0 and less than 35 year old.  In my age bracket, 39% of families making less than $20,000 per year had no debt, and only 3% of families making more than $150,000 per year had no debt.  This is a very stark difference.  When I changed the age bracket to all age groups, 47% of families making under $20,000 had no debt while only 14% of families making more than $150,000 had no debt. That is still a very big difference.

I noticed that regardless of income, most of the debt of these families came in the form of mortgage. The average amount of mortgage debt goes up as you scroll up in income. This makes sense because more income allows people to qualify for larger mortgages.  Higher income families also tend to live in areas with high costs of living so housing is more expensive to begin with. Some would argue that mortgage is a type of “good” debt because it allows people to have a piece of real estate after it is paid off, but that alone  does not change the fact that it is a debt.

In all the other categories of debt, higher income families still owed more than lower income families on average.  The average automobile debt of families making over $150k  is nearly 9 times the automobile debt of a family making less than $20k.  All of this just shows that those with higher income spends much more on the same goods and services.

Personally I have lived in both ends of the income spectrum presented in this survey.  When we just moved to America we were living on one graduate stipend.  All three of us lived on less than $1000 a month and we watched our expenses day to day.  Nothing was bought without a coupon, and the damaged foods section is where we shopped first. When my family was at that income level, frugality was necessary for survival  and  there is no room for debt because one credit card interest charge could mean a week’s worth of groceries.

Later, my parents graduated and we moved to the San Francisco Bay Area.  They both had well paying jobs after a few years, and they took on a mortgage. A big change I noticed is that we no longer cut out every coupon we found for food and we ate out much more.  It was much easier to spend money because we had more income than before.  The rationale was that coupons were no longer worth the time and effort to redeem, and paying for good food was great because we can’t cook like that anyway. Being frugal is just harder when you have the means to spend your money and justify it later as only 0.25% of your salary.

Though, having said this, I would like to clarify that my family was never that extravagant and got in any debt other than their mortgages. Also, I think it would more interesting if the NY Times reported the amount of assets these families had and see if these families could cover the amount of the debt they have.  If the higher income families had enough assets to make their net worths positive, then they are not too badly off.  If they had the most debt and least assets, then they are really in trouble.

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This weekend my church had its first ever meeting related to finances.  The financial details are supposed to be confidential so I will not talk about it here.  However, I was pretty encouraged by what the leadership said about how they conduct the finances of the church.

The main message I got from the meeting is that God is in control, but we still have to be good stewards of the money we are given.  My church is quite small so it is not very wealthy. The elders of the church are volunteers and they work on the finances of the church on their own time.  They assured us that all of our tithes are being spent responsibly and they have been making great progress in eliminating debt.   They also told us how our pastor is always dedicated to finding the best price when he buys something for the church and how they all try to live below their means to honor God.  I was very happy to hear all of this because I agree with all of it.  I know some Christian churches preach a philosophy that says you could be raptured anytime so it doesn’t matter how much money you spend.  Also, some pastors of mega churches are also extremely wealthy and live very flashy lifestyles with sports cars and Rolexes.  I am glad that I don’t see these attitudes at my church.

If you were there and heard some of the financial details, then you might be quite amazed as to how this little church has operated for so long in such an expensive place like San Mateo.  Seriously, the events surrounding the finances of my church just convinced me further that God is working here and that living beneath my means is the right thing to do. I am really blessed to be part of this church, and I hope to contribute more to it in the future.

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Lately, one news story that has been really getting on my nerves is that of Laura Richardson, the Southern California congresswoman who defaulted on three separate homes repeatedly and most likely used her influence to take back a home that has already been sold. The investor that bought her home has filed a lawsuit against the congresswoman and Washington Mutual for illegally rescinding a proper sale. I hope the buyer James York wins because there was no possible way that the congresswoman didn’t know about the sale. She didn’t pay her mortgage for more than six months!! What did she think was supposed to happen? After the congresswoman’s mortgage troubles were publicized, more information came to light that she has a history of being a deadbeat and owed property taxes and many other debts. She took money out of her three homes to finance her campaigns, and made only a few payments on her Sacramento home. If debtors’ prisons were still in operation, this woman would be sitting in jail right now eating gruel . Instead, she is being treated to a fundraising party in her honor to help her with her debts. One thing that made me laugh and cry at the same time was that in this AP article she said “she is like any other American suffering in the mortgage crisis and wants to testify to Congress about her experience as lawmakers craft a foreclosure-prevention bill.” Right, she is just like any other American that buys three homes, pulls money out, stops paying the mortgage and property taxes, and then denies that she knew anything about an oncoming foreclosure. That is really believable and poignant!

Apparently, Laura Richardson is not the only representative with mortgage woes. A less publicized case is of state Senator Julia Boseman of North Carolina. She and her ex-partner Melissa Jarrell haven’t paid mortgage on their $1.3 million dollar mansion since August 1, 2007. In order to clean her own hands, Boseman has taken herself off the home’s deed without her ex-partner’s knowledge. The house is set to be auctioned, and I hope Boseman doesn’t use her political clout to take the house back like Laura Richardson did.

Finally, we have the bizarre story of Shirley Huntley, a state Senator from New York. She stopped paying her mortgage intentionally as an “experiment” to see if she gets proper notification from her bank. After four months of not paying her mortgage and facing foreclosure, she paid up everything plus legal fees to avoid foreclosure. According to the article, her “original mortgage in 1976 was $28,500. Three decades later, she owes $290,000 due to repeated borrowing against her home”. So did she really conduct an experiment or did she just try to cover up some financial trouble? Either way, at least this woman owned up to her debt and paid it off. The alarming thing is that she used her home as an ATM so that her initial debt ballooned to more than 10 times of its original size.

With representatives like these, I guess I understand why the housing bailout is so popular. Congressional rules do not prevent representatives from voting on issues that help themselves financially because it is hard to avoid, but is supporting financial irresponsibility really wise? Anyway, all members of Congress and the Senate are required to report their personal finances and you can see the reports at Open Secrets. I encourage all of you to take a look at your local politicians and see how responsible they are with their own money, because I believe a person really needs to get his or her own affairs in order before making laws that affect millions of other people.

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