Principle #4: Power Down Your Debt

It goes without saying that today, both nationally and personally, we are tangled in a trap of debt. As a nation our collective credit-card bill, which was $240 billion in 1990, has now climbed to a whopping $677 billion.1 And total U.S. household debt now stands at $5.4 trillion.2 Debt in this country has risen as a percentage of disposable income from 35 percent in 1952 to 100 percent in 1998.3 That means that as a nation, every penny of our in- come is going towards debt, leaving nothing to save for the future. Our product-oriented society most assuredly contributes to all this debt entrapment. Americans have become so accustomed to spending and borrowing that they never question whether a purchase should be made, but only if they can cover the minimum monthly payment, falling victim to what debt counselors call the “minimum-payment” syndrome. 

This reckless spending has infected the majority of Americans. James Clayton, a history professor and U.S. economics researcher confirms this point in his best- selling book, The Global Debt Bomb: Along with the lowest savings rate in the industrial world, the United States has the highest consumption rate. To illustrate, in 1965 the rate of personal consumption as a percentage of net national prod- uct was 68 percent; by 1991 that figure had risen to 77 percent. This substantial increase comes at the expense of everything else...As Peter Peterson, who was secretary of commerce during the 1970s has long argued, this strong desire to consume is part of our policy of growth maximization and entitlement mentality....Our rapidly expanding en- titlements are a derivative of this larger desire to consume [and] debt is the vehicle by which greater consumption is made possible.4 If it weren’t for easy credit and the widespread acceptance of debt (once broadly shunned as an immoral and shameful method of acquiring goods), Americans would not be infected so seriously with the disease of consumer- ism. Debt helps makes the entitlement and material acquisition possible on a scale in the United States that has never before been seen in any country or at any other time in the history of the world. Savvy media moguls know how easily available credit has become, counting on it as a means to further seduce Americans into purchasing more goods and services through emotional advertising messages. Not only do those who are sick with the disease of consumerism listen to these messages and make purchases they cannot afford, but they further compound the problem by going into debt for them, adding an interest payment on top of the expense. 

This triples the amount of money they should actually be paying for an item. Is it any wonder that the majority of Americans cannot keep most of the money they make? In the United States, consumer spending has risen twice as fast as income, and individuals have been withdrawing more money than they put into savings for the first time since the 1930s.5 In addition to consumerism, a prosperous and seemingly strong economy during the 1990s added to the notion that high levels of personal debt are acceptable. A somewhat artificial euphoria has floated over the United States for years because of a 10-year economic boom, a boom that dampened the stigma of borrowing on credit and contributed to a sense of “entitlement” that many people possessed during that decade. Most Americans didn’t worry about getting into debt, believing that it wouldn’t really hurt them because they could not imagine an economic downturn. But history proves otherwise: Where there is a boom, there will always be a bust that will follow it. James Clayton notes that the euphoria surround- ing Americans has given them a false sense of well-being and he warns that being in debt without fear of economic risk is a very dangerous place to be: 

The message conveyed. . .by Congress is that Americans no longer need to worry about rising public indebtedness—that a growing economy and a continually rising stock market will solve the debt problem that has plagued the nation for several generations. This euphoric outlook is even more evident regarding the rising private- sector debt. Private-sector debt in the United States in 1999 was about 130 percent of the gross domestic product (GDP), the highest level on record. Equity prices, which have risen faster in the U.S. than in any other major nation since 1990, are often used to justify this level of private indebtedness and unprecedented optimism. A rapidly ris- ing stock market is thought to have increased the net worth of corpo- rations and households, thus justifying historically high levels of debt. This stock-inflated net worth is also used to justify a zero household savings rate.6

Without fear and respect for money, our current generation is sinking itself into greater debt enslavement by its “gotta-have-it-now” attitude. In 1998, consumer credit as a ratio to after-tax income reached 21 percent in the U.S., the highest on record.7 The average American now has 11 credit cards, up from seven in 1989. And the number of credit cards in circulation increased 34 percent between 1988 and 1994, the number of transactions increased 55 percent, and the overall value of credit card transactions in- creased 98 percent.8 James Clayton, again, makes a very stark observation about this level of debt: “Americans, who invented the shopping mall and the credit card, believe they deserve more than they have. So why shouldn’t they continue to prosper even if they do not earn it.”9 Debt penetrates every part of our lives, with the potential of ruining far more than just our credit ratings; it can break up marriages and destroy future financial happiness. This indebtedness, naturally, is counter to the principles we have already taught about getting spending under control so that you can save for the future. And it eliminates any possibility of prepar- ing for the emotional, emergency, and retirement events we mentioned in the last chapter.