I can remember the days before refinancing, adjustable rate mortgages, student loans, automobile leasing and multiple credit cards. Sounds like a long time ago but it actually wasn’t that long ago – sometime in the 1960s. Now maybe for some people that is a long time ago.
It is too easy to get into debt these days and if you are not careful, you can dig yourself into an economic hole that is deeper than the Grand Canyon. Somewhere along the line, you have to use common sense. I am amazed today at the people who couldn’t raise $100 dollars without borrowing. A contingency fund – what is that? A saving account that is not a 401(k) or a 403(b) – you have to be kidding?
Our whole concept of debt has changed. People now live like the United States Federal Government. They carry lots of debt. Years ago most people had a 30 year mortgage on a reasonably priced home. Maybe a 30 year mortgage was not the best debt instrument but there weren’t many other options back then. I have heard of mortgages today, however, where there is a balloon balance at the end of a fixed number of payments. You make 120 payments for 10 years and then refinance the balloon balance at the going rate. Amazing! Or there are 5 year adjustable rate mortgages in the market today that are “interest rate only” mortgages. It became fashionable a few years ago to gamble on the fact that your home would rise in price and you would gain equity through appreciation. Sadly today, many young couples still refinance their homes taking cash out in the form of a loan and basically eliminating any equity they have gained. Home prices are a far cry from those of even 20 or 30 years ago. The average home in some part of the country can be between $500,000 and a million dollars or more. I recently saw a small home in the area I live in that was about 45 years old and had a one car attached garage that was listed at $890,000. So much for houses in New Jersey being affordable!
There is no doubt that cars have gone up in price making paying the car off nearly impossible. However, when one considers only the monthly lease cost, many drivers will lease a more expensive auto versus a lower priced vehicle that would give them a more reasonable monthly lease payment. The critical factor here is the difference monthly in the lease payment. Thinking today is – “go for it.”
Again there is also no doubt that college tuition has gone out of sight. My grandson is using all the money that he and his family have accumulated to pay for as much tuition, books, room and board that he can for the first year or two and then after that is gone, you guessed it – loans! Recently I read that a student graduating from college today can carry a college loan with him or her along with their diploma down the aisle in the area of $35,000 to $40,000 dollars. I understand investing in your future. However, some common sense has to be used when this loan is taken out. What type of degree are you getting and what is the salary you can expect to have when you start paying against this note? Sadly, many students graduate without giving a lot of thought to paying for this debt. Many do not have any money management skills and with the loan money being deposited in their bank account at the beginning of the semester, do not realize that the pizza and beer that they have just charged could cost them a lot more than they think if it becomes part of that $40,000 balance.
Have you ever been behind a person in a grocery line that fishes through his or her wallet to find a credit card that they can use to pay for their purchase? I watched a lady recently do just that. I can only estimate but I would safely say that she had at least 15 or 20 cards. Many could have been retail store cards but I cringed when the first two cards were declined. She was not deterred in any way and continued to feed cards to the grocery clerk until one was accepted. For many consumers today, credit card debt becomes burdensome so what do they do? They take out a debt consolidation loan. Now the interest rate and terms of many of these debt consolidation loans are a better financial deal but unless the borrower has some plan to pay down or pay off the debt, what they are basically doing is deferring the inevitable. Recently there was an article that the average credit card debt was around $15,973.00. I think this is high but then I grew up in an era when that dollar amount was close to the cost of a house for my family.
Without using common sense today in our financial dealings it is like the Federal Government operating without a balanced budget. It should be of no surprise today that many people have provided nearly nothing for their retirement and their savings, other than maybe an investment account, is close to nothing also. People today have to live more responsibly. Most students graduating from college today at 22 years of age have about 40 to 45 years in their working careers. Living on the edge is risky as all it takes is an accident or sickness or the loss of a job to catapult you into poverty or bankruptcy or both.
I think the problem today is that it is hard to say no. The good life is there to enjoy. I think there was a beer ad a few years ago that advertised “go for the gusto.” Youth has a fooling affect that says “you have time to pay for it later.” I wish this were the case. Economic sense has to return at some point in time.