Peruse any personal finance blog and you’ll see that debt is a huge concern for the average consumer. From credit cards to student loans, car loans to mortgages, debt is prevalent in our lives.
The Federal Reserve reports household debt at a record high, hitting $13.29 trillion this year. That puts the average household credit card balance around $8,000.
Most of us won’t find these stats too surprising.
Recent movements like Dave Ramsey’s
But is it helping? Are we better off as a society from a newfound awareness of excess consumerism? Or are we spinning our wheels, frustrated because the debt machine is still churning and we’re being crushed by it?Are we better off as a society from a newfound awareness of excess consumerism? Or are we spinning our wheels, frustrated because the debt machine is still churning and we’re being crushed by it? Click To Tweet
Debt elimination programs are helpful but they’re often incomplete. They address the what and the how, but not necessarily the why.
The reality is, excessive debt is a complex problem based on a lot of factors. In dealing with it, we should consider not just the symptoms on the surface but the underlying causes as well.
Here are some truths about debt.
1. Debt isn’t complicated
Debt overload is a complex issue but debt itself is not. Before we can have a meaningful conversation about debt, we need to understand the basics of how it works.
Stripped down, debt is merely buying money that we don’t have (yet). In this sense, money is a product. A thing that you buy, just like a pair of shoes. The price you pay for those shoes is above and beyond what it cost the retailer to make them.
In the case of money, that premium you pay is called interest. Interest is simply the cost of money. When banks (the store) lend money (sell the product), the interest they earn on that loan is their profit.
Easy enough, right?
2. Debt can be useful
Debt has a purpose. It can be a useful means to an end but not an end in itself. It’s meant to be a tool, not a source of consumption.
Like a lever (hence the word leverage), debt is merely a way to access something bigger (more costly) using less force. Think down payment on a home.
But when we use debt improperly, we end up having to exert much more force than we intended (i.e. paying a ton of interest on something we charged on the credit card three years ago). That’s when debt goes from being helpful to harmful.
This drawing shows the right and wrong ways to use a lever. It applies to debt as well. You can use leverage to do amazing things. Or, you can wear yourself out. It depends on how you position debt in your life.
3. The world is built on debt
Debt is fuel for propelling the world forward.
Governments borrow money from citizens to fund public amenities like roads, parks, and libraries.
New businesses borrow money to build out their entrepreneurial vision.
And many esteemed professionals–doctors, lawyers, university professors–borrow money at some point to fund their extensive training.
Likewise, student loans were how I funded my college education. Without taking on debt, it would have been hard for someone like me to get postsecondary schooling. I wouldn’t have learned what I needed to get into my industry, or even write these very words that you’re reading. I’m indebted to debt and most likely, you are too.
4. Debt is dangerous
While it’s true that debt spurs innovation and helps build the world, it can also be our demise if we’re not careful. Just a decade ago, it almost destroyed us.
That’s because there are inherent dangers in dealing with debt. Lenders are taking a risk loaning out money that might never get repaid. Borrowers are risking their other assets (things they own) being taken away if they’re unable to pay back the loan.
The problem for consumers is that the ability to pay back debt is not always within our control. Unexpected life events or a poor economy could ambush our best intentions to repay, resulting in bankruptcy and damaging our credit history.
Debt is a gamble. And it could be lethal financially.
5. But debt is not evil
However, debt is not inherently bad. While some people clearly abuse their access to credit, debt is not the humongous moral shortcoming that we make it out to be.
On the contrary, excessive debt reflects a failing in our system–a system that worships the free market yet doesn’t inform its people about the inner workings of capitalism.Excessive debt reflects a failing in our system--a system that worships the free market yet doesn’t inform its people about the inner workings of capitalism. Click To Tweet
A system where consumers get lured into overspending as sellers chase profits by exploiting the ignorance of unsuspecting buyers.
A system where knowledge is rampant, but understanding is scarce.
As a part of that system, we’re constantly badgered by marketers to invoke demand. We’re pressured to enter the marketplace and browse before we’re ready to buy–before we’re even aware that we need to buy.
It’s an endless cycle of prospecting and pressure. We start borrowing money to get things we want–but may not need–without fully understanding what we’re getting into. Compounded over time, our economy ended up here: a hot mess of wildly growing credit lines.
6. Debt is a slippery slope
So, you might feel desperate to turn back the tide and get out of debt. It’s a noble pursuit. But even when you manage to get out of debt, it’s hard to stay out of it. Unless you disappear off into a cave for the rest of your life, you will continue to be bombarded with consumerism.
I know I was. I was debt free a few years ago. But bit by bit, I ended up back in debt (I’ll share my debt story another time). It’s an unfortunate boomerang effect and it’s even worst the second time around. I’m actively working to get back to zero but now I know firsthand that debt is a slippery slope.
Getting out of debt is hard but staying out of debt is harder.
7. Debt is a choice
You may think that your peace of mind is held hostage by banks. Or that your future wealth is in the hands of brokers.
The truth is, you have a choice. We all do. Many of us were never taught how to choose wisely so most of us haven’t. But you can still choose to get informed and make better choices going forward.
Instead of avoiding it, you can choose to own it.
Facing the facts
Debt is a fact of life and it’s not disappearing any time soon. It’s multifaceted and complex. The best way to face it is to learn about it and gain a working knowledge.
Ultimately, we don’t lack information. We lack understanding. If we apply ourselves, we can defeat debt. For good.
