How big is the Federal deficit?

Can the debt ever be repaid?

How big is the federal debt

“A national debt, if it is not excessive, will be to us a national blessing.” – Alexander Hamilton

The average American doesn’t understand how money, budgets, and debt work at the local level. Personal finances are referred to by economists as ‘microeconomics’. When you start dealing with the finances of nations, your discussing what is known as ‘macroeconomics’. In any case, the underlying principals of income, budgeting, and debt are basically the same, only the scale is different. Savings is always good, and debt is never your best choice. Debt in and of itself is just a tool, but it can quickly spiral out of hand, and you are always spending more money when you go into debt than if you were to pay the full amount upfront in cash. The decision that needs to be greatly mulled-over is the benefits of waiting verses the benefits of instant gratification. 

Going into debt for any reason is never to be taken lightly, and should NEVER be used for trivial pursuits. Sometimes it can be very important to make an purchase in order to establish a platform for future benefits.  On a personal level, an example of this could be purchasing an automobile. There are not many individuals who buy brand new cars outright with cash, though older, used cars might be attainable. In some parts of the USA a car is a necessity. You can’t get to work, or buy groceries because there is no direct public transportation available.  Buying items you really don’t need like the latest video game, or the newest smart phone are examples of foolish debt.

In 1803, the USA doubled in size through a land deal between the United States and France, in which the U.S. acquired approximately 827,000 square miles of land west of the Mississippi River for $15 million. Known as The Louisiana Purchase, this deal was more than the country could afford even at the bargain price of 3¢ per acre, yet it was also an offer that then president Thomas Jefferson could not refuse.  The purchase deal  had to be paid immediately because Napoleon needed the funds for a war with Great Britain.  As a result the US was forced to borrow the funds from two banks in Europe at 6 per cent interest.  It took twenty years to pay back the loan, and cost $8 million in interest fees.  Even after the repayment of the loan in 1823, the USA remained in debt for another twelve years.  On January 1, 1835, president Andrew Jackson paid off the entire national debt. That was the only time in U.S. history that had been accomplished.              

Most nations have national or sovereign debts, and there is nothing wrong with having a debt in many cases. Most creditors don’t worry until the sovereign debt is more than 77 percent of GDP, according to the World Bank. In the fourth quarter of 2018, the U.S. debt-to-GDP ratio was 105 percent. That’s the $21.974 trillion U.S. debt as of December 31, 2018, divided by the $20.891 trillion nominal GDP. So the USA is in ‘the danger zone’ where creditors could begin panicking.  This was one of the reason we lost our historical AAA+ credit after the deficit doubled under the Obama administration.  

The national debt is made up of a few things, and is the total of all the bonds held at the Federal Reserve. Money begins and ends with the issuing body. When certain debts are extinguished, so is the money that created them. US Federal reserve notes are based entirely upon debt having been created through the process of fractional reserve banking. In this process, bank notes are printed and then loaned out to be repaid over time with interest. Our money is not based on a gold standard, or backed by any form of precious metals. A dollar is worth a dollar because the US Federal Reserve Bank tells you that it’s worth a dollar. It is a promissory note printed on paper or stamped on a metal coin that is redeemable for an equal amount in goods and services.  For all intents and purposes, a dollar is little more than an I.O.U.  Since all money created has interest attached to it, the amount of debt will always exceed the amount of money  in circulation.

When president Woodrow Wilson created the Federal Reserve Bank by signing the Federal Reserve Act of 1913, he created the perfect excuse of widespread spending abuse by the government. If planned government spending exceeded the federal budget, the deficit could be plugged by borrowing the funds from the Federal Reserve Bank, at interest, for the public good.  As a result, the federal deficit was  $25 billion by 1934, and rose to $250 billion by 1945. In 1982, the national debt reached  $1 trillion for the first time.  There has almost always been massive government over-spending which blew the budget. In the past fifty years,  only five years have had balanced federal budgets: 1969 under President Richard Nixon; 1998, 1999 and 2000 under Bill Clinton; and 2001 under George W. Bush.

The worst example of government over-spending occurred during the two terms of the 44th president,  Barack Hussein Obama II , the worst president in history.   On January 20, 2009, when he was sworn in, the debt was $10.626 trillion. On January 20, 2017, when he left, it was $19.947. President Donald J. Trump has been doing his best to slow the out of control spending, and he has been making progress.  It’s going to take time to repair the damage done by the previous administration.

“President Obama has almost doubled our national debt to more than $19 trillion, and growing. And yet, what do we have to show for it? Our roads and bridges are falling apart, our airports are in Third World condition, and forty-three million Americans are on food stamps.” – Donald J.Trump

The ‘I’ in Team

You earn so much in personal income each year. Your personal income is analogous to the national income from tax revenue.  Your personal budget is like a small scale version of the federal budget. Think of the national debt as you would your personal credit card. It’s the excess that has been borrowed plus interest that has been charged to bridge a spending gap.  If you’re still following along with me in this example, you’re smarter than the average American. 

The nation’s debt limit is similar to the limit your credit card company places on your spending. But there’s one significant difference. Congress is in charge of both its spending and the debt limit. When you max-out your credit card, one of three things happens:

  • You request a limit increase, so that you can continue spending more money than you can afford.
  • You request an addition line of credit, so that you can continue spending more money than you can afford.
  • You stop spending more money than you can afford because no one will extend you additional credit.

On February 9, 2018, President Trump signed a bill suspending the debt ceiling until March 1, 2019. As a result, the limit will be whatever level the debt is on that day. On February 11, 2019, it was $22 trillion. At that level, the U.S. Treasury estimates it will run out of money in September 2019. The debt ceiling is a limit that Congress imposes on how much debt the federal government can carry at any given time. When the ceiling is reached, the U.S. Treasury Department cannot issue any more Treasury bills, bonds, or notes. It can only pay bills as it receives tax revenues. If the revenue isn’t enough, the Treasury Secretary must choose between paying federal employee salaries, Social Security benefits, or the interest on the national debt. Congress created the debt ceiling in the Second Liberty Bond Act of 1917. In 1974, Congress created the budget process that allows it to control spending. That’s why Congress raises the debt ceiling. Congress must raise the debt ceiling so the United States doesn’t default on its debt. During the last 10 years, Congress increased the debt ceiling 10 times. It raised it four times in 2008 and 2009 alone.

In addition to the current national debt of $22 Trillion, the USA also has additional debt in the form of unfunded obligations, or future services that the country has promised to pay for years in the future. This is an estimated additional $80 trillion, but might be as high as $200 trillion according to some estimates.

According to experts, there are three possible ways to pay off the deficit:

  1. Raise Taxes
  2. Cut Spending
  3. Print more money

Unfortunately, each of these by themselves are all bad ideas.

Raising Taxes

All taxes raised in this country are paid for by the top 40% of wage earners.  So 60% of the workers in our country pay ZERO in federal income tax.  This is why tax cuts are always tax cuts on the wealthy. It’s because only the wealthy are paying taxes, and that’s not fair. When you raise taxes on the wealthy, you stymie economic growth and slow the economy, thus reducing tax revenue.  Consistently over time, the government has collected 17% in tax revenue of the total of the portion of the US economy regardless of the tax rate.

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Cutting Spending

When you cut spending there are certain places you can and can’t cut, plus when you do cut some federal program, the beneficiaries of that program are going to have a hissy fit.  50% of the federal budget funds social security and medicate. So you can’t cut that. Salaries of federal employees also can’t be cut, nor can you cut military spending unless you want to weaken the defense of our nation. The only fair way to cut spending here would be to phase out certain programs, and privatize some federal jobs.  The problem with privatizing some jobs is that they are tied into national security,  so only cutting jobs or lowering the starting pay for new hires could reduce costs. Also this would only affect agencies that receive tax dollars to pay bills. Quasi-government agencies like the United States Postal Service would be unaffected (as they were during the recent government shutdown) because they receive no  funding from tax dollars. All of their income is derived from postage sales.            

Printing more money.

When you print more money, you increase the number of  dollars in circulation and create inflation, so the spending power of the dollar is diminished. Also depending on how fast you increase the money supply, you run the risk of galloping or hyper inflation. Galloping inflation is when prices rise 10% each month. Hyper inflation is worse at 50% per month. Now as costs rise, salaries eventually rise to compensate, but any savings you have never increases and is worth less.  Inflation is a tax on savings.

“Blessed are the young for they shall inherit the national debt.”– Herbert Hoover

Is there a way out?

According to economics professor Antony Davies there is a way to balance the federal budget within 5 years

1) Cut ALL federal spending 10% NO EXCEPTIONS.

2) Maintain this spending level for 4 years, no increases, and no adjustments for inflation.

At the end of 5 years the budget will be balanced.

If you keep the budget balanced and maintain that fixed level, eventually the economy will grow and the deficit will be paid off in about 80 years.  There are ways to do it faster. The federal government collects $3.3 trillion in revenue and spends $4.3 trillion. So a straightforward way to pay off the debt would be to increase taxes 20% and cut spending 20% to run a $1 trillion surplus. That would pay off the nominal debt in about 15 years, depending on economic growth and interest rates.  Unfortunately both of these seem unlikely.  It is still possible to accomplish, but pie-in-the-sky programs like the Green New Deal proposed by Alexandria Ocasio-Cortez would destroy our economy, as would an expansion of the welfare state, or any move towards socialism. The best way to increase tax revenue would be through a fair tax or flat tax in which EVERY working person pays an EQUAL percentage tax, with no possible deductions or exemptions. Such a tax would drastically raise the taxes on the poorest citizens while dramatically lowering the taxes on the richest.  You could also eliminate the IRS, and reduce government oversight and expenses related to tax collection and processing.  Everyone would pay their fair 10%. In any case, right now we have the right man for the job sitting behind his desk at 1600 Pennsylvania Ave, Washington D.C.,  working overtime to Make America Great Again! As always, I wish you success and happiness!

A Federal Case?

What’s in a name?

(part one of a two-part series on The Federal Reserve Bank.)

a federal case

‘I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government; I mean an additional article taking from the Federal Government the power of borrowing.’– Thomas Jefferson, (from a  letter  sent to John Taylor on Nov. 26, 1798.)

When most Americans see the word ‘federal’ they automatically associate it with the US FEDERAL Government. By viewing the word as synonym instead of as an adjective, it has led to a confusion of meaning. Adjectives describe persons, places, or things, BUT describing something is not always the same as being something, and there are also subjective as well  as objective descriptions which can be led by emotions verses facts. In a very broad example of what I mean, let’s consider the following example: Susie calls Bobby a lazy boy at a birthday party. Her season for the statement was because she didn’t care for the way he wrapped the birthday gift. Does this mean that Bobby IS lazy? Bystanders at the partying overhearing Susie’s statement quickly take sides, some agreeing with Susie, others standing up for Bobby. None of these emotional reactions are proof of the original subjective and possibly slanderous statement made by Susie against Bobby. Yet this seems to be the modern mindset in contemporary society.  It’s like calling Trump supporters racists. If you FEEL someone is something, does that automatically make them that thing? If you hear someone else describe something, does that make it the same for you? While some things may be immutable,  others can vary widely over time or circumstance, and change from person to person.

If you asked the average person in the USA if the Federal Reserve Bank is part of the Federal Government, they would more than likely say yes, and they would be absolutely wrong.

According to Collins Dictionary of English, the number one definition of Federal is:

  1. Federal–of or formed by a compact; specif., designating or of a union of states, groups, etc. in which each member agrees to subordinate its governmental power to that of the central authority in certain specified common affairs.

The shipping company FedEx was originally called Federal Express before the company name was shortened in 2000 to its current moniker. The company was founded in 1971 by Frederick W. Smith and is currently the eight-largest private employer in the US.  Mr. Smith chose the name because  he believed the patriotic meaning associated with the word “federal” suggested an interest in nationwide economic activity. He also hoped the name would resonate with the Federal Reserve Bank, a potential customer.

The Federal Reserve Bank is NOT part of the US government.

The Federal Reserve Bank was the third attempt by representatives of the US Government to create a central banking system to oversee the nation’s financial needs. Unlike its predecessors, this current bank was NOT restricted by a twenty-year charter, and its many economic policies over the past century are directly responsible for the skyrocketing government debt which now exceeds  $25.2 trillion. That amounts to over $81,000 per citizen, or $139,000+ per tax payer (Since not all citizens pay taxes.)     

A bit of history

The First Bank Of The US

The first secretary of state, Alexander Hamilton was a great admirer of the Bank of England and was pressing President Washington to sign a bill creating the First Bank of the US. Washington had grave misgivings against signing the ‘bank bill’. Thomas Jefferson and James Madison  were strongly opposed to the measure.  Ultimately, after considering many opinions on the matter, and having decided that the bank bill was constitutional, Washington signed the bill into law on Feb 25th, 1790. The building for the newly created bank was built in Philadelphia in 1791. Twenty years later, In 1811, the U.S. Senate tied on a vote to renew the bank’s charter. Vice President George Clinton broke the tie and voted against renewal, killing the institution.

The Second Bank of the US

Modeled on Alexander Hamilton’s First Bank of the United States, the Second Bank was chartered by President James Madison in 1816 and began operations at its main branch in Philadelphia on January 7, 1817 managing twenty-five branch offices nationwide by 1832.  President Andrew Jackson was the seventh president of the US, elected in 1829, was absolutely hated the bank, arguing that the  bank was a corrupt institution which failed to produce a stable national currency, was unconstitutional, and was dangerous to American liberties. He managed to convince congress NOT to renew the charter for the bank in 1836. It folded in 1841.

A political cartoon from 1833 shows Jackson destroying the bank with his “Order for the Removal,” to the approval of the Uncle Sam like figure to the right, and the annoyance of the bank’s president, shown as the Devil himself.

1832bank1

“That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.

Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 per cent, to the stated cost.

But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good. “– Thomas A. Edison

The Federal Reserve Bank

The Federal Reserve Act was signed into law by President Wilson on December 23, 1913. It created and established the Federal Reserve System, the central banking system of the United States. It also gave the newly established system legal authority to issue Federal Reserve Notes (U.S. Dollar). The act had far reaching implications including the internationalization of the U.S. Dollar as a global currency.

Unfortunately the massive downside is that since its creation the Federal Reserve, (or sometimes  just called the Fed)  is directly responsible for the national debt, and the devaluation of the US dollar of 92%. The money the USA ‘borrows’ from the Fed is money that is ‘created’. They just order the mint to print more money. Then they charge interest on the created money. Currently the US can’t even afford to pay the interest on the money it’s loaned.

The fact of the matter is that the government NEEDS money to run, but it was no way to produce money. You can’t create prosperity by spending yourself into debt. Consider that over the next week, and come back next Sunday for part two of this long blog post on the Federal Reserve Bank. As Always, I wish you success and happiness!  

Very Interesting…

Earn interest while keeping your emergency fund fluid.

As you work your way towards financial freedom, it is imperative to have liquid assets. The most liquid of all assets of course is always cash. Having stocks in a brokerage account is dandy, but the turnaround time to sell them can be days until the funds are transferred into your bank account.  This is no good if you have a situation arise which requires immediate funds.

Because life happens, having an emergency cash supply is essential.  The ideal emergency fund is to have two years worth  of living expenses stashed away. It sounds like an excessive amount, but believe me it is achievable. It just takes time to reach that level.

Two years worth of living expenses for most people is measured in tens of thousands of dollars. So for argument’s sake, let’s assume the amount we are discussing is between $25,000 and $50,000. Keeping that amount of money liquid can be a tricky matter, but you should not sacrifice the chance to earn interest on as much of your emergency fund as possible. There are ways of earning varying amounts of interest while still keeping your assets accessible.    

touchme

The first and most important thing I recommend is always having $1000 physically on hand in your home. Keep it hidden of course, but have it! You’ll never earn interest on this smallest part of your emergency fund, but it is worth the small sacrifice to be able to reach out and touch your money if you need it in seconds.  It is better to have a $1000 in cash on hand you don’t need, than to need $1000 you don’t have.  Again, this is EMERGENCY MONEY, not fun money.  If it’s not a matter of life and death, DON’T TOUCH IT! DON’T EVEN LOOK AT IT!

Next, keep between $2000 and $5000 in your savings account. There are still some banks that will offer a minimal amount of interest with no fees. Often times credit unions will offer better interest than banks. Usually keeping $5000 in either a saving or money market account will earn you a higher interest rate for your cash. You can shop for the best interest rates offered at www.bankrate.com

Laddering CDs

Certificates of Deposit or CDs offer better interest rates but they tie up your funds until the maturity date. The longer the term, the higher the interest rate. Typically the terms run from as little as 3 months to as long as 5 years. To take advantage of the best interest rates while still keeping the cash fluid, I would recommend using a CD laddering strategy. Distribute your next $5000 to $10000  into a varying number of CDs each having different terms and end dates. You can create a ladder of CDs as long as you like with each CD being a rung. As each rung matures you can access it without penalty, or roll it over and wait for the next rung in the ladder to mature.

EX: Using $10,000, divvy it up into:  

  • 5 year CD $5000
  • 2 year CD $2000
  • 1 year CD $1000
  • 6 month CD $1000
  • 3 month $1000

With the CD ladder in this example, you will have a minimum of $1000 available to you every 3 months, and a minimum of $2000 every 6 months which you can cash in without penalty should you need it. Or let it roll over and continue to accrue interest.

Brokerage Account

Any part of your remaining cash assets beyond the above suggested $16,000 of allocated funds should be kept in a brokerage account such as MerrillEdge or TD Ameritrade to be used for the purchase of dividend stocks.  By investing in a diversified portfolio of various dividend paying stocks, you will be able to hedge your bets while maintaining a return on your investments. You’ll have to do your own homework on which stocks to buy, as past performance does not guarantee future earnings.

Experimental Investing

When you have two years worth of living expenses under your belt, you can afford to use any additional ‘mad money’ you may have for more risky financial ventures.  Some suggestions could include:

  • Collectibles / art
  • Real estate
  • Starting a business
  • Financing peer-to-peer loans through Prosper.com

 

Again, these are just suggestions and not recommendations. Ultimately you have to decide your financial future, but if you fail to plan for your future, you won’t have one.  As always I wish you happiness and success.  

Other People’s Money

Making reward cards, introductory rates and points work for you.

“A penny saved is a penny earned.” – attributed to Benjamin Franklin

I walk a lot outside during the day. It’s rare that a day goes by where I don’t find at least a penny on the ground. On average, I find about a dollar in coins a week, and I still stop to pick them up.  When I was younger, there used to be a joke circulating about Bill Gates, (who is still one of the three richest men in the world). It ran along the lines of this: “If you average out all the money Bill Gates makes in a single year, he  earns over $500 a second. If he was walking down the street and found a $100 bill lying on the ground, it would cost him money to stop and pick it up.”  The most amount of money I’ve ever found lying on the ground at one time was a loose $50 bill half-buried in the snow on Liberty Ave. That was a long time ago, and I was amazed and shocked at my good fortune, but also I felt a little bad for whomever had carelessly lost that much money.  

At a certain point, picking up discarded coins in the street becomes more trouble than it’s worth to some people, but I’m still of the mind-set that every penny saved adds up. To that end, I still use coupons and reward cards when I shop. These are great ways to save a few cents or even a few dollars each time you used them, and over the course of a year that can add up to hundreds of dollars.

The Store Loyalty Reward Card

Using a store loyalty reward card is easy enough, you just have to swipe or scan the card each time you shop. My local grocery store also sells gasoline (petro). At least 3 to 4 times a year, I accumulate enough points to earn a 100% discount on fuel. Gas in the USA isn’t as expensive as it is in other countries, but it’s still a fantastic savings in my book.  Just always make sure when collecting point to check if and when they expire, or you may lose them with noting to show.

card savings

gas

Reward Credit Cards

Some credit cards have a point reward system as well. These can be as simple as 1% cash back on all purchases, to a range of categories which each  have a special point rating. Reward credit cards ONLY work for people with perfect credit and who pay their entire balance in full each month.  The reason for this is twofold.

  • You usually only receive these special offers if you have good credit. The better your FICO score, the better the offers you receive from credit card companies.
  • Failing to pay the balance in full each month will cost you interest fees which will negate any savings earned by rewards.

I once read a post online where a woman was complaining about how her reward credit card was worthless because she was being charged all these fees each month for interest, exceeding her limit, and late fees. Usually the problem is not with the card, it’s user error indicative of a much greater personal problem. Never give a loaded gun to a baby, or a credit card to a fool.

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Special Rates or Introductory Offers

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Another offer reserved for those with stellar credit are cards that offer 0% interest, fees, and balance transfers. There are great during the introductory period, BUT you must exercise extreme caution with these cards. In essence, you are playing with other people’s money. The issuing bank is allowing you to ‘play with their money’ with no fees, in the hopes that you will ring up a huge balance and not be able to pay the balance in full at the end of the promotional offer. People who lack self-control fall victim to this all the time. Interest is calculated from the time of the purchase. If at the end of the promotional period, a balance is remaining, you will incur the full interest charge of the purchase, even if you have a relatively small portion remaining. For instance: Every October, I take my car in for its annual  maintenance inspection. I get all the little issues resolved, buy new tires, replace worn parts etc. Till it’s all said and done, the bill for keeping my car running another year can range from $500 to $2000. I usually pay with my Firestone Store Credit Card. It has a six months same-as-cash special promotion rate for all purchases over $299. Although the minimum monthly payment is about $20, you’ll never be able to pay the balance off in time if you only pay the minimum. The key to these cards is to divide the balance into five equal amounts, and pay that amount each month for 5 months. This allows you ONE extra month in case you need it.  In the image shown below, the six-month promotion ends April 5th. Even though I’ve paid almost the full balance except for a measly $200, if I fail to send the full balance in by the due date, I will incur $54.46 in retro-active interest fees! No thanks! I (almost) never pay interest.

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If you are able to take advantage of special offers like the ones I covered, enjoy yourself but always remember:

  • Pay your balances in full each month.
  • Pay your bill early.
  • Never skip a payment, or pay the bill late.
  • Never spend more money than you can afford to pay back.

As always, I wish you happiness and success!

A Snowball’s Chance!

Eliminating debt is just that simple!

snowball

It never ceases to amaze me how people seem to just amass mountains of debt, and the ‘creative reasons’ they list for having done so. From the instant gratification of “gotta have it now!”, to keeping up with the Joneses,  or just the insidious swipe of the credit card to pay for our morning coffee on the way to work. Americans seem to have every excuse in the book for why they are in debt, and it’s always ‘not their fault’.  Now don’t get me wrong, emergencies do happen, and tragedies do occur, always at the worst possible time and in the most expensive manner.   Grabbing breakfast and a coffee on the way to work is NOT an emergency. A new bigger HDTV is NOT an emergency. A new outfit when you have a wardrobe bursting with unworn clothes is NOT an emergency. These are bad habits that you’ve fallen into and the credit card which has allowed you to charge up this mountain of debt was your responsibility.

NO NEW DEBT!  

When I found myself in $50,000 worth of debt in 2001, I thought I’d never crawl out of the hole I had dug myself into. It took years of hard work and discipline to become debt free, and I was ridiculed by several know-it-alls who could not comprehend why I just didn’t file for bankruptcy and make it ‘easy’ on myself. Often times, the ‘easy way’ is the wrong way. Bankruptcy is FOREVER.  And if you refuse to change your behavior, you’ll find yourself back in the same situation as before. I’ve witnessed friends making the same mistakes after filing bankruptcy. Because THEY refused to alter their behavior, their chances of ever becoming debt free are the same as a snowball’s chance in a blast furnace. The first step towards recovery is NO NEW DEBT!  You can’t spend one cent on ANYTHING that isn’t essential. Don’t even charge a stick of gum. NOTHING! If you lack the willpower to stop using your credit cards, you MUST cut them up. I remember as a boy watching an old TV show from the late 70’s called WHAT’S HAPPENING!! A character named ReRun (played by Fred Berry) gets his first credit card, and quickly gets into trouble. One credit card quickly turns to a dozen, and soon he needs to finance his credit cards with a loan. In quick order, everything he owns including the Monopoly game and even his red beret  gets repossessed.  In the penultimate scene of the episode, ReRun and friends sell EVERYTHING in the apartment except his food processor, which he fills with his credit cards to make ‘credit card coleslaw’.  

 

The Debt Snowball

The level of intelligence which created a problem is never sufficient to solve the problem, and that’s why there are walls of self-help books in bookstores. It’s so that you have the ability to consult someone wiser than yourself and find a solution to your problem.  For me, that wise counsel came from reading books by Dave Ramsey.  While in a discount remainder store, I found a thin book titled Pricele$$ marked down to $2.99. What drew me to the book was the cover depicting credit cards in a blender which reminded me of the What’s Happening!! episode.

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While reading his book Pricele$$, I first learned about his debt-destroying weapon, The Debt Snowball. It is the opposite of the more convention debt stacking, or debt avalanche payment method.   In the traditional debt stacking method, you pay the bill with the highest interest rate off first. You dump all your extra cash into this bill while maintaining the minimum payments on all other bills. Like an avalanche of money just wiping that debt off the face of the Earth. Dave Ramsey instead advocates the opposite approach, which he dubs ‘The Debt Snowball’. Picture a small snowball rolling downhill increasing in size and speed as it gains momentum.  With this method, you list all of your debts in order from smallest to largest regardless of interest rate, and their minimum monthly payment.  You then use every extra penny you have to pay off that smallest of your bills first. As soon as you wipe it out, you apply its minimum payment and add it to the minimum payment of the next bill on the list. You repeat this process until all debts are paid. This method worked for me, and it will work for anyone as long as you follow three simple rules.

  • No new debt. You can’t charge anything.
  • All ‘extra’ money from cutting non-essentials must be used for paying down the smallest debt.
  • You MUST keep making the minimum payments on all your bills.

The last one is a real no-brainer. You can’t stop paying one existing bill to finance another. I tell myself that no one could be this stupid, but just this week, a friend-of-a-friend had her car repossessed for non-payment because she needed the car money to save for a down payment on a new apartment. I can’t fathom how she convinced herself that this was a great idea.  Like I wrote last week, few (if any) of my friends take my financial advice seriously, often choosing their own disastrous schemes over wise council. Like the old saying goes, “a fool and his money are soon parted.” As always, I wish you happiness and success!