Less debt means more money

I honestly don’t get the Media sometimes.  Between them and politicians, I might go crazy.  Seriously, I mean it!  The other day I was browsing a couple of sites and I see a link to a Pew Report on debt for young households (“Young” being defined as the head of the household is between 20 and 35).  So, I start taking a look at this and in general, I like what I see.

Turns out, we young folk aren’t doing too bad.  Between 2007 and 2010, the last year data is available, we decreased the median level of debt in our age group by nearly 30%!  That’s ridiculous.  What’s more ridiculous is when you see that the rest of the country (everyone over 35) only decreased theirs by 8%.  Even more ridiculous are the facts that 22% of young households have no debt and 61% of households don’t even have credit card debt!

So here I am, reading this and thinking wow, we’re doing good.  We’ve got less credit card debt, less mortgage debt, less auto debt.  In fact, the only debt that’s growing is student loan debt and that only makes up 15% of the total debt for the age group.  Overall, we’re doing really well!  This is exactly how you build a good, solid foundation for later on in life.

As I start reading a little more, I see there are some outliers, as there are in any studies.  25% have debt over $106K, with 25% holding 80% of the debt.  That’s not good, especially when you take into account the good facts about.  But overall, I don’t think this stat ruins the Pew report at all.

But there’s at least one person out there who thinks this is all bad news.  The same day I saw this report, I saw this headline on the front page of CNN: “Why Less Debt among Young Adults is Bad News.”  Nin-Hai Tseng wrote this piece and I’ve gotta say, I really disagree with the sentiment.  I get what Tseng is trying to say: young adults aren’t spending as much and America is a consumer culture.  If we don’t spend more, like the generations before us, then the economy will drag and will never reach our full potential, outgrow the government debt/spending and we’re doomed.  Doomed!

If you know me, you understand that I just can’t get behind this realm of thinking.  For example, last year the US government paid almost $360 Billion in Interest, just to service their debt.  From 2003 to 2012 we spent $3.89 Trillion on interest payments on US government debt alone.  Trillion.  With a T.  Now think of that as your household.  It won’t be trillions but it will be thousands.  For example, let’s say you use your credit card and purchase $10,000 worth of goods at 18%.  You didn’t want to do this of course but you felt guilty of making the economy drag and slow down after reading Tseng’s article.  You start paying down your debt every month, putting $200 towards your credit card bill.  After 7 years and 10 months, you’ve finally paid off your credit card!  And you only paid $8600 in interest over those years.  I won’t even get into how much money you’d have if you had invested it (it’s worth a downpayment on a cheap house).  The point is here, Tseng is arguing that we’re slowing down the economy by not using debt to fund our lifestyles.  I’d like to think that we’re really just finally being smart with our money.

If anything, Tseng does bring up the point of wages being lower for young households.  It’s true that less of us have ordinary jobs, let along good paying ones.  But I think it says something to how we’ve obviously wised up to the mistakes of others, especially if we’re not utilizing credit cards and other financial instruments to make up for lost cash flow.

In the end, I think that maybe, just maybe, our generation is going to be OK.  If we keep up with maintaining less debt then we’ll ultimately have more cash to spend.  And I think in the long run, that’s more of what we need than using debt to fund everything we do.

One thought on “Less debt means more money

  1. It certainly is a catch-22. The American economy is built on spending. Without people buying things, the economy grows slowly and cannot experience full growth. But, if people overspend, they they are saddled with debt. There is a fine line in between the two of consumers spending, but not going into debt.

    I am encouraged about the numbers you mentioned. Hopefully it isn’t just the effects of the bad economy. By that I mean, usually consumers cut back on spending when the economy tanks and then do into all sorts of debt when times are good again. I hope many have learned the importance of staying out of debt.

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