Read: http://news.yahoo.com/s/ap/20090909/ap_on_bi_ge/us_economy
Perhaps the logic the government is employing is the hope that if they say this enough times we will eventually believe it. As if, we American's will simply overlook the other articles discussing unemployment, mortgage delinquency rates, the declining value of the dollar, and our declining global economic status. Nobody in the government wants an economic disaster on their watch and they'll max out the credit cards to prevent it – but will it work?
As mentioned in earlier post, the federal government has spent 7 trillion dollars in interest alone since 1988. The government spends far more money than it takes in and it continues to borrow more money than it can repay. What is even scarier is the fact the government continues to think of new programs (health care) to create when it's unable to pay for the existing ones. You don't need to be a financial genus to recognize this doesn't make a lot of good financial sense.
Why you may ask yourself why do I bring this up – after all, I write personal finance articles not economic dissertations. There are several reason and they all affect you.
First, the government has quickly become the worlds largest debtor. They are sucking up available credit like a super vacuum, competing with you and business for a limited pool of money. Of course, another problem we face is the government is sucking up money that doesn't exist, thereby leaving the Federal Reserve Bank to print more, thereby declining value of the dollar. Now this is the crazy part. The federal government is releasing the money as fast as it can and it's only released less than a third of what they've planned – the dollar is plummeting fast and they're not even close to finishing the devaluation the dollar! Do you remember the day when it cost a nickel for loaf of bread – well soon we'll be saying, “wow, bread is on sale for only two-hundred and fifty dollars, that's fantastic!” And of course, that's the second problem – inflation.
This article isn't to point the finger at the evil government – after all, the government is comprised of people whom we've elected and we hold them to basically the same standard we hold ourselves. However, typically when we make financial mistakes it doesn't impact our entire community. Most of us have been raised to borrow, borrow, and borrow. We already know financial literacy is horribly low, yet knowing this fact hasn't raised it. As adults, it's your responsibility to live responsibly and pass this lifestyle onto to your children and the other people you influence.
Debt is bad. I said it before and I'll say it again. Nobody goes bankrupt for losing everything; you go bankrupt when you lose MORE than everything. Only debt leads to bankruptcy and ONLY DEBT. We won't be able to fix the larger issues that surround us if we're unable to tackle the issues directly in front of us. Focus on your personal finances, learn to live without debt, get out of debt, and then focus on helping someone you know do the same. If we can change the systemic perception of debt perhaps we can influence our elected officials to be far more responsible than they have been to this point. If nothing else, you'll enjoy the prosperity that debt and interest has been robbing from you and you'll at the very least, change your own life.
Now, say it with me, “Debt is bad.”
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http://www.helpyoubuytime.com
Wednesday, September 9, 2009
Tuesday, September 1, 2009
Rich in Debt: The Real Cost of Debt
The average American will spend between $25,000 to $40,000 in interest over a ten year period. This sad reality is what keeps most Americans living paycheck to paycheck, impedes the ability to build a proper savings, and eliminates most American's from being able to invest wisely.
The Real Cost of Debt
Debt has direct and indirect costs; and it's often the indirect costs that are the most expensive. The direct costs of debt are obvious and most noticeable by consumers when they make a minimum payment and see little diminished impact to the principle debt amount. Creditors, as a business, see fit to get paid first, then allocate the remaining payment towards principle. Even in simple interest loans, such as in auto loans, you'll often see a sizable portion of each payment allocated towards interest. Most people do not need any lessons in understanding the direct costs associated with debt.
What is often more obscure are the indirect costs associated with carrying debt. The one area that should concern most debtors are the opportunity losses they commonly experience. Opportunity losses in investments, financial security, careers, and lifestyle.
Investments
While it may be true that leveraged investors are capable of participating in more investments than a cash investor, a non-leveraged investor has the ability to invest in safer financial instruments. Since leveraged investors are borrowing money at interest their investments must provide a return that exceeds that cost. As most investors know, there is a direct correlation between risk and reward, meaning, that if a higher reward is expected the associated risks must also be higher. Since these investors recognize some of their investments will lose significant value, they must hedge there investment bets in a way that their overall financial strategy yields a return to cover their inevitable losses. Of course, if the overall strategy does not yield the minimum expected return, financial disaster lurks in the shadows.
Cash investors are able to invest is far less volatile areas; primary reason, the cost of their money is far less expensive. They are able to benefit from lower yields, along with less risk exposure, netting returns that match/exceed their leveraged counterparts.
Financial Security
People do not go bankrupt for losing everything; they go bankrupt for losing more than everything. By consumers living outside their means they raise the potential of a third-party making the decision of what they'll lose. They raise the potential that a bankruptcy judge can order assets surrender, accounts liquidated, wages garnished, losses that can easily exceed any perceived gains that were realized by using credit. Consumers commonly make long-term monthly financial commitments based on short-term stability.
The one center card to their financial house of cards is often the income derived from a job; two income households are often twice as likely to feel their house of cards shaken – why, because they too live outside their means. Income loss, even temporary income loss, easily can destroy their credit and take away the items they purchased with credit (cars, vacation homes, timeshares, etc). Debt builds an entirely false sense of financial security, if anything, debt builds financial insecurity.
Careers
Just as leveraged investors must realize higher gains on their investments, consumers in debt must earn higher incomes to sustain not their lifestyle, rather, to service their debt. The higher the debt the less career mobility that consumer will be allowed. These people cannot simply wake up one morning and decide they want to start a business, or take a chance with a different company, they are controlled by their financial obligations not their personal career interests.
Lifestyle
People in debt must work. They must maintain a higher level of income to sustain their interest expenses. For those in debt, the prospect of retiring early, taking months off work, truly owning real assets outside their primary home simply becomes an unattainable dream. Consumers that are burdened with debt must conform their lifestyles to match the limitations that debt presents them.
Priority: GET OUT OF DEBT!
The sooner consumers discover ways to manage themselves out of debt the sooner they will be able to move on and discover wealth. Sadly, for many consumers there is no clean way to getting themselves out of debt. Meaning, they have buried themselves so far into debt it will be nearly impossible to get out of debt without harming their credit score. For most, getting out of debt will require a significant reduction in spending habits, it will require significant interest rate deductions, and in some cases, creditors settling the debt for less.
Consumers must also learn to increase their cash savings while paying off creditors. Remember, often significant interest rate deductions and debt settlement will render those credit accounts closed, as credit accounts close, your dependence on a cash emergency fund will increase.
The biggest benefit of maintaining a strong cash account is you'll quickly move from a debtors mentality to an owners mentality. You'll own more and owe less.
The Real Cost of Debt
Debt has direct and indirect costs; and it's often the indirect costs that are the most expensive. The direct costs of debt are obvious and most noticeable by consumers when they make a minimum payment and see little diminished impact to the principle debt amount. Creditors, as a business, see fit to get paid first, then allocate the remaining payment towards principle. Even in simple interest loans, such as in auto loans, you'll often see a sizable portion of each payment allocated towards interest. Most people do not need any lessons in understanding the direct costs associated with debt.
What is often more obscure are the indirect costs associated with carrying debt. The one area that should concern most debtors are the opportunity losses they commonly experience. Opportunity losses in investments, financial security, careers, and lifestyle.
Investments
While it may be true that leveraged investors are capable of participating in more investments than a cash investor, a non-leveraged investor has the ability to invest in safer financial instruments. Since leveraged investors are borrowing money at interest their investments must provide a return that exceeds that cost. As most investors know, there is a direct correlation between risk and reward, meaning, that if a higher reward is expected the associated risks must also be higher. Since these investors recognize some of their investments will lose significant value, they must hedge there investment bets in a way that their overall financial strategy yields a return to cover their inevitable losses. Of course, if the overall strategy does not yield the minimum expected return, financial disaster lurks in the shadows.
Cash investors are able to invest is far less volatile areas; primary reason, the cost of their money is far less expensive. They are able to benefit from lower yields, along with less risk exposure, netting returns that match/exceed their leveraged counterparts.
Financial Security
People do not go bankrupt for losing everything; they go bankrupt for losing more than everything. By consumers living outside their means they raise the potential of a third-party making the decision of what they'll lose. They raise the potential that a bankruptcy judge can order assets surrender, accounts liquidated, wages garnished, losses that can easily exceed any perceived gains that were realized by using credit. Consumers commonly make long-term monthly financial commitments based on short-term stability.
The one center card to their financial house of cards is often the income derived from a job; two income households are often twice as likely to feel their house of cards shaken – why, because they too live outside their means. Income loss, even temporary income loss, easily can destroy their credit and take away the items they purchased with credit (cars, vacation homes, timeshares, etc). Debt builds an entirely false sense of financial security, if anything, debt builds financial insecurity.
Careers
Just as leveraged investors must realize higher gains on their investments, consumers in debt must earn higher incomes to sustain not their lifestyle, rather, to service their debt. The higher the debt the less career mobility that consumer will be allowed. These people cannot simply wake up one morning and decide they want to start a business, or take a chance with a different company, they are controlled by their financial obligations not their personal career interests.
Lifestyle
People in debt must work. They must maintain a higher level of income to sustain their interest expenses. For those in debt, the prospect of retiring early, taking months off work, truly owning real assets outside their primary home simply becomes an unattainable dream. Consumers that are burdened with debt must conform their lifestyles to match the limitations that debt presents them.
Priority: GET OUT OF DEBT!
The sooner consumers discover ways to manage themselves out of debt the sooner they will be able to move on and discover wealth. Sadly, for many consumers there is no clean way to getting themselves out of debt. Meaning, they have buried themselves so far into debt it will be nearly impossible to get out of debt without harming their credit score. For most, getting out of debt will require a significant reduction in spending habits, it will require significant interest rate deductions, and in some cases, creditors settling the debt for less.
Consumers must also learn to increase their cash savings while paying off creditors. Remember, often significant interest rate deductions and debt settlement will render those credit accounts closed, as credit accounts close, your dependence on a cash emergency fund will increase.
The biggest benefit of maintaining a strong cash account is you'll quickly move from a debtors mentality to an owners mentality. You'll own more and owe less.
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