Monday, July 4, 2016

Let’s Rid Ourselves of Destructive Myths About Debt

Consumer debt has reached a crisis point in the US and other affluent countries. Some of the forces driving this debt are beyond the control of individual consumers, but there is much that individuals can do to improve their own financial situation nonetheless. Perhaps the first step we need to take is to rid ourselves of unhelpful and even dangerous myths about debt.

Overspending isn’t always the problem

Few would dispute that we live in a consumerist culture, one in which many if not most of us have too much “stuff.” There are entire industries devoted to helping people organize or get rid of excess material goods, and “reality” shows about hoarders have carved out a solid niche in the infotainment realm. Compulsive spending on items that really aren’t necessities is a problem that has left some in debt.

Yet according to some experts, excessive consumption is not the core problem driving consumer debt today. Too many people, particularly in the US, have bought into the Overconsumption Myth. Belief in that myth can be destructive in several ways, as it alternately makes people feel unnecessarily guilty, while contributing to an equally judgmental dismissal of the needs of others whose lives are filled with desperation, typically through no fault of their own. Furthermore, the myth puts the onus on consumers rather than on policy makers to fix the problem. The truth is that our collective debt problems cannot be so simply categorized, and until we begin looking at it objectively, the chances of eliminating the problem are virtually nil.

The reality of our debt problems isn’t that neat and tidy. There is no hard evidence to support the claims of any “epidemic” in overspending, certainly nothing that could explain the dramatic spike in foreclosures, bankruptcy, and credit card debt. In fact, in many of the areas in which consumers are accused of gross overspending, a glance in the rearview mirror shows that in inflation-adjusted dollars, people of a couple of generations past actually spent more on the very items we now grouse about. For example, families in the 1970s spent $750 more per year on clothing than does a family today, even taking into consideration the current appetites for designer garments and shoes. We spend more today on telephone services, but it would be unfair, even ludicrous, to compare the services we now enjoy to those we utilized in the not-so-distant past.

You still need to monitor your own spending habits

All of the above is not necessarily an indication that you, personally, are off the hook. If you’re experiencing a debt crisis, or even if you’re not in crisis but are striving to improve your credit rating or are struggling to make ends meet, a ruthlessly honest examination of your own spending habits could be an important step to improving your situation.

If overspending on non-necessities doesn’t seem to be the problem, what is? As too many people have discovered in recent years, even a well-thought-out credit plan, bolstered by adhering to a reasonable budget, is no guarantee that you will avoid falling into a credit hole. Even such normal life events as having a baby, needing to have the family car repaired, ending a relationship, or the all-too-widespread occurrence of the loss of a job or other income can leave a reliably conscientious individual over their head in debt. And when you consider that individual income has actually decreased while costs for virtually everything have increased dramatically when adjusted for inflation, it is surprising that even more of us don’t find ourselves in a credit hole.

Honesty is the key here. You have to be willing and able to evaluate your own situation truthfully in order to change it. That means understanding and adapting to the things that are beyond your control, and admitting and correcting the things that are not.

And while we’re on a myth-busting kick…

Let’s face it: getting and staying out of debt is a challenge for millions of people. But you can help yourself significantly if you have a better understanding of how consumer debt works and doesn’t work. Let’s look at the reality behind a few more debt myths that can be decidedly unhelpful, or even harmful, if you buy into them.

Myth: Minimum payments are sufficient.

Reality: Those low monthly loan payments and minimum monthly credit card payments are marketed as being for your convenience, but they are actually some of the biggest profit centers creditors have. You’ll pay less per month, but for many more months, with interest charges stacking up to the point where it takes years to even begin paying down the principal. Creditors are not in business to do you any favors.

Myth: You should only borrow when interest rates are low.

Reality: You should borrow only when it is necessary or when it benefits you financially. Leave “strategic borrowing” to the seasoned experts.

Myth: My debt is “good debt.”

Reality: There is no such thing as “good” or “bad” debt, but it might be argued that debt of any kind is a drain on your resources, and therefore bad. Some debts such as mortgages can be less bad, since they can provide you with assets that will hopefully increase in value enough to at least offset the cost of the debt.

Additional myths that are ripe for busting can be found on the above link, and you will likely come up with a few of your own once you look objectively at the realities of the credit industry.

Millions of us are still recovering from the great financial meltdown of 2007-2008. Although forces far beyond the control of the average consumer drove this crisis, we aren’t helpless. We still have considerable control over our own financial well being. Educating ourselves about debt and freeing ourselves of harmful myths can help us make much better choices now and in the future.

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