Author Bio: Joel Ohman is a Certified Financial Planner™ and the founder of a car insurance comparison website as well as a website for comparing insurance providers.
Guess how much the Congressional Budget Office (CBO) is predicting that the US debt will increase over the next 10 years? 250% – from $7.5 trillion to more than $20 trillion! Yes, trillion with a capital T. Lest we forget, a trillion is a thousand billions. That is a ton of moola that Uncle Sam is borrowing.
While the prior couple of sentences are likely not something that should surprise you too much (sadly) since the astronomical US debt load is broadcast almost nightly on the evening news here are a few applications that we can all make for our own personal finances.
#1 Prepare for Good Times and Bad
It’s just the natural course of things that some times the money just seems to pour in while at other times its dryer than dry. For every real estate boom there is usually a corresponding correction. Make sure to prepare yourselves for the added burden and expenses that a job loss, car breakdown, etc can cause you by having your own war chest of money saved up. Don’t be like Uncle Sam and expect to be able to simply borrow your way out of every economic crisis or simply print more money.
#2 The More You Borrow the Harder it is to Borrow
There are certainly good times to borrow money as well as bad times to borrow money. Going into credit card debt just to buy a big screen TV is certainly a bad time while taking out a loan to start a business could end up being a smart move and end up increasing your net worth rather than decreasing your net worth.
Regardless of the reason for borrowing money one thing is for certain. The more money that you borrow then the harder it becomes to borrow more money at attractive interest rates. The more of a debt load you assume then the more riskier of a borrower you become to future lenders.
Lenders will be forced to compensate for this added default risk by either levying much higher interest rates or flat out refusing to loan you additional money (this is why if you enter the terms of almost any payday loan or cash advance loan into a payday loan interest calculator you can see the absolutely enormous APR’s that payday lenders levy on those high risk individuals who seek out a payday loan).
#3 It’s Easy to Lose Focus
Do you ever get the feeling that the government is simply not paying attention? It can be easy to get addicted to the lure of the fast cash and the “easy” money that comes from simply taking out a loan rather than saving or working for the money. Be very careful that you do not drift into the mindset of “Oh, I will just worry about paying it off later.” The focus should be on creating wealth for yourself by working hard, saving money, investing in appreciating and/or income producing assets, innovating, making short term sacrifices to enjoy long term rewards, etc. and NOT borrowing as much money as someone will lend to you to buy consumables.
What do YOU Think?
What other lessons can be learned from the enormous US debt load that we can apply to our own personal finances?
Do you think that Uncle Sam will ever learn from past mistakes and correct the United States’ reliance on debt financing?
What do YOU think is the best approach for the United States to downsize its appetite for debt?