It's the Debt, Stupid

I'm a big Dave Ramsey fan. Thanks to Dave, over the last year we have paid off our car and two of our small student loans. We still have two bigger loans that are going to take a while to pay off. Since I have a long drive to the college where I teach, I listen to Dave on the radio on the way there.

Something today clicked in my head while I was listening to his show. I'd known all of the facts for quite a while, but my brain hadn't put it together until now. Do you know why we are losing the middle class in this country? It's not the government, it's not that CEOs are making too much money, it's not a conspiracy theory (welllll...), it's not what the talking heads are telling you, it's not what you think. We are losing the middle class in this country because of debt. The middle class is up to their eyeballs in it. And when you're in debt, where is all your money going? It doesn't take a rocket scientist to figure it out! The American middle class has blamed the banks for the housing bust and Wall Street for a crappy economy. It's kinda like blaming the Grand Canyon for being a big hole in the ground. You're missing the real culprit. The Grand Canyon is a huge hole in the ground because the Colorado River running through it made it that way, much the same way that the middle class is becoming impoverished, being worn away, because of their embracing of debt.

Debt is not a tool. Paying hundreds, thousands, tens of thousands a year in INTEREST to the BANKS is not a useful tool. It makes you a tool maybe. But it is not one. This acceptance of debt is fairly new. Our ancestors didn't do it, because you could go to debtors' prison if you didn't pay. Our parents didn't do it either, even though debtors' prison was long since gone. Back when my parents were young, you couldn't get a credit card unless you had a very high income, beyond what the middle class made on average. You couldn't get a mortgage unless you had 20% down and a steady job for three years. Student loans were only for certain programs. There was no way you could possibly live beyond your means. No one would loan you the money to do it.

Fast forward to the nineties, and cheap and easy credit is everywhere. You can run up all kinds of debt. You can get a car loan, a house loan, a second mortgage, hell why not a third mortgage, a student loan, enough credit cards to fill in the Grand Canyon, and if you hit the limit, don't worry, the bank will raise your limit (especially if they're a predatory lender). Eventually, you over-extend yourself, and they raise your interest rates, and now a large portion of your income is going to the banks. You apply for more credit cards to cover the shortfall in your income, and then eventually you wind up filing bankruptcy. But it doesn't end there. After you file bankruptcy, you can get yourself right back into the same mess again. You'll get credit card offers in the mail almost immediately, and they'll give you more credit. Isn't that brilliant?

And the crazy thing is, that this mentality of debt being acceptable has worked its way so thoroughly into the psyche of the middle class (and even the so-called working poor), that they don't care how much interest they are paying, just tell them what the payments are and they'll see if they can squeeze it into the amount that they are capable of paying out each month. A good example of this is the conversation I had with one of my students. He said he was going to go buy a used car that cost probably about the same as what he makes in a year. He had no idea what the interest rate was going to be (it's usually very high on a used car). All he knew was that the payments were affordable. I tried to talk him out of it, but he didn't understand what the problem was. After all, he said he could make the payments with no problem. The idea of saving up and buying a car outright was a foreign concept. Another student told me she had no problem making payments on a bedroom set and some other furniture because, "the payments aren't much." The rich are getting richer because they're investing their money. The poor are getting poorer because they're giving all of their disposable income to the banks!

Debt has allowed the majority of the middle class to live beyond their means and give a hefty percentage of their income to the banks. If you're in debt, add up what you're paying in interest every year. And then go stick that number into a mutual fund calculator with returns showing thirty or so years. Try not to cry. As is so often true in life, if you want to know where the blame lies, go look in the mirror.