Modern Debt Theory

It’s often said in the news and by pundits that America has a debt crisis, and it’s not entirely incorrect.  Government debt is spiraling out of control, individual Americans have on average $5700 in credit card debt according to Business Insider, and that’s on top of student loans, mortgages, cars, and regular bills.  There are so many theories behind how to utilize debt, or whether you should use debt at all, that it’s hard for new adults, in particular, to decide how to handle it. Ironically, despite the importance of credit, and how powerfully it impacts our lives, there is no class, training course, or program to teach individuals how to handle debt, how to read a credit report, or how to properly use both to their advantage.  This has been a major disservice to the American people, and when I approached schools in the state I was a banker several years ago, none were interested in having free seminars provided to their students. This illustrated to me that the education system has no interest in providing their students one of the most basic skills they need to be successful.

First off, let’s dispel a couple of common falsehoods.  Debt is not a crutch, it’s not evil, nor is it something that you should be ashamed of, if you’re managing it properly.  When used correctly, debt creates buying power and cash flow in places you would otherwise not have it. It’s as “Uncle” Grant Cardone says, cash is not king; cash flow is king.  Cash flow is generated using leverage, a term for properly managed and handled debt.  So the question remains, how do you leverage debt in an environment where every market force and advertising option appears to push the use of debt to purchase consumer goods?  The truth is, there’s no easy answer, especially in the highly inflated environment we live in today. In most cases, we are pushed into debt by things we need to live needing to be replaced on a regular basis, an ever increasing cost of living, and an unstable interest environment.  On top of that, young Americans are pushed into accepting crushing amounts of debt on the notion that it will get them good paying jobs in the future.

So how do you manage your debt, and achieve good cash flow?  You start by managing your credit cards appropriately. Credit cards are ideally the kings of cash flow, much as cash flow is the king of high living.  You make purchases on a card and pay the card off each month; this allows you to gain the benefits of the card itself (flexibility and rewards) without paying the punishing interest rates most credit cards require you to pay (anywhere between 12 and 30%). The goal of anyone with credit cards is to ensure they are paid off by the end of the month.  Now, that does not mean that this goal is easy, nor is anything worth accomplishing.  I can’t state truthfully that I have achieved this goal, although I work hard at it every month to retire debt (often set back by the middle class problem of having to replace decaying possessions that are required, such as clothes and vehicles).  That said, it is a focus, and it is one that I have continued to work on since I have had credit cards.

Other forms of debt include personal debt (non-credit card), auto debt, mortgages, and student debt.  Personal debt is the next-most abused, but is far easier to get out of than credit card debt as a rule because there is always some sort of terminal point for it.  Personal loans are often used to consolidate credit cards that get out of control, rein in interest rates, or reduce the amount of money paid on debt each month. They are also used for paying sudden, unexpected expenses, like tax bills, car repairs, home repairs, or medical needs.  The benefit to personal loans over credit cards is that they have a lower interest rate, and they cannot be added to without taking out and being approved for a whole new loan. This means that you can’t lose control of your spending by using this form of debt. That said, it is harder to get than credit card debt because the banks have to consider revolving debt as a factor.  Strategic use of personal loans can make your life easier; just don’t use them as a crutch to pay credit cards you’re abusing.

Other forms of debt really warrant their own articles, and I will make sure to devote some time to providing that information in the future.  The important point to absorb from this is that as a whole, debt should be used to cash flow you life, not as a crutch to buy things you can’t otherwise afford.  There are exceptions of course, such as when you need a vehicle repaired or replaced, a medical procedure, or a sudden expense you weren’t expecting comes up. Even then, you should make every effort to reduce your dependence on debt, and instead make your debt a tool, rather than a liability.

If you’re really deep in debt, and can’t find a way out, my uncle used the process Dave Ramsey set forth in the Total Money Makeover.  Although I have some issues with Mr. Ramsey’s methodology, as several of his methods violate the traditional thought on how money and debt should be managed, the results he produces can’t be ignored.  If you struggle with debt, taking the time to review his methodology is worth your time.

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