In the Wall Street Journal today, Neil Shah states:
“Economists say the progress U.S. households have made in reducing their debt burdens—either by paying off debt or just defaulting on loans—is a key reason why the U.S. is now outperforming much of Europe and Japan. While defaults and bankruptcies are painful and hurt consumers’ credit histories, they also speed up the process of repairing household finances.”
This quote tells a major story. The thrust of Mr. Shah’s story is that total ratio of U.S household debt to disposable income now ranges 108%, compared to 135% in 2007 (immediately prior to the Financial Crisis). The current level is far below that of Britain (143%), Canada (167%) and Japan (124%). Because debt is reduced and real property values are beginning to climb, the hunch is our economy will be “juiced” by increased consumer spending which accounts for two-thirds of U.S. economic output. I was actually surprised to see how high the debt ratios are in Britain, Canada and Japan– because the U.S. is by far the leader in credit card consumer debt.
Here are the important points to take home: (1) It doesn’t matter if you reduce debt by paying it off, filing bankruptcy or what we call debt resolution– either way, it’s a good thing. From my perspective, the less money you pay to reduce the debt, the more money that remains in your pocket. This is what I call “preserving future income;” (2) while boosting consumer spending is good for the U.S. economy, you don’t need to be the leader here– you will be better off continuing to reduce your debt and increase your savings; and (3) you must think long term when it comes to your finances– paying interest at 20% for one month on a $40,000 balance costs you $666.00. But over 10 years, it’s $79,920. If you saved that money at 7% interest, in 20 years it would be $346,941.
Keep this in mind during the holiday shopping pressures– and revisit it each time your credit card bills come! Better yet– revisit it with us at our seminar this Wednesday– details are below!
Have a great weekend and be sure to listen in on Saturdays from 8:30 to 10 AM on WDFN 1130 AM – on iHeart by CLICKING HERE– and watch the show on TV 20 on Sundays at 11 AM. Law and Reality is not just information – it’s entertainment!