Consumers Slash Borrowing at Fastest Rate in History

Economists expected consumer credit to shrink by $4 billion between June and July 2009. Their predictions missed the mark by a long shot.

Instead of $4 billion, consumer credit shrank $21.6 billion in just one month’s time, “the most on records dating to 1943,” according to this article.

Why such a drastic drop in credit?

With job losses mounting and an uncertain economy, many consumers are canceling cards and voluntarily cutting back. Plus, credit is hard to get these days. And banks and credit card companies are reducing available credit limits in an effort to reduce their exposure.

Of course, reduced credit isn’t good news for the economy because consumer spending accounts for “70% of  economic activity.” But what’s bad for the economy may actually be good for consumers.

Like a forced diet can help you lose weight, so can a forced “debt diet” force you to refrain from spending money you don’t have.

This Is Crap!

Those were the words of a disgruntled reader who recently unsubscribed from my email list. Coincidentally (or not), he unsubscribed right after I published my post about becoming “Instantly Debt Free.”

I wonder which part he didn’t like: the part about forgiveness of debts or the part about getting rid of the income tax?

Who wouldn’t want their debts to be forgiven?

Who wouldn’t appreciate an increase in cash flow because of no longer paying the income tax?

Oh, well. Some people are weird. They just love getting screwed over by greedy credit card execs and power-hungry politicians.

And some people just like to rob certain classes of people through the tax code so they can give it away to others who they feel are more deserving — and, of course, take their cut as the middle man.

I’m not for any of it.

And if somebody is offended by the ideas of debt forgiveness or living in a country where there is no income tax… then this is definitely not the blog for them to be reading.

Offended? Vindicated? Leave a comment and make yourself heard.

Paying for the Privilege of Debt

At breakfast this morning, my brother reminded me of my original goal that I’ve stated publicly here on this blog before: to pay off all my debt… and then buy a house.

(Public blogs are GREAT for accountability, by the way.)

After that, he made an interesting observation.

“Buying a house is kind of like paying for the privilege of debt,” my brother said. “It’s like, ‘Hey, you give us $30,000 and we’ll let you have $370,000 of debt.'”

When you think of a mortgage as “paying for the privilege of debt,” it turns the whole thing on its head… and it makes renting seem more logical.

Sometimes, we’re so locked into our normal way of thinking, we need a completely new paradigm to get us to see more clearly.

I think my brother’s observation is one of those mind-shifting insights.

Seems to me, buying a house made a lot more sense back when people saved up 20% to 50% as a down payment… and only got a 10-year mortgage. In 10 years or less, you would actually own something.

Nowadays, actually owning a house — and I mean really owning it, as in there’s no more mortgage — is very uncommon. I’d guess that less than 10% of Americans actually own their homes. The overwhelming majority are just renting their homes from the bank.

Anyway, what do you think? Are my brother and I just being too extreme? Or is buying a house the equivalent of paying for the privilege of debt?

Leave a comment and let me know your thoughts.

Instantly Debt-Free?

Certainly, the discipline of paying off large accumulated debts teaches us some things about financial responsibility and how better to handle money. And for that, I’m grateful.

In the current economy, though, millions of people are struggling. And the idea of becoming instantly debt-free would be exhilarating (and life-changing) for just about everybody.

Not only would it impact people on a deep, personal level, it would also lift the heavy burden that’s dragging the economy down. Perhaps we could recover sooner rather than later.

Here are two things I think would be beneficial:

#1 Declare a Jubilee

In the Bible, a Jubilee happened every 49 years. Anybody who was an indentured servant was allowed to go free… and all debts were erased.

Essentially, in a Jubilee year, everybody got to start over at zero.

A friend recently asked me: But isn’t that being unfair to all those people who save money or charge interest on the money they’ve loaned?

My answer: Not really.

First: Savings retain their value when there’s an honest money system. The American system is dishonest; it creates money out of thin air. As the money supply increases, each individual dollar is worth less and less.

Inflation (also called devaluation of the currency) is the hidden tax, and it penalizes savers while rewarding debtors.

Second: God’s law prohibits charging interest on loans. If we were to honor and follow God’s law, then there wouldn’t be so much debt in the first place.

It is unhealthy to build an economy on debt-funded consumption. This can only happen when interest (especially exorbitant interest) encourages money lenders to lend.

But since God’s law prohibits interest, this would never happen.

#2 Get Rid of Most Taxes (Particularly the Income Tax)

Right now, chances are you pay from 15% to 25% of your income just to pay state and federal income taxes.

Then there are a whole raft of additional taxes you pay: sales tax, gas tax, real estate tax, car registration tax, etc etc etc.

Some organizations estimate that the average American pays 40% to 55% of his/her gross income in various forms of taxes.

God’s system is much better. Rather than demanding 20% or 30% or 40% or whatever, He asks for only 10%. And that “tax” is only due on the increase of the produce of the ground and on the increase of the herds.

Basically, God wants a return on His labor.

But God doesn’t get involved in double/triple/quadruple taxation like man’s government does. When you really study the Biblical law, you’ll discover that God is much more merciful than you might have imagined him to be.

If you’re interested, you can learn more about The Law of the Tithe here.

Now, whether you believe in the God of the Bible or not, imagine how radically the U.S. would change if all debts were forgiven and we eliminated most of the onerous taxes we pay.

Can you imagine what that would do for people — their lives, their feelings, their productivity? And can you imagine what it would do for the economy?

I’m not holding my breath waiting for this to happen… I don’t think “the powers that be” would ever willingly do such a thing.

But stranger things have happened. After all, Pharaoh did let the Israelites leave Egypt.

What Are Your Total Monthly Minimum Payments?

If you’ve ever needed motivation to pay off your debt, then here’s an interesting exercise:

Add up your total monthly minimum payments.

Most people don’t know this number. They might think they know it, but in actuality, they don’t.

Today, I’m going to show you three extra columns from my debt spreadsheet that I haven’t published here before. These columns show:

  • Minimum Payment
  • Interest Rate
  • Priority

The “minimum payment” is the lowest amount of money I can pay on that line of credit each month. The “interest rate” is self-explanatory. And the “priority” shows which balance should be paid off first, second, third, etc.

(On a side note, you can see all the interest rates on my previous lines of credit that are now paid off.)

The first payment is for the loan I have through Prosper. The second payment is for my USAA credit card balance. And the third payment is for my Honda Odyssey.

We didn’t put any money down when we bought the Odyssey, which is why the payment is higher than a normal car payment. Fortunately, the interest is only 4.9%, so every payment I make decreases the balance by a fair amount.

But the real story here is that I’m paying $934.07 a month in minimum payments.

This means three things:

1. If I paid off all my debt, I’d have an extra $934 in cash flow every month.

2. To really make a dent in my debt, I have to pay MORE than my minimum payments. Let’s say somewhere around $1,500 a month to really see some progress.

3. If choose to pay more than the monthly minimums as I have suggested in #2 (let’s say $1,500 a month), then that means I’d actually free up $1,500 a month — and not just $934 a month as I have suggested in #1.

A Shock to My System

I remember the first time I totalled up all my monthly minimum payments. Do you know how much it added up to?

It added up to $1,128.33 a month. And when it was at its highest, my monthly minimums were $1,399.94 — nearly $1,400 a month!

That’s practically as much as I’m paying in rent every month. So, to put this in perspective, I could have rented TWO houses instead of one if I didn’t have any debt.

Anyway, the reason I share this information with you is because I think it’s a frightening yet healthy exercise to know how much you’re paying in minimum payments every month.

It’s not a pleasant thing to know at first, but it may provide you with the impetus you need to really knuckle down and pay off your debts.