LendingTree.com has a great television ad that shows a suburban homeowner telling us what a wonderful home he has in a wonderful neighborhood and what a wonderful car he drives. We see him in the backyard, complete with swimming pool as he tells us, "I'm in debt up to my eyeballs." "Somebody help me," he cries, as he circles the yard on his lawn tractor.
Poor people have always known that feeling. When it takes everything you have just to live from day to day, you live in fear of the next bit of bad luck that will throw you over the edge. These days a lot of folks who don't consider themselves poor feel exactly like that. They got to their precarious position by chasing the painted lady of a richer lifestyle out to the verge of disaster. It didn't happen all at once.
Our buddy on the lawn tractor and his wife probably wanted the big house and the new car and great clothes and dining at fine restaurants and college tuition for his kids. They probably figured they could make it all happen if they both had jobs. That strategy can succeed if you count the costs and weigh the risks.
Start with the costs of just going to work. You need appropriate clothes and maybe a second car, complete with maintenance and insurance. Between lunch at work and the evening meals you buy because you're too tired to cook, you'll probably spend more for food. Then there's child care and maybe a cleaning service. When you're done toting it all up, the additional discretionary income number at the bottom of the page is usually a small fraction of the promising gross income number at the top.
Whether your two-income strategy will work depends a lot on what you spend that discretionary income on. Our buddy and his wife look like they've put that extra income into acquiring that great house and car and pool and lawn tractor which, it seems, come complete with monthly payments.
That's not a good idea because using the second income for fixed obligations means there's no way to cut back if either partner's income is lost. That's dangerous in a world where even good workers can be downsized or cost-reduced, or off-shored out of a job with very little notice.
Twenty or thirty years ago the system would protect you by making it harder to overload yourself with debt. Then, you needed a down payment of 20 percent to buy that nice house. Today you only need 3 percent. And you can get a mortgage for more than the value of the house and use the money for that pool. Auto loans have gotten just as easy, and then there are credit cards.
According to Demos, a public policy research group, during the 1990s American middle class families increased their credit card debt by 75 percent. Lots of folks, maybe including our friend on the lawn tractor, borrowed because they figured that the economy would just keep going up and their higher incomes would make paying off the debt really easy. Bad guess.
Load your credit cards up to their limit and they get even harder to pay off. The minimum payments get larger. There are stiff penalties for being late even once. Late fees on credit cards average a bit less than $30 and the grace period has been eliminated by most issuers. But wait, there's more. That same missed payment may be the card issuer's excuse to cancel your lower rate and jack the interest up to a loan-shark-like 22 to 29 percent.
Our friend on the lawn tractor says he's worried but lots of folks in his situation don't seem to be. A recent survey by Harris Interactive found that 54 percent of all credit card debtors say that their debt simply doesn't concern them. They've gotten used to it and so have their kids.
Send a child to college today and that child will come back with more than an education. There's a better than even chance he or she will pick up about $17,000 in student loan debt and add some more debt on credit cards. The average college student has almost $3000 in credit card debt. 10 percent of them have more than $7000.
Imagine this scenario. John and Jane go off to college where they meet and fall in love. They graduate with a dream of building a future together, assets that total two used cars, some clothes, books and CDs, and combined debt of almost $50,000. If they decide to get married and they're among the quarter of couples who pay for their own wedding, they could add another $10,000 in debt without trying too hard.
That's not just bad for their finances, it's bad for their relationship. According to the Center for Marriage and Family, during the first five years of marriage, the biggest source of conflict among couples under 30 is debt brought into the marriage. It's not unreasonable to imagine those young people trying to save for the college costs of a child while they're still paying off their own student loans.
Mortgaging your future only makes sense if you can pay that mortgage off without the effort sucking all the enjoyment out of your life and relationships. LendingTree.com and the rest of the loan making industry think they have the answer, but it always seems to be another loan.
That will only work for our friend on the lawn tractor, or anyone else, if it's coupled with a change in the way they live. As the saying goes, "There's no such thing as a free lunch," and that's still true. Taking out a loan to buy lunch doesn't make it free.
