According to the US Debt Clock, the national debt is $19,918,328,833 and rising fast. US federal spending is approaching $4 trillion and the US federal budget deficit is $591 billion. The largest budget items in the US economy are Medicare/Medicaid at $1.1 trillion, Social Security at $925 billion and defense spending at $584 billion. These are but a few of the harrowing statistics that US citizens are faced with daily. These numbers are deeply troubling because they indicate that the US government is spending far more than it is taking in, and is extending credit with no guarantees of returns.
If we extrapolate this to our personal financial situation, it seems extraordinarily reckless that the government would allow the national debt to reach such epidemic levels. Currently, the US gross debt to GDP ratio is 105.17%. The revenue to GDP ratio is 35.359%. Simply put, these numbers are not good. We can learn an invaluable lesson from our reckless lawmakers – it is expensive to maintain a government and all the people who rely on that government for their well-being. Bureaucracies are built to be as bloated as possible; they are net deficit items in a budget, and a surplus is hardly ever an achievable objective.
So what is debt and how do we manage it?
If darkness is the absence of light, is debt the absence of savings? No. Debt is simply the amount of money or assets that Party A owes to Party B. Debt and credit are flip sides of the same coin. Debt is necessary to finance big-ticket purchases that would otherwise be impossible without the extension of credit. There are different types of debt that we can cite such as consumer debt (the amount of debt that a merchant is owed by a consumer), and there is also problem debt. This is known as bad debt and it is all the debt that is unsustainable and unnecessary. Debt that is chalked up for purchases that are unnecessary such as goods and services we will not be using is bad debt.
Individuals who make emotionally-based purchasing decisions typically rack up bad debt quickly. Credit cards are the most notorious forms of bad debt on the market, since many of the purchases involve unnecessary items such as Starbucks, late night e-commerce shopping sprees, jaunts at the local Cheesecake Factory and other inane hedonistic desires. If there is little disposable income available, debt is not the way to finance a desired lifestyle. Rather, the sensible way to manage debt is to curtail one’s lifestyle choices to fit one’s economic reality.
How do we get out of debt while still living like a mensch?
It seems unlikely in an inflationary society and a contractionary job market that debt relief is coming anytime soon. Fortunately, there are ways to consolidate debt, settle debt or declare bankruptcy in order to get out of debt. If those options are a little too dramatic for your tastes, there is always debt repayment. Sadly, many people find it difficult to meet their monthly debt repayment obligations, and they keep on borrowing to finance a lifestyle that they can no longer afford. The best approach to take is immediate debt reduction.
This begins by focusing on the debt that needs to be repaid, and making a concerted effort to pay it off. Debt consolidation is a parallel track that can be taken by consolidating all debt together into one payment by taking out a large loan. This is typically done at a lower interest rate. But be advised that it is only possible to enjoy debt consolidation with unsecured debts. The better your credit score, the more likely you are to receive credit card consolidation. The best way to get out of debt is to understand the nature of the debt. Use all the tools available to you to start digging your way out of debt. Most importantly, though, if you ever hope to stay out of debt you need to control your spending. If you spend more money then you make, then you’ll continue to rack up more debt.