The Treadmill of   Debt

           Many clients ask me, "Ruth,   I make a decent enough income, why don't   I have more money to spend?   Where does it all go?"

           When someone asks me this question, the first place I look for an answer is at the amount of money being spent on debt reduction—or more accurately for most of my clients—how much money is being spent on interest to float the amount of money that is owed.   Whether on credit cards, lines of credit or equity loans.   Whether on Ready Reserve, loans taken out on 401K balances or loans on life insurance policies. Whether on car loans, house loans or school loans. No matter what kind of a loan—you may be in more debt than you have ever been.  

           Because of the increased use of debt as a way to help pay for a lifestyle that you may think you have to have, you, like many other people, may be having difficulty making the payments on your debt.   More and more people are relying on minimum payments which have dropped from about 4-5% to 2-3% of the total amount owed. According to American Express, almost half of consumers pay the minimum. These minimum payments keep consumers on a debt treadmill.

           There are two kinds of debt that consumers hold.   One is asset debt and the other is expense debt.  

           In order to understand the difference between these two kinds of debt, picture an old fashioned scale.

           Holding a mental picture of the scale, let's talk about asset or secured debt, first. On the one side of the scale, mentally place the value of the asset that you are purchasing.   A house is an example of asset debt. On the other side of the scale, mentally place the amount of debt that you owe with the purchase of the asset—this is your mortgage. In asset debt, the value of the asset always exceeds the amount of the debt that you hold. This means that the price your house can be sold for is always greater—always weighs more—than the amount of your mortgage.   So, if your circumstances change and you can't make the debt payments any longer, you can always sell the asset and totally get rid of the debt.

           Expense or unsecured debt is quite different from asset debt. Again, holding the mental image of the scale, this time you are going to purchase, say, a suit for yourself. You decide to buy a $600 suit and charge the suit to your bank credit card. So, on the one side of the scale you place the value of the suit—$600. On the other side of the scale you place the amount of debt that you owe on the bank card, for the suit—$600. Now, let's say that the day the bill arrives in the mail for the suit, you look at the bill and say, I really can't afford a suit that costs $600. I'll need to sell the suit in order to get rid of the debt.   It's not that simple with expense debt, because something has happened to the value of that suit.   Right?  If you decide to sell the suit now, you maybe could get $35 or $40 for the suit. Selling the suit will not get rid of the debt. In expense debt, the amount of debt always exceeds—weighs more—than what was purchased.

           Expense debt is money that you owe for things that do not hold their financial value—clothes, trips, eating out, books, tickets, groceries, car gas.   Expense debt is lifestyle debt. Expense debt fills the gap in your financial life between the cost of your lifestyle and the amount of money that you have to spend to pay for that lifestyle. Expense debt is paying for yesterday's lifestyle.   

           When my client wants to know where all his money is going, I look to see how much money is going to pay for yesterday's living. The money that is being spent for this debt can't be used for today's lifestyle. So part of today's lifestyle has to put on a credit card.    This is what I mean by the treadmill of debt.