The Debt Trap: Factors That Have Led Us To Our Debt
We're a nation of borrowers. This reality is quite well illustrated by the personal stories and profiles covered by various media publications on the subject of consumer debt. Recently, The New York Times published a series on debt, which I found to be both highly intriguing and sobering, as it shed light on the plight of debtors and took a peek at our saving and borrowing habits. When I hear and read about these debt stories, I sense a common thread in the discussion, as people ponder what got them into this kind of trouble in the first place. In many cases, we point fingers at lenders, banks and credit card companies for creating financial products and developing an environment that is conducive to lending and borrowing (and that which allows us to shoot ourselves in the foot).
Let's review how we've found ourselves so heavily in debt as a nation of consumers.
In the past, it was simply too easy for consumers to obtain access to credit. Not long ago, I remember the slew of 0% interest credit card offers that would invade my mailbox. Because credit was so easy to get, consumers figured out how to leverage their credit card rewards as well as balance transfer cards in order to make money. Many tried to perform credit card arbitrage by taking out cash advances and balance transfers from these cards, then investing the amounts into a rising stock market. This was just one of those things you'd consider to be a "sign of the times." Of course, things are different today, but the 2000s was a decade during which our debt ballooned due to these types of products. Subprime loans, jumbo mortgages and other forms of costly debt are inventions of our capitalistic society; these are high-risk financial tools which countless consumers have used and gambled with, often with dire results.
Need for instant gratification
As a society, we're quite an impatient lot. It's ingrained in us to be able to get immediate access to the things we covet, even if we can't really afford these things at the moment. We live in a highly consumerist society that encourages materialism and is not ashamed of excess. Have you seen just how huge the portions are served in most American restaurants? It's all about more, more, more right now! So it's often the case that funds that should wisely be funneled into high interest savings accounts or into high yield savings are instead being used to keep up with the Joneses, a syndrome that many of us harbor, and which has caused many a household to fall into debt.
Lack of financial education
I don't believe that we're giving our finances enough priority; after all, personal finance isn't given importance in schools. A lot of us don't learn about finance while in school and instead are picking it up through experience and trial and error. Unfortunately, this lack of understanding and awareness about money management can make us vulnerable to making many financial mistakes, particularly those that land us squarely into the depths of debt. We should take it upon ourselves to learn the ropes: you can become informed and educated for free, if you check out libraries and the Internet for financial material and resources such as money management tools, budgeting tools and investment software that are available at no cost.
Lack of accountability
I don't think we're accountable enough for ourselves either. It's too easy to procrastinate about our finances, go in denial or sweep things under the rug when we get into trouble. But also detrimental is when we can't take responsibility for our own actions and mistakes. We readily blame the government or the financial industry for causing the rifts in our economy, but we're just as guilty about causing the crisis as they are. Both lenders and borrowers contributed to the subprime lending boom, subsequent bust and credit crisis, but guess who's getting the lion's share of the blame?
Debt as a cultural phenomenon
You've heard the saying "it's the American Way," a statement most applicable when referencing our relationship with consumer debt. In other cultures, debt is heavily frowned upon and is only gingerly used by households. But in America, debt is socially acceptable and ingrained in our culture; it carries no stigma. If bankruptcy, foreclosure, debt and being broke are things we easily accept in our culture and way of life, then these aren't things we'd readily condemn (or worry about) until too late or until we're forced to face the painful consequences.
When the economy blew up last year, it prompted the government to start making some changes; they've since introduced policies that help regulate the financial industry to some degree (e.g. credit card rules) but in many respects, it's still pretty much "business as usual." Instead of worrying about what the Fed or Obama is going to do next, we should focus on the things we have control over, and take responsibility for our own financial predicaments.