Get Out of Debt: Back to Basics
October 3, 2008 by Miranda Marquit
Filed under Finance
This morning, I was listening to the Diane Ream show on NPR while taking my son to the library. The subject was the forthcoming $700 billion bailout bill in the House, and how it is expected to loosen credit markets. I heard one of the guests say something similar to this: “If people can’t buy things on credit, the economy comes to a grinding halt.”
This was the first time I heard someone state this truth so baldly. But what has me worried is that now we’re treating this as something that’s no big deal. We *need* credit — and by extension we *need* debt so that we can keep the economy going.
Well, when tough economic times loom, if you want your personal finances to survive a recession, you actually need to do your best to get out of debt. Now is not the time to rack up the credit card bills. Debt make you vulnerable to economic downcycles and we are in one right now.
The basics of getting out of debt
I submit that it is time to practice some solid personal finances basics and remember the three rules of getting out of debt:
- Cut back on your expenses (making a budget can help).
- Make a debt reduction plan (a lot of people like the debt snowball).
- Do not add more debt to your personal finances.
While now may not be the time that you can aggressively pay down your debt, it is the perfect time to follow rules 1 and 3.
Yes, we need a certain amount of credit/debt to run the modern economy. On an individual basis, some individuals have too much debt, but in reality, business require at least some credit.
Take the example of the Mexican restaurant down the street. It depends on its supplier of fresh ingredients to permit the restaurant owner to pay at the end of the month. The supplier says, “Look, with the economy so dicey, I really need to you be able to pay me today.” And the restaurant owner say, “The economy’s been difficult lately and I don’t have the savings. Right now, I need you to let me pay, say, at the beginning of next week because I do my best business over the weekend.” The supplier says no dice. “I gotta family too, you know, so I don’t have a choice but to sell to the big restaurant and/or Taco Bell across town because I know that they’ll be around next week to pay me.” Restaurant owner says, “Without fresh ingredients, I can’t survive.”
This illustrates a microcosm of eventual jobs that could be lost. Will it happen? Maybe, maybe not.
The economy is addicted to credit. Stopping any addict cold turkey may be successful, but it can be destructive. I don’t think that most people want to take the chance on the level of destruction if the economy isn’t weaned off some of its credit habit gracefully.
I agree that there is credit that is necessary — especially for small businesses. However, part of our problem has been a huge emphasis on materialism and personal credit to buy things that we don’t necessarily need. Or to over-indulge in wants because personal credit has been exceptionally easy to come by.
Part of the reason the country is in this situation is consumer debt. This country is making more than any point in our nations history and not even coming close to saving more in the nations history. CEOs, businesses, and consumer took advantage of the housing bubble and it popped. Use this as a lesson and never let it happen again.
You are correct, Brian. One of our biggest issues is consumer debt. Unfortunately, it will have to be the consumers who open their eyes, because the folks at the top make too much money to want to restrict credit to those who can actually afford it — and they make much more by encouraging people to be in just enough debt that they have to keep making payments, but don’t go under. The people at the top have no interest in a financially literate or practical populace.