Get out of Debt

I remember it fondly: The Grasshopper. The Grasshopper was a radio control car. Not just the everyday RC car sold in the toy stores. This was a boy’s dream. Upgraded suspension, motor that allowed it to go at lightening speed and a remote control that had more buttons and dials than my other childhood love, airplanes. The problem was simple. I wanted The Grasshopper, it was hundreds of dollars and I was 12 years old and unemployed. I went in search of capital and found my self at my primary lender: My parents. It went about as well as it always has. No free money, no loans, just a job. They made me the standard deal that if I did jobs around the house, they would pay me and when I got close to the goal, they would throw in the rest. I never knew what “the rest” was so I just worked.

You might be wondering what my boyhood stories have to do with the economy. Through all of the excuses and reasons, there is one reason that businesses are dying at such a pace. It’s the same reason that is contributing to the economic issues we are going through right now. That reason is debt. In the financial world debt is called leverage but they are essentially the same.

First, let’s look at corporations. When a company is looking to expand somehow, often with mergers and aquisitions, they borrow money. Rarely do they use cash reserves to finance expansion and because of that, their expansion must begin to pay off in a relatively short amount of time. If the economy goes sour, something happens with the internal structure of the company, or a natural disaster knocks out manufacturing power, the debt becomes a sometimes insurmountable weight on the back of the company. In short, the more debt a company has, the less flexibility they have as the uncertain events arise.

Let’s look at you and your finances. Americans are poisoned with debt. Cars, houses, credit cards, and for some investors, margin debts to name only a few. Americans have found a host of creative ways to owe people money. They are living so far beyond their means that if an illness, job loss, or other big change happened, they would be forced to ruin the financial life by filing for bankruptcy. Even now, the reason so many people are living from paycheck to paycheck isn’t because they don’t get paid enough. Instead, it’s because they are paying more on their debts than they are on living expenses like food.

Let me be blunt and quite possibly say something that will strike a nerve but its for your own good: If you can’t afford it with your current paycheck, you shouldn’t have it. You don’t deserve it and you are no better than the corporate executives if you are using borrowed money to buy it. This economy is swallowing up people who are in debt and you could be next much more quickly than you think. If you don’t believe me, do this exercise: I’ll allow you to keep your house and college education in your calculations but subtract all other debt payments from your monthly expenses. You will most likely find that your financial comfort level will increase largely. We as a country MUST get out of debt and buy with cash.  The Obama Stimulus Plans are, at their core, doing one main thing:  Paying off peoples’ and companies’ debts.

I eventually made enough money to buy my Grasshopper and it was well worth the wait. More important, I learned what it meant to earn something and to this day, make a lot more money than my standard of living would show. My investment portfolio is larger than my yearly earnings for one reason: Rather than paying debt, I pay my investment account. Of course it’s easier said than done for many, but everybody can take one step towards that today.

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