The DOW jumped up 108 point yesterday. The headlines offer many reasons why this is so. But we don’t have time to consider them today. For we have other points to ponder…like debt.
You see, individuals and nations alike have generally tumbled far too deep in debt. Spending more than you make is the main culprit. So, too, is making less than you spend. One way to get out of debt is to make more money…for the government this means increasing taxes.
Yet time and time again, it never fails, when income goes up, spending goes up too. Often times, when income goes up spending goes up even more. Thus, regardless of how much an individual or a nation makes, they will somehow find a way to always spend too much.
So, while making more money seems like a good solution to the debt problem, history has shown that it often just perpetuates it. Ultimately, the solution to the debt problem is spending less than you make.
But no one likes to spend less than they make. For that takes discipline, prudence and sacrifice to accomplish. Who wants to do that when you can just ‘charge it’? During the mid-years of the first decade of the new millennium, only dorks and squares believed that you should actually earn the money before you spend it. Now, that appears to be changing…
After much discomfort and pain over the last four years individuals and local government are getting after it. Conversely, federal governments the world over are still trying to grow their way out of debt – with more debt. We’ll have more on this in a moment…but first an example of what we are talking about…
Jimmy’s Story of Sacrifice and Discipline
“I extinguished almost $10,000 of debt in one year,” announced Jimmy Collins on Yahoo! last Friday. Moreover, if you are in debt, you can take the simple steps Jimmy took to get out of debt too. “The method I used was not rocket science, and anyone can duplicate my success with just a little sacrifice and discipline.”
First Jimmy cut out the morning coffee shop routine and began brewing coffee at home. “I saved about $4 per day or $28 per week, for a total of $1,456 a year.” Next he and his wife sold one of their cars and kept the one that was paid off. “As our car payment was $450 per month that meant we saved an astounding $5,400 in one year. Include the money we saved on insurance at $70 per month or $840 per year, plus what we saved on gasoline at $25 per week or $1,300 per year. In total our downgrade saved us $7,540 for the year.”
Jimmy also began making purchases with cash rather than credit cards. “Now, I use my credit cards only to secure a hotel room or a car rental.” Other than that he switched to a prepaid cell phone service.
The moral of the story, “With a little sacrifice and discipline, I have been able to get rid of almost all my debt in one year’s time and sock away a few bucks. At the end of the year I paid off $9,956 of debt. What’s more, “Even though I did this without making any additional money, it feels like I make more since I actually get to keep some of it now.”
Be Like Jimmy
“President Barack Obama plunged into deadlocked negotiations to cut government deficits and raise the nation’s debt limit Monday,” began an AP story yesterday. No doubt this is a noteworthy statement.
One critical misconception about cutting the deficit is that it reduces the debt. It doesn’t. The debt will not be reduced until the deficit is eliminated and a budget surplus is used to pay down the debt. That’s why even with deficit reductions the debt still goes up. That’s why a deal to cut the deficit also requires increasing the debt limit.
According to the National Inflation Association, even if all U.S. citizens were taxed 100 percent of their income it would not be enough to balance the federal budget. There would still be a deficit that would have to be filled with borrowed money. Obviously, this is a spending problem not a revenue problem.
Here at the Economic Prism we believe our readers are smarter than the average bear. We doubt you are in debt like Jimmy was in debt. So what’s the point?
The point is, as Jimmy’s experience illustrates, debt is a spending problem not an earning problem. Furthermore, where the federal government is concerned they need to be more like Jimmy. They need to eliminate the deficit and use their existing income to pay down their debt.
Will we ever see the day this happens? Don’t hold our breath.
for Economic Prism