Yesterday, the DOW surged by 108 points, generating a flurry of headlines discussing various contributing factors. However, today we shift our focus to a pressing issue: debt.
Both individuals and nations have often found themselves ensnared in excessive debt due to spending beyond their means. The primary causes include earning less than what one spends or simply spending more than one earns. An apparent solution for governments is to increase taxes to raise revenue. However, history shows that when income rises, spending tends to escalate as well—often even more than before. Consequently, regardless of financial gains, both individuals and nations manage to overspend.
While generating more income seems like an intuitive approach to addressing debt, history indicates it often perpetuates the issue. The true resolution lies in the principle of spending less than you earn. Yet, few are eager to embrace this path—it demands discipline, prudence, and sacrifice. After all, who wants to restrain their spending when it’s so easy to just “charge it”? In the early years of the millennium, typically only the most conservative thinkers believed one should earn their money before spending it. Thankfully, this mindset appears to be gradually changing.
After experiencing considerable hardship over the past four years, many individuals and local governments are beginning to take action. In contrast, national governments worldwide seem to be attempting to ‘grow’ their way out of debt, albeit through accumulating more debt. We’ll delve deeper into this matter shortly, but let’s first consider an exemplary case.
Jimmy’s Journey of Sacrifice and Discipline
“I managed to eliminate nearly $10,000 in debt within just one year,” Jimmy Collins shared during an interview on Yahoo! last Friday. He emphasized that anyone in a similar situation can replicate his success with a little sacrifice and determination. “The strategy I used wasn’t complex at all; it just requires a commitment to change.”
First, Jimmy eliminated his daily coffee shop visits and started making coffee at home. “I saved approximately $4 a day, which adds up to around $28 a week and totals about $1,456 a year.” Additionally, he and his wife sold one of their cars, opting to keep the one that was already paid off. “Since our car payment was $450 per month, we saved a remarkable $5,400 a year there. When you factor in the savings on insurance—$70 per month or $840 per year—and gasoline—around $25 each week, amounting to $1,300 annually—the total savings from our downgrade came to $7,540 for the year.”
Moreover, Jimmy began using cash for his purchases instead of credit cards. “Now, I reserve my credit cards only for booking hotels or renting cars.” Additionally, he switched to a prepaid cell phone plan.
The takeaway? “With some discipline and sacrifice, I managed to pay off almost all my debt within a year and even saved some money. By the end of the year, I had wiped out $9,956 worth of debt. Even though I didn’t earn any additional income, it feels as if I’ve made more because I’m finally able to keep some of it.”
Emulate Jimmy
As reported yesterday, “President Barack Obama has plunged into lengthy negotiations to tackle government deficits and raise the nation’s debt ceiling.” This statement certainly captures attention.
A common but misguided belief is that reducing the deficit automatically decreases the debt. In reality, debt will only diminish once the deficit is fully eradicated and a budget surplus is implemented to pay down the existing debt. Consequently, even when deficits are cut, the overall debt can still rise, necessitating a simultaneous increase in the debt ceiling.
According to the National Inflation Association, even if the U.S. taxed all citizens at 100 percent of their income, it would still fall short of balancing the federal budget. This glaring fact indicates that this is not a revenue problem—it’s a spending problem.
At the Economic Prism, we believe our readers possess insight beyond the ordinary. We trust you’re not entangled in debt like Jimmy once was. So, what’s the crux of the matter?
The takeaway, as illustrated by Jimmy’s experience, is that debt stems from spending habits rather than income levels. Furthermore, with regard to the federal government, adopting a mindset akin to Jimmy’s is crucial. They must work towards eliminating the deficit and utilize available funds to pay down existing debts.
Will we ever witness such a transformation? It’s hard to say.
Sincerely,
MN Gordon
for Economic Prism