To understand the hazards of excessive debt read last week’s
headlines; the Emirate of Dubai, awash in luxury building and
tourist projects, ran out of money. Dubai World, the government’s
investment arm, is asking lenders to extend repayment deadlines for
six months.
To understand the hazards of excessive debt read last week’s headlines; the Emirate of Dubai, awash in luxury building and tourist projects, ran out of money. Dubai World, the government’s investment arm, is asking lenders to extend repayment deadlines for six months.
Dubai, with a GDP of only $37 billion, had foreign debt that totaled about $100 billion; each of its 250,000 citizens owed $400,000. GDP stands for gross domestic product, which the value of all final goods and services produced within a nation in a given year.
The U.S. hasn’t done too well with debt either. America’s total public debt, the amount the government owes – including what it owes to itself – has exploded. In 1990, the debt was 56% of GDP, by 2008, it was 70 percent of GDP and the estimate for 2011 is that it will be more than $15 trillion, a whopping 101% of GDP. The debt will equal more than a year’s worth of the nation’s product. Our debt is growing almost twice as fast as the value of our output.
Each American will carry about $50,000 of that debt; a four-person family ‘owes’ $200,000. At 6 percent interest that will require $12,000 a year in interest and I have not added in the $1.5 trillion healthcare ‘reform’ is going to cost over the next 10 years.
On the private side, Americans have been reducing consumer debt since the economic crash, but not much. Consumers are currently carrying $1.5 trillion in nonrevolving credit like automobile, education, boat and vacation loans and $900 billion in revolving credit according to the Federal Reserve. That $2.4 trillion adds $7,600 each and doesn’t include secured real estate loans.
Meanwhile, according to the National Retail Federation’s 2009 Survey, U.S. consumers plan to spend an average of $682 on holiday-related shopping. I’m not at all sure where they are going to get the money. I’m not going to be Scrooge and tell you not to shop, but I encourage you to make sure you get your money’s worth. Here are some tips.Â
First, don’t spend more than you can afford and if you must use credit, use it wisely.
Don’t take ‘no interest’ deals unless you’re absolutely, positively, sure that you can meet all the terms. The ‘no interest’ credit providers are betting you’ll slip up and they know their business. They often charge crippling interest rates of 25 percent and the default rate may go to 29 percent. If you miss or are late on a single payment, some charge interest from the day you made your original purchase. All the ‘savings’ will immediately disappear and you’ll owe a bundle.
Before you buy a gift or debit card make sure you understand all the terms. Some cards have monthly charges that will reduce their value even if they not used; some actually expire. Others might not refund left over amounts after a purchase forcing the recipients to either buy another item or abandon the change. Overall, that can be a very expensive proposition. Why not just give cash – cash spends – every penny of it?
If you have your heart set on a big-ticket budget buster, consider a less expensive model, brand, or one that has been factory-refurbished. Factory refurbished items often come with a full manufacturer’s warranty. Every feature will cost you; do you really need that 52-inch flat panel or will a 40-inch due?
While you’re at it, why not give yourself and your family a great Christmas present that will last all year long – a debt free holiday. But don’t feel cheated, I guarantee that the government will rack up enough debt to satisfy everyone.
Marty Richman can be reached at cw*****@ya***.com.
