I have this older friend who is in serious financial distress.
Unfortunately, this friend has gotten himself deeply into debt, and continues to spend way more than he brings home every year. Consider these details:
- For the last few years, my friend has been making around $24K-$25K in net take-home pay. But he's been spending more than he brings home each year, borrowing anywhere from about $1,500 to $4,500 annually to make up the difference.
- In 2009, with a down economy, he had a modest $20,740 in net take-home pay. However, he also increased spending significantly. So he found that he needed to charge an additional $20,530 on credit cards, plus borrow from his own 401(k) savings in the amount of $1,730. This brings his total credit card debt to $78,560 and his total 401(k) self-loan to $43,560 at the end of 2009, for a grand total debt of $122,120 (as I mentioned my friend is older, and has been borrowing thousands of dollars a year for many years).
- His expectation for 2010 is to have a slight improvement in net take-home pay, up to $22,640. Of course, he also expects to continue his high-spending ways and to finance this he plans to charge an additional $17,190 on credit cards, while taking out an additional $1,570 in 401(k) self-loans.
- This means that at the end of 2010, he expects to have a total credit card debt of $95,750 and a total 401(k) loan to himself of $45,130, grand total debt of $140,880.
Given all of the above -- what advice would you give to my friend?
Obviously he's on an unsustainable financial path.
He could work on increasing his income, certainly, though when he borrows nearly as much as he makes every year just to pay the bills there's only so much that can be done in that regard.
He could, like most people in such situations, work on cutting expenses -- generally much easier to control than income -- however deleterious to one's standard of living that may be. Anybody with half a brain can recognize that if you're in a deep hole, the first thing to do is STOP DIGGING!
I expect most financial advisors would seriously urge my friend to consider bankruptcy as the most viable option available, given his crushing debt-to-income ratio (at the end of 2010 he expects to owe more than 6 times his total annual take-home pay!)
There are no easy answers or painless solutions to my friend's financial woes, and I worry about his future. The longer he puts off addressing his serious debt issues, the more painful the ultimate fix will be.
Oh, did I mention?
My "friend" is the U.S. Federal Government.
Of course, the Federal budget deals with billions and trillions, so for my story (which is admittedly a greatly-simplified analogy) I scaled down the numbers to a range most people could more easily relate to. If you want to see the real-life numbers, just add eight (8) zeros to the end of everything.
Think about that for just a moment, please.
Think about how the government borrows significant amounts from itself and has been for years. What does the 401(k) self-loan represent in my little story? Mostly, that's the Social Security Trust Fund. In other words, for years as the government has needed to fill annual budget deficits, it has taken part of the money from Social Security and put an I.O.U. in its place.
Think about how, unlike with individuals such as you and me, bankruptcy is not actually a viable option for the U.S. government.
With bankruptcy off the table, think about what it's going to take to eventually pay off all that debt.
Think about what it would mean to your family, if you owed more than 6 times your own take-home income, and expected that debt to continue to grow significantly over the next several years even as your income (hopefully) increases over time.
Think about what those whom we've elected at the Federal level have been doing to our country's finances for many years.
And think about how an election decision you might make matters, not just in the short term but potentially for decades to come.
Note: Budget numbers and historical data were taken from the following, as provided by the United States Government Printing Office web site: