Unless you’ve been living under a rock, you’ve probably heard or read something recently about our nation’s impending debt problem. In the next few days, our elected officials will decide whether to extend the debt limit, default on our payments, or balance the budget. While it seems that most people agree that the first two options aren’t ideal (for a variety of reasons), they can’t come to an agreement upon how to balance our national budget.
The debate revolves around two options:
- Spending cuts & increased taxes for the upper tax bracket (favored by most Democrats)
- Spending cuts only (favored by most Republicans)
During this debate here’s been a lot of comparisons of our nation’s options to that of a business. For a couple reasons, I felt that this analogy is a bit flawed. First of all, a business operates for profit. In other words: when they balance their books, the ideal situation is to have more money than when they last did the books. Governments must balance spending and income evenly, more like that of a family. Anything leftover gets spent, saved for future use, or given back to taxpayers (in the form of tax rebates). With the exception of the last option, these choices more accurately reflect those of a family.
The other main reason the USA as a Business analogy is a bit flawed is the motivation for spending. Businesses spend money in hopes that they get a return for their investment. Hiring new employees or building a new facility means selling more product which turns into more profit. Government and Families spend for social reasons, things like education, health, and other every day living resources that don’t have monetary returns.
Setting up the comparison
Since we feel government budgeting is more like that of a family than a business, we thought it might be interesting to see what it would be like for a family to have a credit card debt comparable to the debt of the U.S. government. Here’s what we did to find the numbers:
We took the national debt and compared it to the annual tax income of the U.S. to get a ratio of total debt/yearly income. We then used that same ratio to calculate the comparable debt for the average family income. As a result, the average family that makes $50k/year would have a credit card debt of about $161,000. That’s 10 times the average family debt! (including mortgage, student loans, and other debts) Keep in mind: this family has a fantastic credit card with an interest rate of only 3.5% APR.
Our government is currently spending more money than they’re taking in. And instead of paying down the debt, we’re simply paying the interest only (which is now the 5th most expensive item on the budget). So Another thing to consider for our family is that along with this debt, they still are spending more than they make each year. They pay only the minimum balance on the credit card bill each month ($470 – which is all interest) while piling on more debt every day. The most urgent problem is they’re about to hit the credit limit on the card soon, and the bank refuses to raise it any more. They know something needs to change…fast. What should they do?
The first step for anyone caught in this kind of situation is to immediately cut spending. It probably means going out to eat less, going on less vacations, getting rid of expensive cell phone & cable bills. It may even mean getting rid of a second (or only) car and taking public transportation more or moving to a more economical living space. It means making sacrifices for anything that costs money and isn’t essential.
That’s what all sides of our government are working to do right now. There’s not a single public official who’s proposed otherwise. According to our president, however, that’s not going to be enough. Applying this to our family, this means cuts alone might get them to the point where spending and income are even again, but the debt would still remain…interest and all.
The other thing our family needs to try and do is look for ways to increase their income. This might be easier said than done, however. Those with jobs can ask for a raise, but if that doesn’t work, the only other option is to get a 2nd or even 3rd job. It’s not a decision families take lightly, but if the current income isn’t enough to balance with essential expenses, it’s not really a decision at all. It MUST be done.
For our government, the way to increase expenses is to raise taxes. The President’s proposal is to let the Bush tax cuts expire essentially increasing taxes on the highest income brackets. While this certainly sounds easier to accomplish than what our family has to go through, Republicans who criticize this proposal don’t feel it’s a decision that should be taken lightly. They argue that higher taxes could further hurt the economy forcing even harder decisions down the road.
Paying down the debt
Having gotten to this point, a balanced budget isn’t going to be enough for our family. $470 is a huge monthly bill for a family that only makes $50k/year. And since that’s only interest, they would be paying this amount for the rest of their lives and the debt will never go away. They need to come up with a plan for paying down the debt over time.
Our family decides they want to have the credit card paid off in the next 30 years. To do so, at 3.5% APR they’ll need to pay $723/month for the next 360 months. All of this on top of their other living expenses. That’s pretty daunting.
Beware of piling debt
Getting into a situation like this isn’t too difficult. Spending money is easy, and it can quickly get out of control. Making cut-backs isn’t so easy and having to come up with additional income to pay off debts is even less so. I’m not sure why our government thought it would be OK to let us get into this situation, but one thing’s for sure: we’ll be digging ourselves out of it for some time…
http://www.usdebtclock.org/- National Debt
http://www.usgovernmentrevenue.com/#usgs302a – National Income
http://www.census.gov/compendia/statab/cats/income_expenditures_poverty_wealth.html – Average Family Income
http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm – Interest rate
http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#footnote1 – Average Family Debt