Your Own Personal Debt Ceiling

Like most Americans, I’ve been watching the political debate over the debt ceiling with some mixture of incredulousness, cynicism and alarm. The former comes from the oddity of the whole situation. Total debt is a function of money coming in being less than money going out for several years. Congress authorized all those decisions on money in and money out, so why on earth does there need to be a separate one for the total? A family that was spending $1000 more than it was bringing in every month from January to October would not need to have an urgent vote in October to “authorize” itself to go more than $10,000 into debt. That was the inevitable result of previous decisions.

The cynicism is because I’m pretty sure there will be grand posturing on all sides for quite a while before some less-than-radical solution is reached. The alarm is from a wonder of what happens if there isn’t a solution? Defaults are pretty nasty things (see Greece).

But anyway, at least the larger macro situation offers an opportunity to think about and talk about the micro situation many families find themselves in. USA Today has a story about “5 Tips for Staying Under Your Own Debt Ceiling.” The general guidelines from financial counselors on how much of your income should go toward servicing debt vary, in part because many people have mortgages, and so this gets caught up in the question of what is the right percentage of one’s income to spend on housing. One suggestion in the article is that housing account for no more than 30% of take-home pay, and other debts, including car payments and credit cards, account for no more than 20%. Of course, at that point, you’ve still shelled out half your income and haven’t done anything creative or exciting or fun yet, let alone eaten, put gas in your car, etc.

Perhaps a better question than how much can we put toward servicing debt is why we should be servicing much debt at all. I had many issues with Dave Ramsey’s Total Money Makeover, but his advice for people barely treading water to save $1000 fast is good. Obviously, vast amounts of wealth, built up and invested over the long term, is a good thing too, but the $1000 cushion that is not immediately directed toward current needs is a good mental barrier to break. Because one of the best reasons to build up assets is not what they will buy you 30 years from now (especially if it’s many of the widespread notions of “retirement”). It’s what they’ll buy you today: freedom. Freedom to fix your car if it breaks without taking on more debt that you’ll be paying off for years.

But why stop there? Living within your means and building up assets will, eventually, give you the freedom to quit a job you don’t like and try something else. It will give you the freedom to take a lower-paying job because it intrigues you (see Robert Pondiscio’s tale of going from being the communications director at BusinessWeek to an elementary school teacher here). That’s not really possible when working to service yesterday’s purchases.

On some level, I think we all know this, but the problem with most savings advice is that it is incredibly dreary. Don’t go out to eat. Don’t buy name brands at the grocery store, or anything you don’t have a coupon for. Don’t buy that latte. Not only is it hard to live life in the negative, requiring daily doses of self-discipline (a virtue most of us have in limited supply), small frequent pleasures tend to have a bigger effect on our overall happiness than infrequent big ones.

A more cheerful way to build up assets? Keep your set expenses low as a percentage of your basic income, then look for ways to boost your income. This extra income will be relatively easy to save, without requiring giving up the small pleasures. Is that doable for most people? I don’t know — but given the statistics on consumer debt and saving, it doesn’t appear that the usual advice is proving to be easy for many people either.

NOTE: We have been having some problems with links going to pill ads or resume services from here. Somehow this account was compromised as well (following on the heels of Twitter). I’m trying to get this all ironed out, and I appreciate your patience.

 

5 thoughts on “Your Own Personal Debt Ceiling

  1. Another significant factor is choosing a career in a stable field, like health care, vs. “doing what you love”.

    1. @Twin Mom- Although history is littered with industries that seemed stable, but turned out not to be. Cars. Steel. Some parts of health care (like drug companies — they are cutting left and right at the moment).

      1. Perhaps another way to look at it would be to consider the advantages of a career at which you can likely earn a living wage by being mediocre, because most of us are. I’ve seen your work elsewhere- City Journal, etc.- and I estimate that you are in the most successful 1% of freelance writers by most metrics. But the average freelance writer doesn’t do nearly as well as the average nurse and even pharmaceutical research skills are transferrable. A friend with a PhD who has worked for a decade plus in pharmaceutical research plans to become a physician’s assistant (only another 2 years for her) if she’s laid off. She’s personable and very intelligent- it seems likely she could support her family that way.

        1. @Twin Mom – there may be something to that. A poet earning $100,000 and a lawyer earning $100,000 are both earning a good living, but if the poet is earning that all from poetry, he/she is totally off the charts in terms of success, whereas the lawyer is solidly in the middle of the bell curve (though I’ve seen some scary articles on law careers lately that may be changing that… but we’ll see). Scrolling through the BLS’s annual Wage Estimates chart is definitely an enlightening experience. But of course, there are complicating factors. You may be more likely to put effort into practice, career advancement, etc., in a field you love, which might increase your odds of being on the leading edge of a bell curve.

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