Basic Lessons in Financing: Ability to Pay Debt
An ingenious mechanism makes money flow throughout the economy: financing. Various permutations of financing have bent the rules defining value, money, wealth, and rich. The “bubble economy” created by speculative financing is responsible for much of the economic hardship we have to deal with, because it creates an economy grounded on uncertain territory: a prediction of an individual’s ability to pay.
The idea behind financing possessions is that you do not immediately have the money to pay for something, but you are promising to pay for it by degrees. Houses and land became the first items subject to such agreements. Cars soon followed, but today you can finance minor items like couches, recliners, televisions, and anything else you can imagine.
What inevitably happens is that the financially irresponsible sit down and think, “My car payments are only $300 a month. That leaves me another $800 to spend after my $900 house payment!” These individuals do not stop to think that they still have car insurance, food, electricity, water, and all the basic essentials of life to pay for. The next step is that they quickly erase any savings they did manage to scrape together. After this, they realize they need to start liquidating their possessions in order to keep making payments, and they do this at a fraction of the price (or have them repossessed). After taking out a loan to cover all these vain expenditures, the final step is to lose the house. What can be done to avoid this?
Skip the entire paradigm! The convoluted “American Dream” that says you have to have everything now plays right into the hands of profit-motivated retailers. You don’t need it all now. You cannot start with your dream house and dream car and expect to live a dream life. Instead, spend a little and save a lot, and you will be living quite a retirement instead of a few short years of imaginary prosperity.
Financial responsibility is just as important for you as an individual as it is for society as a whole. Each failed household becomes another number to add to the statistics. When the statistics get too large, a recession starts. Perhaps if we each learn to live lean and responsibly, we can avoid the pitfalls that, multiplied by 300 million, make for an unstable society. If everyone maintains a large enough reserve to weather a storm (say, 5 times your yearly after tax income or as close as possible to this figure), then perhaps we won’t experience the economic volatility that we have in recent years.
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