Don't get too comfy with your debt
Turns out that many people are so accustomed to living with ever-deeper debt that they are reluctant to let go of it, even when they have the cash.

MP Dunleavey, August 7, 2006

Editor's note: Columnist MP Dunleavey and other women have come together online to strip away the myths surrounding money, lay bare their assets and liberate themselves from debt. Follow the quest for financial fabulousness of these "Women in Red" in Dunleavey's column on MSN Money and on her message board.

The world of personal finance is rife with get-out-of-debt advice. I should know. I've read it, written it, followed it.

Even though people pay lip service to the gospel that debt is bad, millions of Americans are still borrowing beyond their means, spending like the bills will never come -- and saving less and less of their personal disposable income.

I've attributed this debt dependency to living in a ridiculous consumer culture, to humankind's innate greed, to a Darwinian need to keep up with Mr. and Ms. Crate&Barrel, to elevated blood levels of financial denial.

It only occurred to me recently that maybe, deep down, people not only like living on borrowed money, they've grown so accustomed to its seductive presence that they can't imagine a life without owing.

Addicted to money you don't have

It's no secret that people's tolerance for owing evermore massive sums of money, on all fronts, is at a record high.

These familiar statistics reflect a comfort level with escalating amounts of personal debt that verges on addiction -- or insanity -- and I'm not sure which:

  • Credit-card debt alone spiked from about $250 billion in 1992 to $804 billion in 2005, according to government data.

  • Americans borrowed about $11 billion in home equity in 1995. By 2005 that had soared to $243 billion.

  • Student-loan debt has tripled in the past 10 years, according to student-loan lender Nellie Mae. In addition, students graduate today with an average of $3,000 in credit-card debt.

The fact that we can't afford this borrowed lifestyle is apparent from the steady drop in personal savings -- by some estimates people haven't saved this little since the Great Depression 70 years ago -- and by the lack of retirement savings in particular.

In debt we trust

It's the lack of focus on the future that most worries Robert D. Manning, an economist and professor of finance at Rochester Institute of Technology, Manning is best known for his book "Credit Card Nation," which launched him as one of America's biggest anti-debt crusaders.

This fall, Manning will release a documentary called "In Debt We Trust," which is partly inspired by research he did for a study published last October. Titled "Living With Debt" and commissioned by Lending Tree, the study documents Americans' growing tolerance of debt throughout various stages of the lifecycle.

"In the past people would have based their budget on 80% to 90% of their take-home pay," Manning says. "Now we see, based on the federal Survey of Consumer Finances, that people are living on close to 120% of their discretionary income.

"That not only means we've changed our lifestyle from a certain level of saving, but people won't be able to retire the way they want to."

Worse, young people are being trained to depend on debt before their adult lives even begin, says Tamara Draut, author of "Strapped: Why America's 20- and 30-Somethings Can't Get Ahead." A growing number of students routinely take on five-figure and sometimes even six-figure debt just to get a bachelor's degree, notes Draut, who is also director of the economic opportunity program at Demos, a New York-based research institute.

"The normalization of student debt, I think, probably makes young people more comfortable with other types of debt, like credit-card debt," she says.

The ho-hum $17,000 credit-card debt

While these numbers are always stomach-churning, they're not new. What is eye-opening now are those who are clinging to their debt. For these folks, debt has become such an integral part of their lives that they don't want to part with it.

I spoke to Susan Farr, 54, a lawyer in Illinois, about her reluctance to pay down her $17,000 credit-card balance -- even though she has the cash from a divorce settlement this past spring.

Understandably, her sense of security was roughed up in the year and a half it took to arrive at a settlement. With three kids in college, she amassed nearly $20,000 in various debts, which she consolidated on a zero-interest credit card last January.

"It just feels so darn good to have money in the bank after not having any for so long," Farr says. Yet she knows the cash is something of a mirage, because she intends to use the settlement money to pay off the card. "I've discounted the fact that I'm $17,000 in debt -- I think of myself as debt-free."

True, Farr's $200 monthly payments are going straight to principle -- and she plans to pay down the full balance on her card by December, before the higher interest-rate cycle kicks in -- but why pay rent on the debt instead of paying it off now?

Farr doesn't seem addicted to debt, not by a long stretch. She put down more than 50% in cash on her new post-divorce home and has all the property taxes for 2007 already in escrow -- on top of saving $1,400 a month for her emergency fund and short-term savings.

Yet she has a psychological need to hang on to the cash -- and tolerate the $17,000 debt -- for as long as she can, even though she could be debt-free today if she so chose.

Money in the bank vs. the bill in the mailbox

Dana Balansag, 30, feels the same way. A compulsive saver, she and her husband have about $24,000 stashed away in an emergency fund, on top of several thousand dollars saved for other expenses. (She asked that her city not be disclosed.)

Could she pay off the $12,000 balance on her car loan today, if she wanted? Sure. "But I'd rather have the cash in hand in case something comes up," Balansag says, reasoning that her three-year-old car has enough value that she could always sell it to pay down most of the loan if she had to.

She says it's worth it to her to keep paying $300 a month toward her car for the peace of mind she gets from knowing her nest egg will remain untouched -- even though at about 5% interest, she will end up paying $1,100 more for the car by the time her loan is paid off. Another young woman on the Women in Red message boards confessed she was feeling anxious about paying off her $16,000 student loan -- even though she has enough money in savings to pay it off in full right now.

She'd gotten used to having the cash for an emergency fund, she wrote, and dreaded the idea of watching her savings dwindle.

"Is the psychological benefit of paying off the debt going to offset the return of my old anxiety of not having a cash buffer?" she fretted.

A better question would be: How much will it cost her to maintain her debt? At 6% interest and a 10-year term, she could end up paying over $5,300 in interest. Having cash and living with debt, even temporarily, seems like a recipe for futility at best and financial loss at worst.

She finally decided to pay off her debt in the coming month. Other people in the forum applauded her, pointing out that once her loan is paid, she'll be saving even more money.

That's the point: Let go of the debt. When it's gone, your cash is your own again -- to invest as you please in the life you want now and the future you dream of. Living with ongoing debt, just because it's easy or you can "afford the minimum payments," is like living on borrowed time. Your life isn't your own until you own it.


This story ran on on August 7, 2006.