Most Americans believe debt is necessary. In fact, 7 out of 10 expressed this belief in a recent study by the Pew Charitable Trusts. Another 85% admitted to utilizing debt to live beyond their means. The pursuit of “things” keeps many consumers in perpetual debt from their teens until retirement age.
Everyone wants to feel like he or she has accomplished the American Dream. Debt allows us to buy things that we really can’t afford but that we really want now. However, is debt creating an illusion that we have actually attained the American Dream? Is living paycheck-to-paycheck paying for stuff we can’t really afford part of the American Dream?
What is the American Dream?
The American Dream has been the gold standard for life in the U.S. for a long time. It consists of the foundation principles of our Declaration of Independence, which is that we are all equal and endowed with certain unalienable rights such as “Life, Liberty and the pursuit of Happiness.”
Other aspects of the American Dream involve the idea that anyone, regardless of background, can attain success through hard work and sacrifice. Immigrants, as well as citizens, can achieve the same upward mobility and achieve success. Other countries that employ forms of government such as communist dictatorships deny their citizens these opportunities. Our free-enterprise system here in the U.S. makes it possible for individuals to achieve whatever their capabilities deem possible.
The American Dream means different things to different people. For some, it means marriage and family; for others it means acquiring wealth. For most Americans, home ownership is central to their vision of the American Dream. Private property rights give one the right to live as he or she likes without the threat of imposition of a landlord. This and other rules of law provide individuals with the assurance that the fruits of their labor cannot be taken from them in any arbitrary, forceful manner.
The American Dream provides citizens the opportunity to live freely, make their own choices, and aspire to and ultimately achieve whatever they desire.
Is debt necessary to achieve the American Dream?
Many believe that debt is necessary to achieve the American Dream. After all, very few people can buy a house with cash, so homeownership usually means taking out a mortgage. The same goes for buying a new car. So how is anyone able to achieve the American Dream without going into debt? If your idea of the American dream is having everything now, then the answer is probably no.
Young people are very much of the belief that, as long as they can make the payments on a house or car, it’s okay to buy it. While the basic tenets of that concept are true, it doesn’t mean that it is always the right decision. One of the foundation principles of the American Dream is sacrifice, which may mean putting off purchases until the time is right to make them.
This may mean renting for a few years to save for a down payment on a house, or driving an older car until you get a promotion or are able to save for a new one. Young people today forget that their parents took years to acquire the wealth they have. Many want it all now.
We have all heard the stories of those who came from nothing and worked hard to become successful. Often, these stories tell of difficult sacrifices and hard work. Many people presented with very little opportunity in life go on to become some of society’s most productive and successful members, but they achieved this through diligence and sacrifice. Working two jobs, managing their money well, and living below their means are some of the ways they have gotten ahead in life. They were also willing to put off things such as buying homes and new cars until they had achieved a certain level of success.
Why student loans might be the biggest roadblock to the American Dream
Student debt in America has reached an all-time high. According to the New York Federal Reserve Bank, consumers in America owe a whopping $1.4 trillion in student loan debt. That number encompasses 44 million borrowers, and this may have impacts on the economy for decades to come.
The average student leaves college with $34,000 in education loans, and carrying that debt into their working lives means it could have serious adverse effects on their ability to pursue the American Dream. Consumers looking to buy a home who hold significant student loan debt are finding it increasingly difficult to qualify for a mortgage loan.
With the rising cost of tuition at colleges across the board, more students are taking out student loans, and the average loan is getting larger, which will only make matters worse down the road. In the past few years, the rate of repayment has slowed down as well, which will stretch the student loan problem out even longer. Bottom line: while a college education will help consumers earn more income, those who borrow in order to do it will find it harder to attain the financial levels associated with reaching the American Dream.
Other types of debt that may be a roadblock to the American Dream
Mortgage debt represents the largest amount of household debt that American consumers hold. In the latest report from the Center for Microeconomic Data, total housing-related debt, in the form of mortgage debt, stood at $8.63 trillion as of March 31, 2017. This represents a $147 billion increase over the 2016 fourth quarter numbers.
While owning a home is central to attaining the American Dream, many Americans have mortgages that are too big and have essentially rendered them “house poor.” This means that by the time they pay their mortgage and other bills each month, there is little money left to do anything else. Things such as travel, dining out, and discretionary purchases become difficult, if not impossible.
Auto loans topped out at $1.04 trillion at the end of the first quarter of 2017. Auto loans have also risen sharply over the last six years as lenders continued to lend in this segment regardless of the tightening up of lending standards in other areas. Delinquencies have also risen, as subprime buyers have still been able to borrow, despite poor credit scores.
With easy credit available to just about any type of consumer, many consumers purchase new cars when they might be better off purchasing a used vehicle. New car payments can be very high and eat up substantial portions of a monthly budget. Sometimes, in order to keep the payments lower, consumers will take long-term loans of six or seven years. While this does lower the payments, the debt becomes a long-term burden.
Credit cards are an easy way to acquire the things in life that consumers really cannot afford to pay cash for. Most retail establishments have low lending standards, so getting credit to buy furniture, televisions, and other household goods is easy. This puts consumers who have an “I want it now” mentality in a position to rack up considerable credit card debt.
Credit card debt is easy to acquire, and while many consumers may feel they are living the American Dream with all of their “stuff,” they are actually a slave to their monthly credit card bills. Credit cards trick consumers into thinking they are attaining success with their purchases and possessions.
Other reasons consumers fall into debt
There are many ways consumers accumulate debt. Many are self-imposed but other circumstances are beyond a consumer’s control. Let’s have a look at a few.
Overspending
Many consumers just simply overspend. Their monthly income is not enough to cover all the purchases they want to make, so they rely on credit cards to give them the things they cannot afford. Not living within one’s means is the fastest way to accumulate undesirable debt.
Lack of budgeting skill
Most consumers do not know how to budget their money and make ends meet. It’s not a skill normally taught in school in America, so many consumers are on their own to try to figure out how to manage their money. With the inability to stretch their dollars to the end of the month, many consumers need to rely on credit cards to get by.
Loss of a job
Losing a job can be devastating to a family’s finances. If the income is not replaced quickly, the situation can become critical very quickly. There is little help available for those who find themselves suddenly unemployed. Unemployment compensation pays only a fraction of a person’s weekly paycheck. With a substantial gap in income, many need to turn to credit cards to pay their bills.
Divorce
Nothing tears a family’s finances apart quite like a divorce. When married people separate, it usually means that overhead costs will double, as the divorcing parties need to set up separate households. This often happens without an increase in income, which puts a huge strain on the overall financial picture. With money stretched so thin, often, the use of credit cards increases to meet everyday expenses. Under such difficult circumstances, debt can accumulate very quickly.
Lack of savings
Many Americans have little to no savings, making them financially vulnerable to life’s emergencies. For many families, even the smallest emergency can throw their finances into chaos. During these times, those financially unprepared will sometimes rely on credit cards to get them through.
Medical Bills
When an unexpected illness or injury occurs, many Americans are financially unprepared. Aside from the medical bills that can accumulate very quickly, being out of work can mean a substantial loss of income. With mounting co-pays and deductibles piling up and little to no income coming in, many need to turn to credit cards to survive.
Ways to work on getting out of debt
When consumers find themselves in debt that is overwhelming to their financial well-being, they need to act. Often times, if they wait too long, their options become limited. Let’s review a few options consumers have to address their debt problem.
Debt consolidation
Sometimes, if consumers act early enough, they can work with a lender to consolidate their debts into one loan. The benefit of this is that consumers consolidating debt can often get a lower interest rate than what they are currently paying on their credit cards. This can mean a much lower payment. Here are a few ways consumers can consolidate their debts.
Home equity or home refinance loan: If a consumer owns a home and owes less than what the home is worth, he or she may be able to obtain a home equity loan or refinance the home and take some additional cash out. The benefit of these types of loans is that mortgage loans have a much lower interest rate than credit cards and a much longer term. This substantially lowers payments and helps consumers get back on track financially. The downside is that, because of the longer terms, it is likely that consumers will pay more interest on that debt over the life of the loan.
Personal loan: If a consumer has good credit and not a lot of debt, sometimes, he or she can utilize a personal loan to consolidate debts. Generally, these loans help a consumer pay off loans in a shorter period, so payments on the loan are not likely to be much lower than what he or she is already paying. In addition, most personal loans are limited in how much a consumer can borrow, so they may not be appropriate for all consumers.
Other Options
Sometimes a consumer’s debt becomes overwhelming and he or she falls into a situation where meeting obligations is impossible. Before considering bankruptcy, which will have long-lasting detrimental effects on credit standing, consumers should consider all other options. One such option is working with a debt relief company such as National Debt Relief, which can work with creditors to settle their debts. It’s not an easy or fast process, but it can help consumers get out of debt and get back on track.
It’s important that consumers faced with oppressive debt explore their options to find the right solution to relieve their financial burden. Don’t let debt hold you back from attaining the American Dream. Get started today!