My friend Cindy is $50,000 in debt after getting her PhD in British literature. She recently reached the maximum limit of debt allowed on her credit card, another $20,000. Thus she has a total debt load of $70,000. She pays a total of $6,000 in interest alone each year to the bank and credit card company.
Her credit card debt came primarily from Cindy’s one weakness—buying shoes.
She loves everything about the latest fashions and just can’t stay away from department stores. She rarely leaves a store without a purchase of $150 or more.
Cindy started a job last year as an Assistant Professor at a small liberal arts school. Her salary is low--$40,000--until she gets tenure. Her take home pay after taxes and retirement contribution is $34,000.
Here is a list of Cindy’s expenditures for last year.
Rent: $12,000
Debt servicing: $6,000
Car payments, insurance, maintenance and gas: $5,000
Food: $4,000
Health Care: $3,000 (subsidized at work)
Clothes and shoes: $3,000
Books and entertainment: $1,000
Religious affiliation and charity: $1,000
Total: $35,000
Cindy increased her debt by $1,000 last year.
This year she is determined to cut her debt. She is going to buy shoes only if they are on sale.
Unfortunately, inflation has affected the price of shoes. A good shoe shopping trip, buying only sale items, will cost her $175.
First, she must get more credit. She signs up for another credit card.
Cindy says she needs more credit because she is cutting her budget. She only buys shoes on sale now. She has never done that before. Before this year, she increased her charitable contributions by ten percent each year. This year she cut that item in her budget as well, decreasing her charitable giving 50 percent by increasing her giving by only five percent instead of ten percent.
Here’s a list of Cindy’s expenditures after she made the cuts noted above. She still netted $34,000 from her salary. She didn't get a raise. Times are tough in academia.
Rent: $12,000
Debt servicing: $6,200
Car payments, insurance, maintenance and gas: $5,000
Food: $4,000
Health Care: $3,000 (subsidized at work)
Clothes and shoes: $3,800
Books and entertainment: $1,000
Religious affiliation and charity: $1,050
Total: $36,050
Despite her intention to live within her means, Cindy increased her debt by $2,050 last year, a 105 percent increase! What happened?
• Cuts aren’t really cuts but simply slowdowns in the growth rate of spending
• Interest service on the debt becomes a larger and larger part of expenditures
• Total debt increases, leading to even larger interest payments
• Eventually, creditors see that the debt has snowballed and cannot be paid, and credit dries up
Feel free to apply this story to our current predicament—the increasing debt of the federal government.
such a sad story!
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