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Discussion: Consumer Debt

posted on December 11, 2007 at 11:17 AM

With us is Dr. Tahira K. Hira, professor of personal finance and consumer economics at Iowa State University. Among other things, Dr. Hira's work looks into the social and psychological aspects of borrowing. Also with us is Adam Carroll, co-author of "How to Win the Money Game," a book that offers counsel on personal finance. He is chief education officer for Four Legacies Mortgage.

Mundt: To both of you, welcome.

Carroll: Thank you.

Hira: Great to be here.

Yeager: Dr. Hira, I saw you nodding your head at that piece a couple of times. What are your thoughts about a Blobaum family?

Hira: It's amazing. I'll tell you, that says to me everybody can do it. What they are saying, we have control of our money. They're saying we make choices. They're saying we decide how to celebrate things, so that’s the key to it. They're telling you it's not blindly, mindlessly doing things that everybody else is doing. It's the family value system. It's a -- to recognize what is important, what is important for holidays. They say it's important to have time together, to share good time with each other, rather than pulling each other under the debt -- heavy, heavy debt burden just because -- so I just think they have all the important messages there.

Yeager: Do you find, Adam, that there are a lot of families like the Blobaums out there in your line of work? Do you see there's a lot of families who have been smart about this and they've avoided some of the things, or do you find that they're an exception?

Carroll: I wish I would see more families like the Blobaums out there. In all honesty, we're seeing more and more families who are doing exactly the opposite. I think one of the things that Phil said that really stuck with me in that piece is that wealth has to be redefined in America. Unfortunately it's very possible and easy for families to show the trappings of the wealth without having any real wealth to back it up.

Yeager: You talk about trappings of wealth. Let's go down this road already. We think -- there are some in this country who think that wealth is by having all the fancy toys in their house, whether it's a new car in the driveway, a big-screen TV, new furniture. Is that wealth?

Hira: Well, I’d like to take that on. I think it is wealth if you have it, if it's yours. If you don't have a title to anything that stands in your garage or in your house or on you, it all belongs to other people, you still owe money on it, you don't have the ownership papers with you, well, it isn't yours and you aren't wealthy.

Yeager: Adam?

Carroll: I would piggyback that thought. And we tell people a lot of times that are suffering under the tremendous pressure of credit card debt and car loans and home loans certainly, that either you own what you own or it owns you. In most cases people go to work every day because the old adage is true: I owe, I owe, it’s off to work I go.

Yeager: I have a question about -- well, we'll get to the holiday season in a little bit. We'll talk about the Christmas season. But just in general we seem to be under duress to -- every time we pick up the newspaper, there's a series of ads that say sale, sale, sale. Is it really a sale? And why do some people feel like they should go out and take part in that sale; they feel like they're saving money?

Hira: What we do today, it is not -- the answer doesn’t lie in one thing or the other. There's a set of variables that are in the external environment, and there's a set of variables that are within us, in our house, in our family, but also within me as my psychology and my personality.

So there is no doubt that there is a pressure from outside to come and buy -- there is a pressure from outside to buy in a way that you can't tell you're buying, to deal with money in a way that you don't even know that you're spending money. If you don't touch, feel money, you have no sense that you're spending it.

However, there is a whole lot that lies within us. They're doing their job. We live in a free country. It's a capitalistic country. We're not going to have the Soviet Union, where we're going to dictate businesses what to do; I hope not.

But at the same time, the world is not going to become simple. It is going to become lots more complex. Lots of automation of everything. How many us even bring our salary home, then divide it up into envelopes, and then say this is all for rent, for car, for food, for children, for this and that, and this is left for discretionary income. We don't even understand the term discretionary income anymore.

Yeager: True.

Hira: And then when we go out to borrow, we thought what are we going to borrow for. You borrowed for something that you couldn't buy within your current income and you needed it and you would pay off and it will be still there for you. However, before we borrowed even for the most important thing and the most critical thing, we needed to put our income together, we needed to put our assets and liabilities together, we needed to walk into a bank and face a human being who would ask us some questions and then they would say, well, I don't think you can borrow yet, you need to do, blah, blah, blah, blah.

So what we're doing right now is that we don't have to do any of that. Nobody is checking us. We can swipe the card, swipe the card, swipe the card. What that says to me actually is that that job I need to do myself. I need to ask myself what do I borrow money for.

Another thing that has happened is that the distinction between using the credit card and borrowing money has been taken away. It's just like a credit card use and you're not realizing the minute you don't make full payment at the end of the month when the bill comes. If you didn't make the full payment, you have taken a loan at the most expensive rate and for things that if you had sat down and thought about it and said do I want to go and buy things because they're on sale whether I need it or not, you wouldn't have done that.

So what it says to me is we need to bring the control to ourselves. We need to sit down and say what my income is. How much taxes are gone out. What's left over. What's the lifestyle that I can support and afford.

Yeager: Well, you mentioned discipline and that's just something that we don't seem to have anymore. Adam, do you see that with clients or anybody that you've come across? And same with you, Dr. Hira. You've seen people -- we don't have the discipline -- or I guess do we have the discipline and why is that so important to try to get a hold of our finances?

Carroll: Well, I think the discipline question, it’s certainly an issue right now. In my own experience, you know, as an example, Starbucks trips, it's an indulgence. It's not a given. It doesn't happen every day of the week. And for some people that's just part of their daily ritual. And so the discipline of understanding, I’m going to make choices: I'm either going to have a $4 cup of coffee, or I’m going to set that $4 aside for when I need it most.

People -- they just don't seem to have that discipline right now. And I think once they understand the benefit -- or the consequences of those actions -- and they will come January 15 or 20 when the credit card bills come due --

Yeager: Well, you think about the $4 coffee a day. You do that every day of the week. That's $20 right there all of a sudden. You basically -- what do you have to show for that $20? I think you mentioned that. You have nothing to show for that money. How important -- is that something you should think about when you're going to make a purchase is: What am I going on get in return; am I going to have something that's just going to -- am I going to eat or wear that's going to eventually wear out? How do I -- when I’m thinking what purchase I’m going to make or what -- spending, how do I rate that?

Hira: I think one has to have a plan. One has to have a spending plan. We don't have a spending plan. We just spend. If I don't have money, the card is there. So that's okay. So I don't think that we will bring the discipline unless we really decide to sit down and figure out what it is that we can spend and on what. So we’re responding to our wants and our impulses and in some cases compulsive behavior as well, but we're not really attending to the needs.

The lessons are very basic: Know your cash flow; know your own -- plan for it; be prepared for season. Nothing is a surprise. You know, Christmas is not a surprise for us. So what's the big deal about? We all know come December there is Christmas. So that month of salary is not going to bring the money that I want to spend -- "want" to spend. So if I know how much I can afford to spend, then I need to set that aside every month. Come November I have the money that I have decided that I can afford to spend, rather than I have a card and I’m going to go buy what I feel like buying because everybody else is buying.

Yeager: So you mentioned a couple of things. But what are a couple things that we can do beyond a budget ahead of the holidays or buy a holiday gift in July and August and spread it out? It goes beyond that?

Hira: It's not buying the gift in July. First of all, we need to ask sources once I have -- once I have understood what I bring in, what I need to live, then what’s left over. Getting gifts is a discretion -- is a want. It's something nice to do.

But first of all, I have to ask myself what my limits are. How much can I spend this year to give for Christmas. And then I decide how many gifts and how will they be divided to who gets the $20, who gets the $10, who gets it is $5. And then I say, oops, it all ads up to, you know, dollar, dollar, dollar, and I don't have that. So what do I do?

Then you think back and you say what am I really trying to do with gifts? I'm trying to tell you that I like you and I appreciate you in my life and you've been good to me and I want to say thank you to you today. Is there another way of doing that? Is there a way of doing it with a smaller amount of money?

For our parents, grandparents, children, sisters, brothers -- like this family just showed us, we could make create good times together. We could make things together. We could write beautiful notes and on this say I will give you half a day, four hours, two hours, three hours, I’ll come wash your car, I’ll take the dog out. I will paint your house. I will do whatever. There are things that we can do that don't have to bankrupt us.

Yeager: So, Adam, how do you do that?

Carroll: Well, that's a good question. I think you have to have a discussion as a family of what -- first of all, what do we value. What do we want over Christmastime? We have a running joke in our family, why don't we just write each other a check for $30 and bypass going out and getting gift cards and gifts because ultimately that's what it becomes.

Instead, much like the Blobaums, let's create memories, let’s create gifts and times spent instead of money spent. So how do you challenge that or balance that? I think you have a long discussion with your family about what Christmas is and the fact that you are operating within a budget and, because of that, this is what will be spent per person this Christmas, and we’re going to focus on good times and creating memories for the long haul.

Yeager: We haven’t really talked too much about saving in general or trying to get out of holes that are dug. How do you put -- family members might get excited at you for not getting the gift that you really wanted. How do you get beyond that mentality and teach to your children that this is what we need to do to be -- I’m trying to teach you a lesson more than --

Hira: I think the point that he's made -- I want to underline that in a very, very, very big bold line. Talking about money is so important. And in this society, we don't talk about money. We wear our money. We flaunt our money or no money or credit card -- actually everything you see is all on credit, it's not yours anyway, so it should be repulsive to us rather than attractive to us. I don’t understand the attraction there at all.

Then if I myself as a single person, if my parents haven't taken the time to talk to me about money, once I am 18, 19, 20 years old, I’ve got to grow up and I need to make that decision that I need to talk to myself how much money I have, what I need to do. The money that we bring in every month, there is a part that the government is going to take.

There is a part that I need to set aside for tomorrow, meaning some bills will come third month, six month, eight month, twelve month, and I don't have -- that much money wouldn't be there so I need to make a plan for that. And then there's the after tomorrow.

Because when you are going to have large expenses, you need to understand that I am not going to one day wake up and be prepared for a trip or for a new car or for some unexpected thing happens. The unexpected is actually the timing is unexpected. It will happen to all of us. It's just we don't know when it's going to happen, so not having an emergency fund, etc. So first I need it talk to myself.

And second, he pointed out something here before we got onto the formal thing. I always advise to my students in my class that how many of you are dating or are about to get married and how many of you have taken time to talk about money. And they go, ouch, that's not romantic. Well, I say you need to talk. So you talk and when you get married, you're bringing two value systems together.

You need to sit down and have a conversation: How are we going to own a home, and not by just borrowing a hundred percent of the amount; and how are we going to have a car; and how are we going to have a down payment; and when are we going to take vacation; how much is it going to cost? I think in order to do that, what will it mean? When we wanted to buy our first house, we said, first of all, we need to decide how much house you can afford.

You don't let the real estate person tell you. The real estate person told me and my husband that -- they were showing us houses. They said this what your income that you can borrow – buy. We said but you don't anything about us. You don’t know where else we want to spend money. You don’t allow other people to make decisions for you. You say I know how much house I can afford. You have no idea I like to travel. You have no idea what my other goals are. I don't want to spend all my money on my house. Then we said so how do we get this thing paid. That means, honey, you can't do this or I can't do this, or if we were doing this once a week, we will do it third week or fourth week. And that's the kind of point that you’re making.

But if you are going to make that decision by yourself and you have a spouse and a child that you didn't include into the conversation, that plans is never going to be realistic and nor is it going to be successful.

Yeager: Dr. Hira, thank you very much. Adam, we have about 20 seconds left. What thoughts do you have on the discussion?

Carroll: I would echo Dr. Hira’s sentiment. I think the most important thing for your viewers to understand is if they have children right now and they haven’t had a money discussion with them, someone is talking to them about money. And more than likely, it's Master card or it’s Discover or Visa. So bottom line, we have to be talking to our kids about money and we have to be talking to each other about money.

Yeager: It starts extremely early that we need to do that.


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