Hebrews 12:1-2

"..let us run with perseverance the race marked out for us. Let us fix our eyes on Jesus, the author and perfecter of our faith..." - Hebrews 12:1-2

Monday, February 22, 2010

What Uncle Sam's House Looks Like

Since Lisa and I have been working diligently on getting out of debt (excluding the house debt), I find myself continuously perturbed by the actions of our Federal Government (read "Total Outstanding Debt Owed by the US Federal Government"). When I think about how hard Lisa and I have worked to eliminate our debt by making some tough choices and sacrificing certain luxuries, it infuriates me to see how our government is spending the money that it took from us and is taking from our future paychecks.

The method that Lisa and I have used to become debt-free is quite simple: spend less than you make. In doing so, we have had to plan to save for future known expenses (ie insurance, renovations), while reducing our expenditures. This has led us to where we are today, on the verge of not having a monthly bill associated with credit card or student loan debt. (As an aside, we never carried a balance on our credit card, but we have stopped using it anyway.) It's a great place to be and we are looking forward to the financial freedom we will have in the future because of the decisions we have made over the past few years.

Thinking about all of this, I wondered what it would take for the United States of America to get out of debt and how long might that process take. What I have found is a very bleak future for our nation and our children, who will be strapped with more debt than they can ever repay.

The following graph shows the amount of debt we carry as a nation, as as a percentage of our Gross Domestic Product (GDP).
As you can see, the percentage of our GDP that is dedicated to debt and will be dedicated to paying for it in the future is utterly overwhelming. In 2008, the estimated amount of debt as a percent of the GDP was 75%. Let's pause for a moment and consider what that might look like for a normal, everyday America family.

First, let's consider what the average American family's financials look like. Let's say the Jones family has a household income of $50,000 a year. They have a car loan of $8,000 and they have credit card debt of $8,635. This means they maintain the national average non-mortage debt of $16,635. They live in a fairly comfortable house that has a $167,500 mortgage on it. They pay $15,540 a year to their mortgage company. This leaves them with $17,825 (35%) of their annual income for expenses and entertainment.  All of these numbers do not account for any taxes whatsoever. Considering that the average tax rate is 40%, it becomes quickly evident that the average American family is completely broke and in debt, with no easy way to escape their current situation.

Now, let us consider how the Federal government of the United States lives. Uncle Sam also has an income of $50,000 per year, but he lives quite differently.  Uncle Sam has a budget that dedicates $34,000 of his income for maintaining and expanding his house. Because of previous lifestyle choices, Uncle Sam is paying 10% of his annual income to cover the interest on previous debts and will never pay off the mortgage. The remaining $11,000 has already been allocated for new expansion next year, as his house continually grows larger in size. In fact, Uncle Sam is beginning to take out lines of credit for work that he hopes will take place in the coming years, even though he cannot pay more than the minimum payment right now. Add to all of this that Uncles Sam has already planned to spend 100% of his budget in two years on maintenance and you can see a growing problem. This cycle will inevitably lead to Uncle Sam not being able to make the minimum payments of his mortgages and will eventually lead to creditors being unwilling to lend to him to help cover his ongoing expenses.

See the difference? The typical American family is broke and digging a deeper hole each year. The federal government is getter bigger each year, and does not generate any income on its own. What this means is that the Federal government will have to continue to raise taxes to cover that minimum payment, which will result in more familes going bankrupt. As more families go belly-up, the tax base shrinks, leading to less "income" for the government. And so the cycle becomes self-perpetuating, leading to the eventual collapse of the government as laid out by the Founding Fathers, only to be replaced by a much different structure and format.

As for Lisa and I, here is what our budget roughly looks like after taxes are removed:
28% to pay for our 15 year fixed mortgage
15% towards retirement
10% Tithe
47% Expenses, Entertainment and additional savings
0% car and student loans
Important note: In the past 16 months, we have paid the equivalent of 25% of our income on eliminating our debt!

What does all that mean?
We are very comfortable with the decisions we have made and have a very sustainable plan for the immediate and long term future.

That's more than our government and most of our neighbors can say.

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