Take It To The Limit

I recently watched a documentary on Netflix called “MaxedOut”. The documentary was about how Americans are in debt and are struggling to pay their bills. The film shows different people from different backgrounds and follows their story of how they got themselves into debt. The documentary also shows debt collectors and I believe tries to label them as the bad guys for harassing people that don’t pay their bills. Let’s remember debt collectors harass people that are not responsible. Elizabeth Warren (then Harvard law professor) and now Chair of the Congressional Oversight Panel talked about the dire situation of how people simply can’t make their ends meet. I think the more important question is what kind of ends are they trying to meet? People don’t have to buy a larger house, nicer car, or a boat they really didn’t need. What happened to people being self-reliant and prudent?

If you tried to explain the concept of a credit card to an alien it could get complicated very fast. A credit card is normally used when people don’t have enough cash on hand to pay for certain items. In the past credit cards where used to purchase big ticket items. However, now people are usually credit cards to pay for a coffee at Starbucks or something on the 99 cent menu at McDonalds. Why don’t more people go on a cash diet? This could be quite simple. Every month you allocate money for certain purchases like transportation, food, clothing, and entertainment and put that money into an envelope. The rule would be you can only use how much is in that envelope and couldn’t use ATM, debit or credit cards. Another caveat would be you couldn’t mix and mingle funds from different envelopes. Whenever you bought something you could physically see and feel that money coming out of your pocket which might encourage savings. However, people don’t think like this. I guess people feel a sense to entitlement or just simply can’t defer gratification. Although, statistics show that in rough economic situations people do in fact become prudent. Data from the Bureau of Economic Analysis shows that savings rates are much lower in boom periods and much higher in recession periods. In the middle of 2005, when the economy was doing quite well the savings rate was around 1.5% of disposable income. Contrast this with the second quarter of 2009 when the savings rate reached 5% of disposable income due to the economic uncertainty. What we don’t know is much people really should be saving. Perhaps even saving 5% of disposable income is too low. Some of the reasons I think people might be “maxed out” is because they really don’t understand the full implications of paying interest if they miss a credit card payment. True, credit cards companies can charge 30% on a balance that isn’t paid but aren’t you the one that took out the credit card?

One criticism I had when watching “MaxedOut” was how the story was one sided. The documentary failed to show the reason people where in debt. The film sort of took the premise “Oh poor us and let’s condemn all these evil credit card companies”. A sad story was told in the film how two mother’s children committed suicide over mounting credit card debt. Clearly, this is tragic but where was the communication process between the parents and children that could possibly have prevented these tragic events. I do not believe credit card companies are evil. Credit card companies are there when people need them to buy things that people can’t afford. The idea that you can stick a little piece of plastic into a wall anywhere in the world and get cash is quite interesting and novel. People should understand that getting a credit card is voluntary. People should be responsible with a credit card just as they are with alcohol, food intake, or anything else that could be harmful. We have to remember there is no such thing as a free lunch.