Thursday Thread: Balancing Our Perception of Debt (2020 Experian Statistics)
I recently came across Experian’s 2020 Consumer Credit Review, which they publish to outline how debt/leverage statistics fared in the previous year. I’d like to share some of the highlights and then discuss a frequently forgotten fact when it comes to how we think about personal debt.
Not a Surprise: How Americans treated all types of debt changed during the unordinary experience of 2020.
Surprise: There were actual positive trends towards how people treated their debt.
For multiple reasons, consumers improved their timeliness of payments and decreased the credit utilization. The average FICO scores increased, and average credit card debt actually fell. However, most other categories steadily rose.
2020 was one of the biggest “educators” in our modern economic atmosphere. We are seeing more and more evidence that a dose of fear was beneficial in shaking the complacency that most Americans fell into after 12 (ish) years of upward financial trending. But it is actually the average levels of debt that I want to highlight. I wonder how they compare to your numbers.
Average Debt Levels by Type
Credit Card Debt: $5,315
Personal Loans: $15,458
Auto Loans: $19,703
Student Loans: $38,792
Home Equity Loans: $41,954
Mortgage Loans: $208,185
Interesting averages. In light of these statistics, here is the fact we usually forget when we weigh our purchasing options:
By taking on debt, you are essentially borrowing money from your "future self."
When we are faced with purchasing something, in our economic culture, many of us get the privilege to decide whether to borrow money for the purchase, or to pay cash outright to gain what we want. This privilege is made possible by a combination of our credit worthiness, capital on hand, and current borrowing rates.
But if you strip away the cultural expectation that we can purchase most of what we want by borrowing, you are left with two interesting realities:
We can get what we want, to have it immediately, without having enough money to pay for it.
When we do this, we are betting the future value of the thing (education, car, home, mattress, etc.) that we will eventually have enough money to pay for it in full.
Exploring both realities:
For many purchases, and for many people, you no longer have to wait (patience), or work hard/save for as long, in order to gain something you value. You can imagine what this does to our perception of value. As a generalization, the longer you have to wait for something, the more valuable it becomes. The opposite is true, as well. Instant gratification can degrade our appreciation of what we gain.
Psychology also shows us that we find an equal, if not larger value in the “chase” than we do in the end achievement. This is evident when we feel a great let down after finally achieving a long-awaited reward. The old adage, “Life is more about the journey than about the destination,” actually holds light to our money saving habits.
But here is the real kicker… when borrowing money from your future self, how do you actually know that you will have that capital in the future? I don’t want to get to complicated in this thought, since I know there are plenty of ways to put money away now for a later “guaranteed” amount. No, I mean to say that…life happens. And if you believe you will have the capital, will you still find the same value in the thing at that later date, while you are still making payments?
This is one of the reasons why I have become less interested in financial plans as a static snapshot, and more intrigued by the process of Financial Planning. How a person’s foreseen and unforeseen circumstance present problem-solving opportunities as time unfolds.
Not all debt is created equal…I get it. But again, this is not a conversation about types of leverage. This is conversation about our perception of debt. Like many financial professionals, I am not an extremist when it comes to debt. Our world runs off debt. It is part of the air we breathe. It is a difficult system to escape. It creates opportunity for some, and strips opportunity from others.
For myself, before I begin asking questions about whether it is financially wise to take on a certain debt load, I try to ask myself hard questions, like:
If I wait 6 months, will I still want this thing?
Can I sleep on it, or do I need it now?
What exactly am I sacrificing in order to have this immediately?
Is current stress worth the long-term use of the purchase?
The content of questions we ask (or others ask of us) are of some importance. But what is more valuable is the pause, the humility to consider an alternative, and to imagine a world without the momentary thing that you want. It is through this mindfulness that you will gain more than that thing could ever give you. Self-control.
I love woodworking as a hobby. Professional woodworkers blow my mind. How can a piece of furniture be made without glue or hardware? Their knowledge comes from experience and patience. And so through my respect, I will leave you with a common woodworking phrase that I apply to different areas of my own life, including personal finance:
“Measure twice, cut once.”
As we navigate a world offering instant gratification in exchange for indebtedness, I hope we find the pause and humility in approaching our different possible options. Exploring our perception of debt, and asking the right questions, will give us more than low interest rates could ever provide.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.