All the news recently has been about raising the debt ceiling and about the national debt. But no one understands billions and trillions of dollars and politicians rely on the arcane nature of the whole discussion to obscure what is really going on.
So I decided to reduce it all down to the level of a personal budget so that it is more easily digested. Here it is in a nutshell. What would you think of a guy who came to you and said the following:
“Okay. I make $6,000 per month but I’m spending $10,000 each month. I’m making up the $4,000 monthly difference by borrowing. I have assets that are valued at $460,000 but I also have debts of $460,000 so that my net worth is $0.00.
Now I realize this situation is not healthy and I know that I need to make some changes. So here is my plan.
I’m going to continue to borrow $4,000 per month for the next two months. Starting Oct 1st, my spending is going to go up by 8% to $10,800 per month. Since I’m not expecting a raise in my income, I will need to borrow $4,800 per month starting in October. By the time we get to the end of September in 2012, I will have borrowed an additional $80,000.
But good news — I’m going to reduce my spending by $80,000 also. Granted, I’m not going to make that $80,000 reduction over the next 14 months while I’m accumulating the additional $80,000 in debt. Instead, I’m going to reduce my spending by a total of $80,000 over the next 10 years. But, hey, it’s a step in the right direction. And it is an average of $8,000 per year.
Now I hope you will understand that I can’t actually spend $8,000 less in this very next year. I’m going to have to ease into this reduced spending. I promise that I will spend $80,000 less over the next 10 years but I’ll start with less than that right now and then do even more than $8,000 per year in the later years.
But, again, I’m committed to spending less. And so, to show my good faith and earnestness about this matter, I will start immediately by spending $684 less over the next 14 months. This works out to $57 per month.
In other words, I’ll reduce my spending from $10,800 per month to $10,743 per month. And, instead of having borrowed $80,000 over the next 14 months, I will only have borrowered $79,316.
And now that I’ve got such a solid plan, will you agree to loan me the $79,316 that I need over the next 14 months?”
(Note: All of the above numbers are exactly the same percentages as what we just did with the debt ceiling and the national debt but just scaled down to a personal level).