A lifetime of debt? Really? Apparently so...

[Independent]

According to this article the average American will spend $600,000 on interest payments over their lifetime. How sad.

I couldn't find $600,000 in the article.

The average American earns about $45,000 per year. Earning that for 45 years means about $2.0 million of lifetime earnings. $600k of interest means devoting 30% of before tax earnings to interest payments alone.

I know that average Americans borrow more than I do, but I can't imagine that number.

 

[shasta]

I don't know much about this topic. Does debt really roll over when a relative dies?

 

[ProspectiveBum]

I couldn't find $600,000 in the article.

It was in the last tile on the graphic at the top.

It's a staggering sum, for sure. I'm less surprised by it when talking to some of my neighbors, who have been paying on interest-only ARMs for *years*. These same folks say they wish they could build up some equity in their home. Because then they could tap that.

During a recent such conversation I said that that's a slippery slope, and I prefer not to be leveraged. The 2 guys I was talking to looked at me liked I'd grown a 2nd head.

 

[Sunset]

I don't know much about this topic. Does debt really roll over when a relative dies?

The dead person's estate has to pay the debts prior to distributing the estate.
So if the dead person has nothing (nobody really counts furnishings and clothing) then the debt will be cancelled.
Thats why life insurance policies should always state the name of the beneficiary person instead of "the estate" , so something will pass onto the heir.
Of course if spouse and dead person are co-signers or joint on the debt, then the remaining spouse is responsible for the full debt.

That is my basic understanding, as someone who avoids debt when possible.

 

[samclem]

On my paid off home I probably paid about $50k, and maybe a few hundred on my education loans. I can't imagine being an indentured serf all my life. Just .... not .... happening.

Do you pay property taxes on that house? Welcome to lifelong serfdom.

If we'd paid cash for our house rather than get a low-interest fixed mortgage, I would have had about $100K less in stocks over the last 12 years, and would have missed out on all the growth of those investments. It wasn't a sure thing, but it has worked out okay. The $100K has turned into about $250K over the intervening 12 years, and we've even paid the mortgage down a bit. But at the present approx 4.5% fixed rate, I'm not in a hurry.

 

[ESRwannabe]

Back when I was in college I used to earn extra money by tutoring people in various math/science classes. That's how I learned that your average person is really really dumb.

I went to a relatively good public university (my state's flagship research university) and I was amazed at how stupid your average college student was. I'm sure it is even worse now.

Your typical person is not very smart and has no willpower. They aren't capable of delaying gratification even if they could understand concepts like compound interest.

 

[shasta]

The dead person's estate has to pay the debts prior to distributing the estate.
So if the dead person has nothing (nobody really counts furnishings and clothing) then the debt will be cancelled.
Thats why life insurance policies should always state the name of the beneficiary person instead of "the estate" , so something will pass onto the heir.
Of course if spouse and dead person are co-signers or joint on the debt, then the remaining spouse is responsible for the full debt.

That is my basic understanding, as someone who avoids debt when possible.

Makes sense.

I only ever had minimal student loans (thankfully I figured out school was worthless to me before I had spent too much - dropped out and went to work), and I have financed a few cars.... Noting now. I have to buy credit when I need it. Or just pay all cash because the thought of %fees makes me

 

[camefromnothing]

Do you pay property taxes on that house? Welcome to lifelong serfdom.

If we'd paid cash for our house rather than get a low-interest fixed mortgage, I would have had about $100K less in stocks over the last 12 years, and would have missed out on all the growth of those investments. It wasn't a sure thing, but it has worked out okay. The $100K has turned into about $250K over the intervening 12 years, and we've even paid the mortgage down a bit. But at the present approx 4.5% fixed rate, I'm not in a hurry.

THIS!

 

[athena53]

If we'd paid cash for our house rather than get a low-interest fixed mortgage, I would have had about $100K less in stocks over the last 12 years, and would have missed out on all the growth of those investments. It wasn't a sure thing, but it has worked out okay. The $100K has turned into about $250K over the intervening 12 years, and we've even paid the mortgage down a bit. But at the present approx 4.5% fixed rate, I'm not in a hurry.

DH and I moved from an HCOL area to a LCOL area in 2003 and could have paid cash for our house. Instead, we took out a traditional mortgage, bought $200 worth of wine and invested the rest. Sinking it all into the house would have been a very bad idea; we'll be lucky to get maybe 20% over what we paid although we've built up significant equity because we took out a 15-year mortgage.

When I was a kid my parents once told me they had the cash to pay off their mortgage but it would be a bad idea. I was puzzled; in general, they never borrowed for anything. Now I understand- they had a low interest rate and figured the money was better deployed elsewhere.

 

[Asher Aion]

Where you are on the mortgage is the rub. From the bottom looking up at a mountain of home debt my priority was to lower that mountain. The day when we felt that we were well on our way to ascending it, the desire to pay it off was lessened, and the idea of investing was stronger.
In my business (yes OMY again at a lesser role) we carry debt as a tool, as many here do with their mortgage.

 

[G8tr]

DH and I moved from an HCOL area to a LCOL area in 2003 and could have paid cash for our house. Instead, we took out a traditional mortgage, bought $200 worth of wine and invested the rest. Sinking it all into the house would have been a very bad idea; we'll be lucky to get maybe 20% over what we paid although we've built up significant equity because we took out a 15-year mortgage.

When I was a kid my parents once told me they had the cash to pay off their mortgage but it would be a bad idea. I was puzzled; in general, they never borrowed for anything. Now I understand- they had a low interest rate and figured the money was better deployed elsewhere.

Exactly. There is smart debt and dumb debt. Suffice it to say, any debt on a depreciating asset is dumb debt.


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[ERD50]

... Suffice it to say, any debt on a depreciating asset is dumb debt.

I'll challenge that.

The asset will depreciate whether you pay cash or borrow. It has no effect either way on the depreciation of the asset.

So the question remains - can you borrow for less than you can reasonably expect to earn from investments?

-ERD50

 

[Closet_Gamer]

It just seemed such a strange concept to be in debt for all of one's life.

Amen. I was in debt from age 18 (college loans) to age 41 (paid off the mortgage). 23 years was plenty for me.

It bewilders me how people don't look up a few years into life on the debt treadmill and say "Hey, wait a minute, this sucks!"

I still smile when I update my finances every 6 months and my spreadsheet says:

Debt:Assets Ratio = 0.0
Debt:Income Ratio = 0.0

It's a vestigial calculation from by gone days, but I leave it there because it reminds me never to owe anyone, anything again...

 

[MooreBonds]

Exactly. There is smart debt and dumb debt. Suffice it to say, any debt on a depreciating asset is dumb debt.

Money and debt are fungible. It doesn't matter what the debt is securitized by or what it is used for, since a $1,000 debt on your balance sheet doesn't matter if it's on a house or on a car or on your credit card - it's still subtracted from your assets in the same mathematical equation. All that matters is what your net worth is growing by, in relation to what interest you are paying on your gross debt.

If I had a 0.9% car loan from the manufacturer and bought a new car, is that "bad" debt because the car drops 15% in value when I drive it off the lot? Does that debt suddenly become 'good' debt if I took out a HELOC on my house for 3.0% instead?

Obviously, for most Americans who take out debt for many things and who don't comprehend many basic financial concepts, it can be a handy rule of thumb. But for the average reader of this forum, there is no "good debt" or "bad debt", since the balance sheet doesn't have emotions and doesn't care what it's for.

 

[Independent]

Thanks to ProspectiveBum I found the $600,000. But, I still can't find support for it in the article, and that still looked awfully high, so I went looking.

According to the Fed, outstanding consumer credit in Sept 2014 was:

$ 849 billion, "Revolving"
$ 944 billion, Auto
$1,311 billion, Student loans
$ 144 billion, other non-revolving
----------------------------
$3,248 billion, Total

If I assume auto and student loan loans charge 6%, and credit card and others charge 13%, I get total interest paid as $264 billion.

There are about 230 million Americans over 19, so this averages $1,150 per person per year on $14,000 of debt.
If people pay that for a full 65 year (to age 85), that's $75,000 lifetime interest payments on non-mortgage debt.

According to the Consumer Expenditure Survey, household that are paying mortgage interest averaged $8,100 in 2013.
About 41% of adults lived in households that were paying mortgage interest (the rest were renters or lived in paid-for homes).

If people paid $8,100 per year for 30 years, that would be $243,000 lifetime.
But, most people who buy houses are married when they are buying, so let's say $150,000 lifetime mortgage interest payments per person.

So I get $225,000 lifetime for the average American.
That's a lot of money, but also a lot less than $600,000.

 

[G8tr]

Money and debt are fungible. It doesn't matter what the debt is securitized by or what it is used for, since a $1,000 debt on your balance sheet doesn't matter if it's on a house or on a car or on your credit card - it's still subtracted from your assets in the same mathematical equation. All that matters is what your net worth is growing by, in relation to what interest you are paying on your gross debt.

If I had a 0.9% car loan from the manufacturer and bought a new car, is that "bad" debt because the car drops 15% in value when I drive it off the lot? Does that debt suddenly become 'good' debt if I took out a HELOC on my house for 3.0% instead?

Obviously, for most Americans who take out debt for many things and who don't comprehend many basic financial concepts, it can be a handy rule of thumb. But for the average reader of this forum, there is no "good debt" or "bad debt", since the balance sheet doesn't have emotions and doesn't care what it's for.

But how many people already in significant debt can get the .9% financing to which you refer? People with good credit do as you describe, while people who think they deserve the good life often fund it with with debt. I thought those people were those whom we are discussing?


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[Rothman]

I have mortgage debt, and get tax benefit for it. I have never had credit card debt and never understood why anyone with an income would. I pay for cars with cash. I expect this is the norm for people on this site. I really can't understand the other behavior.


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[samclem]

So I get $225,000 lifetime for the average American.
That's a lot of money, but also a lot less than $600,000.

Thanks a lot for doing the research, estimates, and math.
Since the "tile" wasn't footnoted, we'll never know where the figure came from. I'm guessing the $600K vs $225k discrepancy is likely a combination of:
1) Household total vs individual totals (though, by the words of the "tile" they should have used a number for an individual)
2) Retrospectively, CC, car loans, and mortgage rates were higher than today. They probably used those rates.
3) Inflation: Who knows what kind of "dollars" they are talking about.
4) The need for a high number in order to grab eyeballs and links.

 

[ERD50]

But how many people already in significant debt can get the .9% financing to which you refer? People with good credit do as you describe, while people who think they deserve the good life often fund it with with debt. I thought those people were those whom we are discussing?


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But you said:

Suffice it to say, any debt on a depreciating asset is dumb debt.

so that is what we were responding to. As was pointed out, debt is debt, money is fungible. Either the debt is advantageous or not. Either the expenditure is advantageous or not. But there really is no tie between them.

-ERD50

 

[G8tr]

But you said:







so that is what we were responding to. As was pointed out, debt is debt, money is fungible. Either the debt is advantageous or not. Either the expenditure is advantageous or not. But there really is no tie between them.



-ERD50

Sigh. As I said, I was speaking in generalities for the purpose of the subset of the population we have been discussing. The people on this board understand that what I said is not an absolute rule (but it is for most people). Let's continue with the discussion at hand, rather than dissect each other's statements with the intent of somehow "being right" or "winning the debate".

https://www.flickr.com/photos/blucier/6027755162/

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[ERD50]

Sigh. As I said, I was speaking in generalities for the purpose of the subset of the population we have been discussing. The people on this board understand that what I said is not an absolute rule (but it is for most people). Let's continue with the discussion at hand, rather than dissect each other's statements with the intent of somehow "being right" or "winning the debate".

https://www.flickr.com/photos/blucier/6027755162/

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Deal. But then, don't speak in absolutes.

-ERD50

 

[G8tr]

Deal. But then, don't speak in absolutes.



-ERD50

Absolutely.


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[daylatedollarshort]

It may not be the majority of Americans, but a lot of people do get that borrowing other people's money for less than you can invest it for is usually profitable. There are whole forums on how to invest money from 0% credit card offers and pocket the spread.

 

[PhrugalPhan]

I think you have a distorted view of this. I'm retired, I'll keep my mortgage as long as the rate is good (it's 2.875% right now). So what?
-ERD50

I didn't mean to start an argument about the value of mortgages. My friend wasn't saying he was not paying off the house so he could invest his money elsewhere, but he was bemoaning the possibility of not getting it paid off before he retired.

Do you pay property taxes on that house? Welcome to lifelong serfdom.

If we'd paid cash for our house rather than get a low-interest fixed mortgage, I would have had about $100K less in stocks over the last 12 years, and would have missed out on all the growth of those investments. It wasn't a sure thing, but it has worked out okay. The $100K has turned into about $250K over the intervening 12 years, and we've even paid the mortgage down a bit. But at the present approx 4.5% fixed rate, I'm not in a hurry.

Yes I pay taxes on my house

I hear see this argument about taking money and investing it versus putting it into the mortgage. This is all well and good when the market is flat or rising (which I admit is most of the time). In my case I bought in 1998 and paid it off in 2011. While overall the market did go up over that time frame (S&P 500 went up about 12% (total!) over that period), my house went up 250% in value (even with the drop off in 2007). And if you were to figure out how much I would have paid on my mortgage over that time, I would have probably paid 50% total. I think I did well putting my extra funds in my house. YMMV.

 

[growing_older]

I paid off my mortgage as soon as I could. I didn't like the risk of having a big debt while I tried to invest my way to a better situation. In retrospect most years the investment would have done better, while only a few would have done worse. On the whole, paying down the mortgage slowly but investing the extra payment money I would have done much much better. But I'm not regretting my choice. It all turned out well. It might have been better, but at least I was assured it wouldn't be worse. I'm content with my choices.

At my workplace, many well paid engineers and managers have discussed their personal situations. Occasionally the question of paying down a mortgage early has come up. Universally the consensus was to pay down the mortgage as slowly as possible, but the reason was not to do other investments. The consensus opinion was that mortgage money was so relatively cheap that the debt should be kept and the money then because available for consumption, vacations, lots of current living expenses. No one ever suggested using it for savings or investments.