Talk To Your Kids About Debt

News item: The Federal Reserve says Americans owe a record $1.58 trillion in consumer debt (in addition to $5.2 trillion in mortgage debt), and they spend 14.3 percent of their take-home pay on debts — the highest percentage in 15 years. Bankruptcy filings in the first quarter were up 17.5 percent from the same period last year, and 2001 is on track for an all-time record number of bankruptcies.

I really like those television ads reminding us to talk to our kids about drugs, alcohol, sex and tobacco, but I’m starting to wonder if ignorance of basic personal finance principles isn’t as much a threat to our children’s future as any of the above.

I don’t have statistics on what percent of personal bankruptcies are filed by people young enough to qualify for our “40 Under 40” list, but I suspect that age group is over-represented. Many of the 20-somethings I know are in credit card trouble. Two of my young relatives, in fact, had credit card debt they couldn’t handle before they even reached the legal drinking age.

A young couple of my acquaintance recently filed for bankruptcy, which they saw as their sole escape from car notes that not only exceeded the value of the vehicles but actually exceeded their annual income. It is easy to blame these kids — indeed, that’s where most of the blame should go. But who lent them the money? Who sold them SUVs after taking a look at their credit application? Did anyone (including me) teach them how to budget? I don’t know enough details to know whether bankruptcy truly was their only way out, but I know that debt always limits options.

Americans under 30 have spent virtually all of their adulthood in the longest economic expansion in history, and they have typically been raised by Baby Boomers, not by parents like mine who vividly remember the Great Depression. They have a very hard time recognizing the difference between a want and a need, especially when they have four or five credit cards in their wallets and more arriving in the mail every day.

Young people aren’t the only ones guilty of going out to eat on a credit card when they really should scrounge around in the pantry for a meal they’ve already bought, but they may be less able to pay for it. They may not be savvy enough to realize that later “consolidating” those credit card debts into a 125 percent home-equity loan means they will be paying interest on a trip to Ruby Tuesdays for the next 30 years.

I’m grateful that my first Visa card (from Simmons First National Bank in Pine Bluff) had a low Arkansas interest rate and a $300 credit limit — enough to repair a blown-out tire, but not enough to let me get in much trouble. Giving credit cards to inexperienced young people can be risky for the lender as well. Standard & Poor’s reported that credit card issuers wrote off uncollectible balances in April at an annualized rate of 6.7 percent — not a record, but higher than during the 1990-91 recession.

Employers who offer 401(k) retirement plans typically accept the fiduciary responsibility of educating employees on the benefits and risks of various investment strategies. It might be time to add personal finance counseling to the list of standard employee benefits. What else would cost so little and be worth so much?

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There are three things no one ever says:

“I should have stopped taking piano lessons.”

“I wish I had taken up smoking.”

“I regret saving for retirement when I was young.”

I should add a fourth to that list: “I wish I had run up more credit card debt.”

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Arkansas Business readers tend to be of such an economic level that $300 isn’t a windfall. But some of your employees are not in that category. It would be a service to remind them that their property taxes for 2000 and subsequent years were reduced by Amendment 79, and they may have an overage in their escrow accounts if their mortgage companies aren’t aware of the change.