“An alien invasion comes to the United States threatening to take over the world. (Imagine screams, fear, and drama.)
How does the U.S. government respond?
It cuts interest rates!”

The Great American Debt Addiction

That joke came to us via an email from Todd Tresidder. It’s funny, sadly, because it is TRUE!

The pandemic revealed an ugly truth about our country: we are hopelessly addicted to debt—the cheaper the better! Debt is an epidemic that has weakened our personal and national financial immune system. And while we can point fingers at the government and the Fed, debt is also an increasing problem that impacts nearly everyone—from manufacturers to farmers, from small business owners to those in the working class.

Low interest rates may blunt the impact, but what’s the real cost of “cheap” debt? It can artificially inflate prices and undermine the value of our assets. The over-reliance on debt undermines our economy, our citizens, our companies, and the well-being and stability of our country.

The debt addiction has also left us vulnerable to the crisis we now face: a nearly instantaneous recession, perhaps even a looming depression. We are still grappling with a public health crisis, but when that resolves—and it will—the economic impact could last many years.

Let’s look at the numbers.

The corporate debt bubble. U.S. Corporate debt has reached an all-time high of $10 trillion according to Forbes.com. Analysts have determined that the average company now carries $3 of debt to every $1 of earnings. In 2009, the ratio was $2 of debt to every $1 of earnings (EBITDA, or earnings before interest, tax, depreciation and amortization).

Of course, along with treasuries, mortgage-backed securities and other assets, the Federal Reserve is now buying corporate debt—including junk bonds and BBB rated bonds sliding into junk territory fast.

The corporate debt bubble.

The National debt. The US Debt Clock puts the Federal Debt at just below $25 trillion. That’s about 10 percent more than the entire U.S. Gross Domestic Product, according to The Balance. We can expect to see the debt continue to balloon with the coronavirus bailouts and monetary policy that has been coined “QE infinity.”

In a Financial Stability Report released in November 2019, the Fed warned about record-breaking business debts in the US. The report said that business debt was the biggest risk to the country’s financial stability. However, it is also the inevitable result of the Fed’s own policies of low interest rates, corporate bailouts, increasing repo market injections, and now—QE to infinity and beyond!

Household debt. In the final quarter of 2019, household debt surpassed $14 trillion for the first time. That’s an increase of 4.4% from the previous year. This includes mortgage debt and also the following:

  • U.S. student loan debt has reached a new high of $1.56 trillion, with an average student debt load of $32,731, reports Forbes.
  • Auto debt has risen for 35 consecutive quarters to $1.33 trillion. The average car payment—and some households have more than one—is $550/month for new vehicles, $393 for used.
  • Credit card debt rose to a record $930 billion. Households that use credit cards carry an average balance of $9,333.

What can be done about the debt addiction?

What can be done about the debt addiction?

In a perfect world, we would have government accountability and leadership that prevents hedge funds and poorly-run companies from collecting bailouts. We would allow well-run companies to succeed and those that invest in stock buybacks rather than long-term stability to fail. This would reward good fiscal behavior and restore confidence in the ability of financial markets to respond appropriately.

It also doesn’t sit well with many people to be told to have a rainy day emergency fund while corporate America can’t get through a couple weeks of disruption without a crisis. It seems that some CEOs have become like college students with bad spending habits. They know that no matter how irresponsible they are, mom and dad will eventually bail them out!

As we have reported in the past, our economy was already challenged with asset bubbles and overwhelming debt. We may have been heading towards a financial crisis this year—with or without the coronavirus. Decades of cheap debt, speculation, and gross mismanagement have made our economy precarious.

However, you and I ultimately have very little influence on the actions of the Fed, the president, and Congress, or corporate CEOs and CFOs. As an individual, you can’t control monetary policy or who gets the next bailout.

The only economy you can ultimately affect is your own. And that’s a great place to start. The solutions to financial instability and debt are simple—though not necessarily EASY. Here are seven steps to more financial certainty in your own economy:

#1: Control your own balance sheet.

“The economy” doesn’t have to be “your” economy. There are always ways to earn money, and as a friend of mine likes to say, you can “choose not to participate in the recession”!

Look for ways to:

  • Increase your earnings.
  • Create multiple streams of income.
  • Eliminate unnecessary consumer debt spending.
  • Spend less than you earn.
  • And pay off all high-interest debt.

(We recommend you still borrow for real estate and possibly cars. Utilizing low-interest, secured debt wisely can enable you to save and invest more.)

#2: Don’t count on debt to be your “emergency fund.”

#2: Don’t count on debt to be your “emergency fund.”

Some people fail to save, believing that in a financial emergency, they will be able to use their credit cards and home equity. This is flawed thinking.

First, you do not control the companies who may—or may not—decide to lend to you in a crisis. And already, we have seen lending tighten up. Bank of America, Wells Fargo and other banks have aggressively tightened up lending standards for people who wish to tap into home equity. JP Morgan just stopped accepting applications for HELOCs. In the Great Recession, we saw banks shrink and even eliminate home equity lines of credit—even for borrowers with excellent credit.

Second, remember that borrowing often requires qualifying with proof of income and minimum credit scores. And the time when people most need money tend to be the same time they are least qualified to borrow it!

Additionally… the last thing you need during a financial crisis is extra high interest debt payments. Average credit card rates remain at 16.12%, in spite of the decrease in the Fed and Prime lending rates.

#3: Save a portion of your income.

Consistently saving 10, 15 or 20 percent of your income is the best protection against the lean years. With discipline and commitment, savings is possible even on modest incomes. As we profiled in “Secret Millionaires,” even secretaries, librarians and janitors can become multi-millionaires!

#4: Have a system for saving.

One thing we love about whole life insurance is that it instills the savings habit. It is a “savings account that shows up like a bill.”

And although there are several ways to halt or reduce premium payments in a cash flow emergency, it is an advantage to have a structure that strongly encourages consistency. Those who intend to “save what’s left at the end of the month” rarely have adequate savings rates. People who prioritize saving first succeed!  

#5: Raise your savings rate!

You don’t have to accept 1 percent (or less) savings rate from your bank. One reason we love whole life as a long-term savings tool is that cash value tends to grow at a rate about 2 percent above what the banks are paying.

The minimum gains guaranteed by policies are more than what banks are currently paying. In some cases, those minimum guarantees for cash value growth are 10 or 20 times higher bank savings rates! Dividends issued by insurance companies increase returns further. (Dividends are not guaranteed, but have been historically paid by mutual life insurance companies for more than 100 years running.)

Low bank savings rates make people less excited to save and more likely to put their money at risk in the stock market. And while Wall Street loves that… it is imperative that you have a safe place to store cash.

Because of recent Fed actions, we know we’ll likely be in a low interest rates environment for years to come. Now is an ideal time to lock in the guarantees of whole life.

#6: Maintain access to affordable loans if needed.

#6: Maintain access to affordable loans if needed.

Don’t try to borrow in an emergency from a double-digit interest rate credit card or home equity you can no longer access. Save where you can easily borrow against your savings at a reasonable interest rate while the savings used as collateral keeps growing. When you have savings, you can provide financing for yourself or your business without having to liquidate assets in a cash crunch.

This is what’s known as “infinite banking.” Whole life policies are the best asset to use for infinite banking, as loan rates are low and the underlying asset is guaranteed to keep growing. The death benefit and other living benefits also provide additional financial security.

It’s also good to keep your credit score healthy. It makes a big difference in the amount you’ll pay for mortgages, car loans, and even car insurance over a lifetime!

#7: Keep a prosperous mindset.

Wealth is ultimately about well-being, not just the bottom line. Nurture your own prosperity and that of those around you.

  • Staying in gratitude.
  • Give to your local food bank and other non-profits when you can.
  • Find ways to create new income through a side gig or “pivoting” your business to stay profitable.
  • Keep your eyes open to see who you can help during this time.

A recent reader commented on our blog post about Dave Ramsey, “During this Covid-19 crisis, I am able to help a couple of my neighbors who lost their jobs keep their utilities updated. I am also in PEACE during this crazy time because my 4 walls are covered for the next 6 months (emergency fund).” We love hearing that!

Debt is an epidemic, but it doesn’t have to kill your wealth.

Debt is an epidemic, but it doesn’t have to kill your wealth.

The solution to the debt addiction is keeping your finances healthy—especially in times of unsound monetary policy or recession.

The best strategy we know of for growing and keeping money safe in times of turmoil is dividend-paying whole life insurance structured for maximum cash value. It truly does create a firm financial foundation. And when economic storms arise, those who have built their finances on firm foundations are grateful to know their money is secure and weatherproof!

We can provide you with further information and a quote for a policy in the form of an illustration. This will show you how a policy might perform, both the minimum guarantees and the anticipated returns based on current dividend rates. Let us show you how to weatherproof your personal economy!

Also recommended from the Prosperity Podcast, “The Safety of Cash Value Whole Life Insurance.”

—By Kim Butler and Kate Phillips