How to Break the Cycle of Debt

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America’s debt crisis has been steadily rising over the past decade, and household debt has risen for the 16th straight quarter.

The Center for Microeconomic Data reports:

Household Debt Continues to Climb in the Second Quarter of 2018

The CMD’s latest Quarterly Report on Household Debt and Credit reveals that total household debt reached a new peak in the second quarter of 2018, rising by $82 billion to reach $13.29 trillion. Mortgage balances, the largest component of household debt, rose to a total of $9 trillion during the second quarter. Auto loan balances increased by $9 billion to reach $1.24 trillion, continuing a six-year upward trend. 

These numbers tell me that there’s a gaping hole in America’s financial literacy, particularly in people’s understanding of debt. The poor are getting poorer and falling into more debt as they struggle to break free from poverty. And what’s worse, they are passing down this cycle of bad spending to their children, creating a crisis that shows no signs of stopping.

The report also indicated that in the past ten years alone, “More than 40% of individuals with a credit report had a collection at some point.” These collection accounts reflect consumer debt balances that have defaulted and been sold to third-party collections firms. Not surprising, collections accounts became more prevalent during 2008-2012 as the Great Recession crippled Americans.

The Bad Kind of Debt

I often write about how debt trumps savings, but there’s a big difference between the good, asset-producing debt and the bad, liability-producing debt that is currently drowning most of America’s middle and lower class.

Good debt makes money for you. It involves taking out a loan or using Other People’s Money (OPM) to invest in assets that pay for themselves.

On the other hand, the debt far more people create takes money out of your pocket, and spends it on liabilities like a car, a mortgage, and material items like clothes and electronics—doodads.

The problem is, most people graduate school with very little financial education, and begin chasing the American Dream the only way they know how—racking up a lot of the bad kind of debt. They want to buy that house, that car, and have that lifestyle they always dreamed of. So, they max out their credit cards and take out loans in order to have it all.

Unfortunately, as we all know, students aren’t getting this vital financial education in school, so they are left floundering as they enter their adult lives. And this debt crisis is getting worse, starting to affect students even before they leave school.

Student Loan Debt

According to the Wall Street Journal, “the biggest force driving household debts higher over the past decade has come from the rise of student loans and auto loans.”

Student loans are growing every year, putting recent grads at a huge disadvantage as they start their adult lives. “A decade ago, there were less than $500 billion in student loans, but as tuition rose and growing numbers of students borrowed for college, the sum surpassed $1 trillion for the first time in 2013 and stood at $1.3 trillion in the fourth quarter.”

This is where many people run into confusion. A lot of people believe that student loan debt is good debt because receiving more education can help students get ahead. While that may be true in some cases, student loan debt still falls into the “bad” column, as it is debt that takes money out of your pocket. Plus, a college degree is not a guarantee of being able to pay the loan back.

Many of these students, with a new diploma in hand, look forward to a bright, fresh future, only to be crushed by the reality of their debt. Suddenly, a shadow is cast over any future plans. Instead of being able to invest, buy a home, start a nest egg, or invest in retirement, they spend the first several years of their adult lives using every spare dollar to pay off their debt.

This slippery slope can also cause many new adults to fall into other kinds of harmful debt, making it plain to see why the wheel of bad spending keeps turning.

Gen Z Has No Idea

What’s worse is that this alarming trend shows no signs of getting better.

A recent survey conducted by NextGenVest.com found that “68% of students said ‘they literally knew nothing’ about student loan payment or refinancing services available to them after college.”

The next generation has no clue how to navigate the first big financial decision of their lives. They blindly enter student loan agreements without understanding how it will affect them years down the line. They simply don’t have the right education that would allow them to make a smart and conscious choice.

Without this education and knowledge, these students will only carry on the legacy of debt that has been passed down to them.

I’ve dedicated my life to financial education to prevent against exactly what keeps happening.

Twenty years ago, in Rich Dad Poor Dad, I lamented the absence of financial education in today’s school system. Unfortunately, very little has changed over the past two decades. Today’s students still are not being taught the essentials of financial literacy, and it’s negatively impacting them before they even leave the halls of high school.

We need financial education in our schools more than ever. Students need to learn financial literacy early before they make life-altering decisions about money. Even just a basic understanding of the difference between the two methods of creating debt, assets vs. liabilities, and how to read income sheets, would prepare them for a much brighter future, free of the crushing weight of crippling debt.

It’s essential that parents begin teaching their children about finances early on. In fact, the earlier the better. That’s why Kim and I created CASHFLOW for Kids, a board game that makes learning about finances so simple that children can understand it. It’s a great way to start the conversation with kids about how money works.

If you’re a parent or know a young adult, take the time to talk to them about money. I guarantee you they’ll be interested in what you have to say. They aren’t getting this education anywhere else, so start introducing them to the basics and help them find the tools to grow their knowledge and end the cycle of debt.

Regards,

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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