Balancing Today and Tomorrow

Do you understand the underlying substance of debt and savings?

They both involve balancing today and tomorrow.

When you borrow you are allowing yourself to live better today at the expense of tomorrow. You are increasing gratification today that will need to be paid for tomorrow.

When you save you are delaying some gratification today to live better tomorrow. You will live better tomorrow at the expense of having a lower standard of living today.

Everyone has a choice. How do you want to live today? How do you want to live tomorrow?

There is no free lunch. There is a price to be paid... today or tomorrow.

It is hard to not want to live better today. After all, you can feel and enjoy the gratification here and now. The pain of payment seems like a long way off.

Most human beings are also optimistic. Even if they fully comprehend the trade off between today and tomorrow they figure they will be in a better position in the future to pay off their debts.

That works with a growing income that surpasses the cost of carrying the debt. However, if your income is only growing at 3% and the interest on your debt is 6% you will never get out from under it.

That is why living for today with credit card debt is so ruinous for so many. Even if your income is growing at 6%, credit card interest rates of 15% will bury you.

The same rules about debt apply to businesses and government. If you can't outgrow your debt obligations you are headed to a lower standard in the future. It is basic economics.

It is worthwhile considering the balance between today and tomorrow when we consider the the debt load in the United States.

There is now almost $4 trillion in consumer debt outstanding in the United States. This excludes mortgage debt.

$1.5 trillion of this amount is in the form of student loans!

$1.1 million in auto loans and leases.

$1.0 million in credit card debt.

This is all at a time when unemployment is at historic lows, wages have been increasing and the stock market has been strong.

What happens when incomes are not as good but that debt is still growing?

The same can be said for United States government debt. It is now over $21 trillion.

Who is this money owed to?

A lot is made in the media that we are dependent on China for much of this debt. This could not be further from the truth.

China only holds about 5% of U.S. debt. Japan holds another 5%. In all, about $6 trillion is held by foreign interests. That is less than 30% of the total.

The reality is that most of the debt is held by Americans. A great share of it is also held in retirement savings vehicles.

The Social Security Trust Fund ($2.8 trillion),  federal government employee pensions ($884 billion), military pensions ($742 billion), other federal government pensions ($415 billion), state and local pensions ($934 billion), private pension plans ($385 billion), US savings bonds ($160 billion).

If you are counting, that is $6.3 trillion. That does not count $1.8 trillion in mutual funds and $344 billion held by insurance companies of which a significant portion is probably held for retirement savings.

An additional $2.5 trillion is held by the Federal Reserve that relates to the debt monetization (money printing) that was done in the aftermath of the 2008 financial crisis.

In total, almost 70% of U.S. government debt is held by Americans. Only 30% is held by foreign interests.

I think the irony here is that $6.3 trillion has been put away in retirement savings accounts where individuals have accepted a lower standard of living today in order to have a richer life tomorrow. These funds are invested in U.S. Treasury bills, notes and bonds. However, those same funds have been used by the federal government to provide someone else a richer life today that will require higher costs tomorrow. It might be in the form of higher taxes, higher inflation or a lower standard of living on those same people. People who did the right thing (saved today) for a richer life tomorrow. It may not work out.

I have written before of how interconnected we all are financially. One person's wealth supports someone else's job. One person's savings supports another's ability to borrow. One person's default on a loan becomes someone else's loss on a note.

Our financial system operates largely on faith and confidence. As long a we have both, things are fine. However, when faith and confidence in the system (and in each other to meet our obligations) is lost, things can turn ugly very quickly.

That is why balancing everything, particularly today and tomorrow, is so important in our financial lives.

It is an important lesson to always keep in mind.