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Today’s Juice focuses on debt. It’s a biggie, so spend some quality time with us this Valentine’s Day.
We’re going back to basics in Q1 2023. And we start today’s newsletter by reviewing the narrative we’ve woven on debt throughout 2022 into the new year.
Then, we review a major psychological trap many of us fall into, particularly with credit card and auto loan debt.
Finally, we cover two types of debt investors need to be acutely aware of. They can put you on a path to financial ruin. You probably can name one of them immediately. The other isn’t quite as obvious…
Sounding the Alarm on Debt: A Review
Before the rest of the financial and popular media hopped on the bandwagon, The Juice was sounding the alarm on debt.
On April 19, 2022, we first expressed concern over consumer debt:
In their respective Q1s, Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC) reported 23%, 29%, 33%, and 25% increases in consumer credit card spending…
According to the Fed, overall consumer credit increased 11.3% in February. Revolving credit, which includes credit cards, drove that number, popping 20.7% annually.
Then on May 9, 2022:
Revolving debt (that’s credit cards) surged $35.3 billion in March. That’s a 21.4% annual increase and blows away the $16.2 billion monthly increase we saw in February.
On May 31, 2022:
[Personal savings] came in at $815 billion in April, a 11.6% decline from March and a whopping 44.3% decrease from September of last year. As a percentage of disposable income, the personal savings rate dropped to 4.4% in April, almost half of September’s 8.1% and the lowest number since 2008.
For August 2, 2022, there’s too much data on the interplay between rising debt and dwindling savings to excerpt. So follow the link to one of the most read Juices of 2022. This was when the debt story hit the next level.
Finally (for this 2022 recap), on December 12, 2022:
In Q3, credit card debt hit $930 billion, up 15% annually. The biggest year-over-year spike in roughly 20 years.
We’ve been covering the story ever since and intend to throughout 2023. It’s part of why we decided to go back to basics this quarter.
Because we think debt and savings (two huge elements of personal finance) will take center stage this year. Without sound personal finance, you can’t have sound investing.
2 Debt Traps You Need to Beware Of
As we continued our multifaceted narrative in 2023, we dug into the psychology of debt. On January 12, we wrote:
It’s one of the dirty little secrets personal finance scribes love to ignore. Some people doing relatively well financially have trouble parting with checking and savings account balances.
At the register in a retail store. In a restaurant. While booking travel. You have to decide whether to pay cash via a debit card or put it on a credit card. Some people with more than enough cash on hand to pay the expenses still turn to credit cards.
Having a cash balance to stare at makes them feel cash-secure. Parting with it to make a big purchase (even if it’s only, say, $100) makes them feel cash-insecure. So they tell themselves they’ll charge it and pay the balance in full within 30 days. After they get paid. Often, this full payoff doesn’t happen, and credit card debt piles up.
But what’s the point of having ample savings if you have copious high-interest debt?
2 More Ways Debt Can Spell Trouble for People With Money
Home equity loans and lines of credit. With homeowners sitting on record amounts of equity, it can be tempting to tap it. While this sometimes makes financial sense (to do home repairs or pay off high-interest credit card debt), it can also be nonsensical.
Like using home equity loans to take a vacation.
Or this. Often, in conversations with friends, somebody has asked the group, “Should I pay off my mortgage?” On more than one occasion, somebody chimed in with, “No, you should take out a home equity loan and invest that cash in the stock market.”
The Juice has almost spit our juice through our nose when we’ve heard this. The idea is you’ll get a rate of return from investing that will offset the interest rate on your loan or line of credit. We heard this advice at least three times when the market was roaring. Hopefully none of our buds did this in 2022, when the market slumped.
Margin loans. When you trade on margin with your brokerage, make no mistake, this is a loan. A loan your portfolio backs. If the bottom goes out on stocks, you could get a margin call. This means your brokerage will demand cash or securities to increase your account’s equity. If you don’t come through within a couple days, your brokerage can sell positions in your account to settle your debt.
The Bottom Line: It’s not only common consumer debt that can get us in trouble. Problems with credit aren’t limited to poor people fighting inflation with plastic or the relatively well-heeled living beyond their means.
Homeowners in otherwise solid positions and otherwise responsible investors can get hurt just as easily. And maybe easier. Because we rationalize our use of credit from a righteous source (our homes) for a good cause (investing for our future) as good debt.
You do you. But think twice. And proceed with restraint and caution.
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