Forget saving, it's time to pay down that debt.

The concept of debt is theoretically simple: debt is the spending of future income today.  When you purchase something on credit—whether it’s a credit card purchase, automobile, home, etc.—you are essentially buying something that you cannot afford now, but you could if you saved for a longer period of time (maybe).  Instead of saving your income until you can purchase it, you are buying it today with the intent of paying it back overtime. 

Debt, however, comes with risk because there is no guarantee that you will receive your anticipate income (e.g. you purchase a home based on your salary, but then you lose your job).  Unfortunately, Americans have saved less and borrowed more over the past three decades.  How much more?  Private sector debt (which excludes all government debt) is now at 357% of Gross Domestic Product (GDP).  See this Naked Capitalism post here!  In other words, we have 3.5 times more debt than our national combined income! 

So why do we have so much debt?  The major source of most debt is a person’s home, which is generally two to four times greater then their annual income (e.g. you make $100,000 and purchase a home worth $400,000).  Throw on car loans, credit cards, student debt, store accounts, etc. and you have a huge pile of debt that will take many years to pay off. 

In fact, private debt is far greater than public debt.  For example, despite the uproar about the federal deficit and the federal debt the federal government’s current debt to GDP ratio is 49% (compared to 357% for the private sector), see here.  That is the government’s debt is half of the America’s GDP.  In other words, the government borrowing is seven times SMALLER than private debt.

(The current federal debt to GDP amount is lower than the debt to GDP levels of the 1950s, even though we think of this era as one of thrift and austerity). 

Clearly we need to reassess our dependency on debt.  Well here is one reason.  With the Feds interest rate set at 0-.25%, banks are offering almost no interest on savings accounts and other savings vehicles.  Most debt, however, is anywhere from 5% to 18%.  Regardless, our current debt-based economy is no longer sustainable, and we need to break our boom-bust cycle (or at least lengthen them).