{"id":5977,"date":"2016-03-07T01:57:31","date_gmt":"2016-03-07T01:57:31","guid":{"rendered":"http:\/\/www.rationalargumentator.com\/index\/?p=5977"},"modified":"2016-03-07T05:37:15","modified_gmt":"2016-03-07T05:37:15","slug":"my-neighbor-sam","status":"publish","type":"post","link":"https:\/\/www.rationalargumentator.com\/index\/blog\/2016\/03\/my-neighbor-sam\/","title":{"rendered":"A Conversation with My Neighbor “Sam” – Article by Mark Brandly"},"content":{"rendered":"
\n
\"The<\/a>Mark Brandly<\/span>
\n<\/big><\/big><\/strong><\/div>\n<\/div>\n
******************************<\/div>\n
\n

Lately, I\u2019ve wondered how my neighbor, Sam, affords to buy so much stuff. He appears to have an unlimited budget. When I asked him about this, Sam asked, \u201cDo you think I\u2019m spending too much?\u201d<\/p>\n

\u201cThat depends,\u201d I said, \u201cHow much money do you make?\u201d<\/p>\n

\u201cI take home $100,000 a year.\u201d<\/p>\n

That surprised me. I would guess that he\u2019s spending more than that. But I tried to be encouraging, \u201cThat sounds like plenty of income. With a little planning, you should be able to budget your spending and be financially stable.\u201d<\/p>\n

\u201cBut my finances are a mess,\u201d Sam replied. \u201cI spend more than I take home. Last year I had to borrow $12,000 just to cover my spending.\u201d<\/p>\n

\u201cWell maybe things will be better this year,\u201d I said, hoping that Sam\u2019s spending issues was a one year problem.<\/p>\n

\u201cNo,\u201d Sam replied. \u201cActually, in the first three months of this year, I\u2019ve already spent $19,000 more than I\u2019ve made. It looks like my budget deficit this year will be much worse than it was last year.\u201d<\/p>\n

Now I was starting to worry. \u201cHave you been borrowing money to cover your spending for a long time?\u201d<\/p>\n

\u201cOh yes. I have a lot of debt. Part of the problem is that I owe myself $150,000.\u201d<\/p>\n

I wondered if Sam misspoke, \u201cWait, wait, wait, you owe yourself $150,000? Why do you think that you\u2019re in debt to yourself?\u201d<\/p>\n

\u201cWell you see, over the years I promised myself that I was going to use my paychecks to pay for a fund for my children\u2019s education, but instead of spending $150,000 on colleges, I spent the money on other expenses. So I figure that I owe myself this money so that I can pay for my children\u2019s college tuitions.\u201d<\/p>\n

Obviously Sam doesn\u2019t understand the definition of the word \u201cdebt.\u201d<\/p>\n

I tried to be polite in my response: \u201cThat doesn\u2019t make any sense. It\u2019s true that you\u2019ve made some horrible decisions regarding your spending, but it\u2019s ridiculous to claim that you owe yourself money. A debt occurs when one person owes another person money. Just because you changed your mind about how to spend your paychecks doesn\u2019t mean that you\u2019ve borrowed money from yourself.<\/p>\n

\u201cSo the first thing you need to do is to think clearly about the amount of debt you have. You don\u2019t owe yourself any money. Now, forgetting about this ridiculous notion of self-debt, how much do you owe?\u201d<\/p>\n

\u201cAlright, I think I see your point. Let\u2019s just talk about the rest of my debt. I owe various banks about $420,000. This debt is more than four times my take-home income.\u201d<\/p>\n

Sam often lies about his income and spending issues, but he always understates his budget problem. If he\u2019s lying now, then I can be sure that the problem is even greater than he says. I wanted more information.<\/p>\n

\u201cThat a pretty high debt to income ratio. But that might be somewhat manageable, although unwise, if you\u2019ve borrowed that money at low interest rates.\u201d<\/p>\n

\u201cI have some good news and some bad news,\u201d Sam said. \u201cInterest rates are low. In fact, in the last fourteen years, my debt has more than quadrupled, but my interest payments have increased less than 50 percent. That\u2019s because interest rates have collapsed during that time. Isn\u2019t that good news?\u201d<\/p>\n

\u201cI suppose, but do you know that interest rates are going to increase over the next several years?\u201d<\/p>\n

\u201cYes, that\u2019s the bad news. In the past year, I only paid $7,000 of interest, but within ten years my debt will increase over 50 percent, and possibly much more, and with higher interest rates I expect to be paying at least four to five times that much in interest annually.\u201d<\/p>\n

\u201cThat\u2019s a huge problem. So to be able to make your loan payments, I assume that you\u2019ve taken out some long-term loans.\u201d<\/p>\n

\u201cNo, no, no. In order to take advantage of the low interest rates, most of my borrowing is short term. I rollover my loans quickly. In the past year my principal\u00a0payments on these loans totaled $207,000.\u201d<\/p>\n

\u201cLet me get this straight. Your loan payments, including principal\u00a0and interest, are well over twice your take home pay?\u201d<\/p>\n

\u201cYes, I take home a little over $8,000 per month and my loan payments are over $17,000 per month. But it\u2019s no problem. In the past year I borrowed $223,000 to cover everything.\u201d<\/p>\n

Shocked, I said \u201cHow can you say borrowing more than twice your income is not a problem?\u201d<\/p>\n

\u201cI simply borrow all the money I need to make all of my loan payments. I never pay any of the loans down. I\u2019ve been doing this for years, ever since I started spending more than I make.\u201d<\/p>\n

\u201cOkay. Most of your borrowing goes to cover your increasingly large principal\u00a0and interest payments. And as interest rates rise, interest payments will become a bigger percentage of your spending. When that happens, your total debt will increase faster than your income. What is your plan, say in the next ten years, to correct this situation?\u201d<\/p>\n

\u201cWell I don\u2019t have a plan for correcting anything, because I don\u2019t see how I can cut my spending.\u201d<\/p>\n

\u201cWhat if the banks stop loaning you money to make your payments on your loans? What happens then?\u201d<\/p>\n

\u201cI guess I\u2019m assuming that won\u2019t happen.\u201d<\/p>\n

Sam\u2019s Budget Situation in Real Numbers<\/b>
\nIf one of our neighbors budgeted in this manner, we would obviously conclude that the guy is crazy. No such plan could work. Eventually lenders would refuse to fund Sam\u2019s spending.<\/p>\n

However, Sam\u2019s situation looks a lot like the federal government budget plan. Take a look at some recent federal budget information and some Congressional Budget Office projections:<\/p>\n