Wealth is Good
Cash Flow Is Better

The Bad News: The Average U.S. Household is Now Bankrupt (Really)

As I write this, our federal debt – the sum of many years of annual budget deficits – stands at $16.1 trillion, or about $135,000 per household*.  (No, that is not a typo.) As noted in our e-booklet, Wealth is Good, Cash Flow is Better, the average U.S. household’s net worth in 2010 was $77,300 excluding this federal debt item.

While economists and politicians prefer to speak of the deficit in terms of abstract formulas and ratios like “percentage of debt to GDP”, I prefer to keep it simple and relevant to you, the individual.  Adding the federal debt to the balance sheet would move the average U.S. household’s net worth into negative territory, to -$57,700.

                       The cost to the average household to pay just the interest on our federal debt

                        is equivalent to losing the opportunity to make at least one car payment

                        each month for the next 20 years.

This isn’t an imaginary number.  It’s real and has to be repaid.  In fact, we all do pay a tiny portion of it – interest on the debt – from our taxes.  It currently accounts for 8% of our federal tax payments – about $2,000 annually per household, or a negative monthly cash flow of –$165.

Interest payments on the federal debt are projected to more than double by 2030,** so the cost to each household for just the ongoing interest payments is equivalent to losing the opportunity to make one car payment each month for the next 20 years.  So in a very real sense we can say the interest alone is costing each household a car.

To make matters worse, those interest payments don’t even reduce the “principal”.  Essentially, each household has a credit card balance of $135,000 on our “Uncle Sam” card – nearly the cost of an average house!  We’re making minimum monthly payments equivalent to a car payment, yet the card balance never goes down.  In fact it continues to grow – rapidly.  Clearly, it’s time for credit counseling.

So What’s The Government’s Repayment Plan?

For a simple explanation of our government’s response to the problem, a video entitled “Government Debt Simplified” *** by EngageAmerica does a great job.  Here’s a summary.

The government takes in $2.3 trillion a year in taxes but is spending $3.6 trillion, resulting in an additional $1.3 trillion in debt.  Add this to our existing $14.8 trillion from prior years and we now have a total debt obligation of $16.1 trillion.

How much has Congress agreed to reduce this?  By $21 billion, or 0.1%…by next year.

Here’s how EngageAmerica helps us put it in perspective:  They drop 8 zeros from all the numbers.  So, it’s like a family having annual income of $23,000 but spending $36,000.  That’s another $13,000 each household owes just from this year’s budget shortfall. Tack it on to your existing unpaid “Uncle Sam” credit card balance of $135,000 and your new balance is $148,000.

And how much would you reduce your household’s $148,000 in credit card debt if we follow Congress’s “plan”?  By $210.  Next year.

*      www.usdebtclock.org

**    Congressional Budget Office (CBO) Long Term Budget Outlook

***  http://www.youtube.com/watch?v=JMDtp-bII9Y

Keith Whelan is Cashflownavigator's founder and author of the "Wealth is Good, Cash Flow is Better" e-booklet. He is a graduate of Columbia University Business School, teaches at Rutgers University, and has over 30 years experience in the banking and financial services industry. Keith, his wife Cindy, and their two sons live in New Jersey.