With Greece grabbing headlines yet again over the past few weeks, I thought it worthwhile to put their debt debacle into perspective for the American consumer. Although there is very little practicality in comparing the finances of a country to the finances of an average individual, I think a rough comparison may help some of you put your own debt loads into perspective.
Greece owes their creditors 323 billion euros. While that’s no small chunk of change, their GDP (Gross Domestic Product) puts them at a debt-to-income ratio of 177%. Meaning, Greece owes 1.77 euros for every 1 euro their economy produces (hence the need to cut spending or increase revenue in Greece).
While 177% sounds like a lot, the average U.S. household actually has a debt-to-income ratio of 370%! This is based on the average U.S. household owing about $204,992 in mortgages, credit cards, and student loans while only having a median household income of $55,192.
Luckily for Greece, a default or debt restructuring would actually give them a chance to wipe away many of their debts, whereas the average American may have a harder time doing so through personal bankruptcy as certain debts like student loans are often non-forgivable. A country in economic peril can have their debt restructured, forgiven, or call of all bets and simply default. While default is always the worst option (for a nation and individuals), as it essentially closes you out from further borrowing in the near term, the pain of a default eventually allows for a recovery and reentry into capital markets for nations and individuals alike.
Perhaps the most challenging obstacle for Greece today is that they do not have the option to simply print more money. They gave up that option when they joined the euro currency bloc more than 15 years ago – and the European Central Bank is in no hurry to bend over backwards for a bad apple like Greece. But even if they had their own currency, printing money is not necessarily the best option when your economy can’t handle the new influx of currency… which can encourage inflation and a host of other non-ideal outcomes.
So – given that neither you nor I can print our own money, what can we learn from Greece’s debt reckoning? The number one takeaway, without a doubt, for the average person is that getting out of debt requires a committed lifestyle change. Sure – Greece may look less leveraged on paper than the US consumer, but the reason credit markets have abandoned them (and not the US consumer) is that they have shown no willingness to adjust their “lifestyle” to help manage the debt load.
In the absence of massive social and economic reforms, Greece will never be able to pay back their debt load even at only 177% of their GDP. As individuals, we must be absolutely committed to adjusting our lifestyles (or increasing our incomes) to continue to service and pay down our personal debt loads. And even though that may not sound appetizing at first glance, it can happen much faster than you think. An extremely powerful way to reduce debt is a strategy I call “Economic Shutdown”.
Again, I understand the title of that strategy doesn't sound appealing to you and your family right off the bat, but I assure you it's not as hard as you think… and it can help you right the ship quicker than you may have ever thought possible.
If you find yourself in a similar debt-to-income ratio as many Americans (or Greece), I would suggest your family rise to the challenge of bringing it down by learning more about Economic Shutdown. You can read about the concept here, or in my latest book, You Can Retire Sooner Than You Think.
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