What if your debt was like the U.S. debt?

Thanks to regular reader Chris for today’s post idea–glad you’re thinking about the U.S. debt! As some of you might know, a large portion of my articles are influenced by my interactions with readers. Please feel free to reach out if there’s an idea you’d like to suggest!

The U.S. national debt sits at about $23 trillion, and it’s climbing. It’s a topic of weekly conversation in the financial media. Headlines abound like, “One day, this monumental debt will come due.” Or, “The U.S. debt is out of control…but it hasn’t always been this way.” It gets me a little bit worried, but I don’t really understand how I should feel about $23 trillion dollars.

So, let’s give it some perspective: what if your household budget operated like the national debt?

Apples to apples: how does $23 trillion compare to an individual’s debt?

Obviously, it’s hard to have an intuitive feel for what $23 trillion looks like. Most people can’t consider what $23 million feels like. Jeff Bezos has about 4000 piles of $23 million–whoa! And the U.S. debt is about 200 times larger than the Amazon founder’s net worth. But speaking personally–I have no sense of what that really means. Do you? How does the average person wrap their head around such a large sum? What’s 200 times 4000 times a number too big to understand?

A common and simple metric used in the personal finance community is to compare debt to annual income. For example, a typical 25-year old might have $50K in student debt and owe $15K on a car. Meanwhile, they’re earning $65K as an entry-level account manager for an advertising firm. Look at those convenient numbers! $65K in debt compared to $65K in income leads to a 1:1 ratio of debt to income.

A few years later, we could look at a young couple just purchasing their first home. Perhaps these two 30-year olds still have some student loan debt. And now they’re adding on a $230K home–if they’re in a relatively average real estate market. Long story short, it’s pretty easy for a young couple to find themselves more than $300K in debt. But if that couple is making an average U.S. salary–$125K combined–then their debt to income ratio is about 2.4.

What’s the United States’ “salary”?

We know how much debt the U.S. is in ($23 trillion), but how exactly do we define the “salary” of the United States?

Some people would point to the gross domestic product, which is the total monetary value of all the finished goods and services produced within a country during a given year. Current estimates for the United States’ GDP is about $20 trillion per year. If we use GDP, then the United States’ ratio of debt to income is about 1.15. Not too bad! That’s better than the young couple buying their first home.

The problem, though, is that GDP probably is not the metric of income that we should be using. GDP encapsulates all products and all services that all citizens are working on. So, if the local playground company earns $5 million in revenue in 2019, then $5 million gets added to the country’s GDP. But how much of that $5 million is actually available to repay our nation’s debt? The answer: only the taxes that the country charges on that $5 million. We shouldn’t be looking at total GDP; we should probably only be looking at the United States’ tax income.

So how much tax revenue does the U.S. make in a typical year? Current estimates for 2020 are that the U.S. will pull in $3.64 trillion. That’s a lot less than the GDP, and it affects our debt to income ratio considerably. Comparing $23 trillion in debt to a $3.64 trillion tax income leads to a ratio of 6.3.

Yikes! That’s the equivalent of a individual making $50K a year and being $300K in debt. Or, it’s like a couple earning $150K taking out a $1 million mortgage.

…and it gets worse

We’ve established that the United States debt-to-income ratio is high. But current outlooks from the Congressional Budget Office suggest that the United States will continue to operate in an annual deficit in the coming years, and that the deficit will continue to grow.

Quick definition: a deficit describes spending more than you earn in a single year. The opposite of a deficit is a surplus. The debt is the sum total of all years’ deficits and surpluses. So this year’s deficit means the debt will grow larger. And forecasts are calling for the 2021 deficit to be larger still, which means our debt is going to be accelerating, like a snowball down a hillside.

It’s not ideal that the U.S. is a middle-class couple in a million-dollar home. But we’re also buying Porsches to fill the garage and designer clothes to hang in the closet. Rather than making extra payments towards our mortgage, we’re asking for a larger credit line from Visa. This is not how we’d want to approach our personal debt.

Where’s the U.S. spending its money, anyway? The big ticket items are the military (~$1.1 trillion), Medicaid/Medicare (~$1.1 trillion), and Social Security/Disability programs (~$1.0 trillion). Those items eat up the lion’s share of the estimated $4.5 trillion in spending that will occur in 2020.

U.S. debt caveats

Now, there are certain caveats at play here. For example, when our country takes on 30-year debt, it assumes the debt in “2020 dollars” but will pay it off in “2050 dollars.” This is “good” for the country. It’s similar to how a mortgage works. Your $1500/month mortgage payment is more difficult to make as a 30-year old than it is as a 60-year old. Assuming that our economy grows, the country will find it easier to make repayments in the future than it does today.

Also, the United States’ debt has an average interest rate of about 2.6%. Compared to a mortgage (~4%), student loans (~6%), or car loans (~5%), this 2.6% rate isn’t too bad. Then again, the sheer size of our debt means that the U.S. had to pay about $500 billion in loan interest last year. Think about what we could have done with that $500 billion instead! It would cover half of one of the big three expenses that I covered above.

Another caveat is that the government has the luxury of printing more money. Yes, there are consequences to doing this. Inflation would be the most obvious consequence–the act of printing more money dilutes the value of all the money in the system. Nevertheless, Uncle Sam could just print up some new Ben Franklins to pay off the debt. Individuals with mortgages and student loans do not have this option (in case you didn’t know).

What can we learn from the U.S. debt?

But those types of caveats aside, we can still approach the United States’ debt as a cautionary tale. Don’t allow yourself to slowly slip into a high ratio of debt to income. And don’t continue to operate your personal budget at a deficit.

For starters, it takes time to get yourself into a 6.3 debt-to-income ratio. Much like Rome wasn’t built in a day, it took many years of deficits for our country to find itself $23 trillion in debt. Similarly, it would take time (or at least, a few very significant decisions) for you to find yourself in spot where your debt was six times greater than your income. Years of pressure from the debt monkey, and years of succumbing to your Buy That! voice.

And I suppose if there’s any single takeaway from today’s post, it’s this: the current debt per taxpayer is a whopping $187,630. And it’s growing…just check out the U.S. debt clock. Over time, taxpayers like you and me will have to shoulder that burden. Do you have an extra $187K to give to Uncle Sam because he couldn’t balance his budget? Maybe he should start using YNAB, too…

Thanks for reading the Best Interest!

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