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Debt and keeping up with the Joneses is not a problem only of the poor or middle class, it's apparently also something the rich deal with. There is a big difference however between their approach to debt and most people's approach to debt. This difference can be summed up with a quote from a WSJ article (paid subscription required). "My litmus test is, if I can't pay it back in a worst-case scenario, I don't borrow."
The article points out that borrowing is increasing fastest among the rich. "Total debt held by the top 1% increased 150% between 1998 and 2004, compared with growth of about 100% for those in the 50th-to-90th percentile wealth range. The rich, in short, have joined the great American borrowing binge." But they're still in a better position since "the debt held by the top 1% amounted to only 3.7% of their total wealth. That compares with 24% for Americans ranked in the 50%-to-90% groups."
That last statement got me thinking. I'm not as rich as the people this article is talking about but what is my percent of debt versus my total wealth? It turns out that I'm much higher in this regard than I would have thought. My debt is 15.17% of my total wealth. The good news for me is that my only debt is my mortgage.
The article points out that, for the rich, debt is a tool rather than a neccesity. The quote I ended the first paragraph with comes from Eric Hadar who is considering the purchase of a jet for both personal and business use. This is not an item most of us consider. "I won't just go out and borrow money to buy a boat, because there's no economic justification for using debt for that," he says. "But if I can make more than my borrowing costs from a loan, I'll consider it." To him a loan is a way to keep his money earning more through investments.
Contrast that approach with this article from USA Today about title loans. Just like pay day loans, title loans are short term loans of relatively small amounts that can quickly spiral out of control. The basic premise of the loan is that if you own a car outright (no loans against it) then you can use that as collateral for a loan. Of course if you can't pay the loan, if you default, the loan company can take your car. Here's the example from the USA Today article.
"Strapped for cash, James Haga of Marion, Va., took out a $1,600 loan last year, using his truck as collateral. In August, when he couldn't keep up with the escalating balance, Haga's Ford was repossessed. Total cost for the loan? A $13,000 auto, plus $4,500 in payments."
The other lesson from the rich and their philosophy of borrowing is that you shouldn't risk a lot for a little. Mr. Hadar from the WSJ article won't take a loan unless he can pay it off in case of emergency, so whatever loan he takes is not a big risk. On the other hand Mr. Haga from the USA Today article took a loan using a truck valued at more than 8 times the loan amount and he lost it. That loan ended up costing him somewhere around 1000 per cent.
While the result of excessive borrowing, or borrowing for the wrong reasons, can be devastating the less money you have at the start, no one is safe. People who are rich, who you think might have it made, can get in trouble too. It may take longer but it can happen. Just like the average person keeping up with the Joneses, rich people want to give the appearance that they are better off than they are too.
Dalton Conley, a sociologist at New York University who studies status says in the WSJ article, "What we're seeing is the top 1% struggling to keep up with the top 1/10th of 1%," he adds. "And those people trying to keep up with the top 1/100th of 1%. There is a drive by the merely rich to keep up with the obscenely rich."
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