Growing up, I was exposed to a more conservative background by my parents who were immigrants from China. Everything made sense though - the Chinese culture is conservative by nature and has always been until more recently. Naturally, one is often influenced by parents viewpoints. My views have evolved over time, however. I'm not going to sell the "parents were immigrants who came here with nothing" story because first, that's reserved for a different post and second, that simply isn't always the case. I also do not consider myself to be republican or democrat and refuse to be identified by a label that encompasses a variety of views, both political and social that I may not personally agree with. Even though I've got friends who have considered me "libertarian", I do not believe that my views are 100% compatible with those extreme free market policies. However, I am fiscally conservative and I would like to explain why you should consider fiscal conservatism as part of your every day life.
Fiscal conservatism is a political-economic philosophy regarding fiscal policy and fiscal responsibility advocating low taxes, reduced government spending and minimal government debt. Free trade, deregulation of the economy, lower taxes, and privatization are also the defining qualities of fiscal conservatism.
Fiscal conservatism does not mean that one has to be stingy so to speak. In fact, friends of mine would say that I can be quite the opposite. The first two lines on Wikipedia define fiscal conservatism as "a political-economic philosophy regarding fiscal policy and fiscal responsibility advocating low taxes, reduced government spending and minimal government debt. Free trade, deregulation of the economy, lower taxes, and privatization are also the defining qualities of fiscal conservatism." What I consider fiscal conservatism to encompass is the understanding of finance, economics, and financial policy as it pertains to our everyday lives and the active management of these responsibilities in a smart manner. *This post will explore a few topics as to why I see financial conservatism to be necessary *
The first issue I will explore is debt. I'll explore U.S. Government Debt along with the key issue of Student Loan debt. Many conservatives will say that the the U.S. Government debt about of around $19.9 trillion as of this writing is problematic and wish to cut spending to reduce debt. I systematically reject that because debt is not necessarily a bad thing - certain types of debt such as credit card or high interest debt is obviously bad. But in corporate finance, scholars Modigliani and Miller state that debt can actually increase the value of a firm because of increased returns to debt and equity holders and a lower cost of capital for companies (up to the point of bankruptcy / financial distress costs). In the case of a country, there are many variables to debt being a issue and a key indicator is the Debt-to-GDP ratio which is the "ratio between a country's government debt (a cumulative amount) and its gross domestic product (GDP) (measured in years)." A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt. [Federal Bank of St. Louis]
Let's look at the US debt-to-gdp ratio as referenced from the St. Louis Fed:
The debt to gdp ratio of the U.S. is 104.13 as of July 28, 2017. Is that bad? Although the rate has increased substantially since 2010 from around 60 to over 100%, the U.S. economy is healthy right now and given the amount of economic activity, I do not anticipate it being a problem.
Let's now look at Greece's debt-to-gdp.
Greece's debt-to-gdp ratio is a whopping 179% of GDP. When an economy like Greece has GDP of around $195bn (compared to the US which has $16tn+ GDP) and a debt-to-GDP of 179% and an unemployment rate of 22.5%, it's not wrong to question how the country will get back on its feet when debt accrues faster than the countrys GDP.
In other words, the U.S. is managing its debt in a way where bankruptcy / default distress costs are not a worry. The U.S. is a diversified economy which is heavily invested through all industries. Greece focused on tourism and Venezuela focused on Crude Oil being 95% of the country's exports. That sets you up for disaster.
Student loan debt
Now that I've proven my case that carefully managed debt is a good way to finance expansion and grow a company or even an economy, I'll move to student loan debt which I contend is a bad form of debt.
New America says that student loan debt hovers around $1.4 trillion right now. Based on financial principles, as long as you take on the debt and manage it well you should be fine right? Wrong. Managing student loan debt simply means you need to start making the payments on the debt six months after you leave school. However, I don't think this system of loaning to students in an environment when tuition costs are increasing tremendously each year is sustainable. Default rates are up to around 11% as of this post.
The problem here lies within the entire system: universities have no incentive to cut costs and the costs are passed onto students who borrow from the government.
This becomes a joke to everyone BUT the student when the student realized that he/she cannot declare bankruptcy to discharge this debt because it's owed to the government. Poor students will keep paying the debt until the day they die. I won't even go into the predatory lending practices where private companies charge students upward 12-13% APR per year for student loans.
This is a problem that I don't know how to fix and it's a ticking time bomb. This is bad debt. All I can say is, borrow responsibly and know that you'll need to pay back every penny that you borrow.
Credit card debt
As I mentioned earlier in this post, this is a no brainer. If you utilize credit cards, pay the damn thing off on time so you don't get charged something like 24.99% variable interest on your balance. This is bad debt. Credit card debt has reached a record high of $1.021 trillion according to CNBC. Is this a problem that will eventually explode? I think so as well. Credit card debt is often securitized and sold to investors as an income generation product. But what if the economy goes south and credit card charge off rates skyrocket?
I use credit cards to build credit by having lines of credit open and to earn the rewards for spending money. Not only do I get perks like 1.5% back on purchases, I also get purchase protection, product insurance, zero fraud liability, among a plethora of other benefits. I've got too many friends who mess up here and think they can just make the minimum payment - they're smart college educated people such as a friend of mine who is an electrical engineering major. It's very simple here: Don't spend what you do not have and make your payments on time. Be fiscally conservative.
The economy continues to operate because household savers invest and lends into markets to drive growth. I think American's aren't saving enough -- too many people are living paycheck to paycheck or they're spending all the money they make. The liberal method is to save 15-25% of what you make. I advocate saving at least 50% if not more. Personally, I'd target 70%. Why? What if you lose your job or some bad event happens in your life? Always be prepared for the "black swan event". See the next section on investing to see what you should do with your 50% savings. But let's not get lost. If you're making a low salary to start, try to find other ways to generate passive income.
Think about it like this: If I spend $100,000 a year because I'm making $500,000 a year, that's fair even though $100,000 seems to be a lot to spend in a year on random stuff. But it's much harder to work with spending $100,000 a year if you're only making $150,000 a year for example. Always seek to find new ways to make more money and save a large portion of that money. See the spending paragraph--
The stock market isn't a scam, for the most part. It's a place for companies to gain access to capital markets to raise money to grow. My best recommendation is to invest into index funds like the S&P500 ETF (SPY) and the NASDAQ 100 Composite Index ETF (QQQ). These passive investments will generate income into the future at about 8% a year and you don't have to actively manage your portfolio. But I think passive investing works so well because of the Fed's QE policies - with that being discontinued and a large $5 trillion balance sheet to unwind, who knows how long into the future passive investing will work. You're not the debtor here - you're giving money to companies hoping for a return on your investment.
This is the fun part. But please, spend only what you can afford to spend. Make a budget if needed. If you're spending too much, cut back or find other ways to make more money.
I've remained moderate politically in this post. I hope you understand why it's important to take on manageable debt and be fiscally conservative.