Wealth Balance:

During the past 90 days many Americans have come to realize how little control they have over their financial destiny. This has come as a horrible shock to many who should have known better. Money and the wise use of money frankly seems more than many folks can understand or handle. So let us review some basic facts.

In science we talk about the half life of an isotope. What that means is what period of time must elapse before ½ of the radioactive atoms have decayed into something that is no longer radioactive. This same concept can be used to look at borrowed or loaned money. If we have any kind of loan there are three parameters to that loan: the amount, the rate of interest and the payment. These three factors go into determining the life or half life of the loan. When a rate of 30% is charged as it is on some credit cards the time to repay the loan becomes very long indeed.

Let’s look at several examples:
Repayment Calculator

Loan A is for $3,000 at 30% with a payment of $100 per month.
That means the loan will be paid in 4.8 years (58 payments) total interest cost = $2,614

Loan B is for $3,000 at 30% with a payment of $50 per month.
That means the load will be paid in 10 years (112 payments) with a total interest cost = $6,487.

Cutting our payment in half increased the term of the loan by a factor of two but our interest costs went up by a factor of 2.8 times. What is most distressing is trying to figure out exactly where we will be financially in ten years time. Today’s worker stays at a job for an average of 3 years.

If we consider the loan for a house and look out 30 years we have some even more astounding figures:

Loan C is for $187,000 at 5% for 30 years gives a payment of $1,004 and an interest cost of $174,387. That is our interest costs were almost equal to the amount borrowed.

Load D is for $187,000 at 12% for 30 years gives a payment of $1924 and an interest cost of $505,448. That is our interest costs are some 2.7 times the value of what we borrowed in the first place.

Now consider what has happened in the past 365 days where the value of the average home has fallen by 30 percent or more. The loan amount has not changed but the value is now $130,900 and so your interest cost becomes 3.86 times the value of the home.

How did this happen. In my judgment it happened because too few hands controlled the wealth of this nation. Because too few people made the decisions on these matters they could be convinced to think the same way. Take for example the idea that wealth creates new businesses. And contrast that with the number of jobs that have been sent overseas where labor costs are a fraction of what they are in America. Is this what is meant by job creation? An autoworkers wage of $25 per hour results in a gross income of $52,000 and that is before taxes and insurance and union dues. Contrast that with the CEO who makes $5,000,000 in salary and bonus. The ratio is some 96 times. And that is before the autoworker pays any taxes or health insurance or union dues at all. Contribution to his 401k plan will reduce his available income still further.

Yet I still hear folks saying the wages are fair in America, and that a minimum wage of $6.55 currently or some $13,624 annual gross income is enough. Poverty line for a family of 4 is $19,350 or some $5,726 dollars above this person’s income. Let us say it another way this worker is not paid even what the government has determined to be the minimum required amount. Is that fair? Add to this his credit card debt and you begin to sense how totally hopeless and helpless these folks feel. I say with all due respect to the folks in Houston’s River Oaks fix this problem or this problem will bring you mansion down around your head.