As we celebrate Mother's Day this weekend, I reflect on my late mother and the lessons she taught me and my older sister, many of them about money. I learned to appreciate finance from her, and while there were several lessons over time dealing with money, the one that stands out the most is the lesson of "The Ledger".
Just a moment on my mother. She was an incredibly hard worker and a major role model for me. She lost her father early on in life and started working at age sixteen to help support her family. She worked at the same company until she retired in her 50s, in part due to her condition with MS, and later in life, dementia. Over those 40+ years she served many roles in that company: receptionist, secretary, bookkeeper, office manager and the assistant to the President of the company. Sadly, we lost mom in February of 2021, just days before her 76th birthday. I miss her still.
Growing up, I had my own bank account. Well, it wasn’t an actual account with a bank – it was more of an account with the “Bank of Mom”. She called it The Ledger. When we received a gift of cash for a birthday or holiday, we would give it to her, and she would put it in the account. If we ever needed money, for example $2.50 for going to the movies (Yes, it really was that inexpensive back then – more on inflation later), she would deduct that from the account balance and record that in The Ledger. If The Ledger balance ever went negative, that was the amount we would need to pay her back. I was only ten years old at the time The Ledger started, but I learned some hard lessons over the years, like the perils of deficit spending and compounding interest.
As a country, we have our own “Ledger” of sorts– the national deficit. We also have some real issues of deficit spending with our annual federal budget. And not to make matters worse, but as inflation has gotten higher and interest rates have increased over the last two years, so too has the cost to pay for our borrowing.
As you can see from the chart below, the U.S. really hasn’t been too good with spending over the past decade and especially over the last several years. In part some of this was post-pandemic spending from COVID where we needed to help get our economy back on its feet, get people back to work and our country out of a short-lived, but very severe recession. The current debt level is almost 100% of our GDP, and if we keep it up, will be close to 120% by 2023. While my mother loved me very much, I am not sure she would have allowed me to get that deep into debt on my ledger.
Well, if we know we have been spending too much and see this debt issue becoming worse in the future, we must be getting better and starting to spend less, right? Nope. The chart below reflects our annual budget for this year. All you need to do is look at the borrowing portion of how we source our financing to realize that almost a quarter of our annual spending comes from borrowing more. How can we do that? How much longer can we afford to keep this up? Again, not sure mom would let me keep doing that year after year.
While inflation has been all the talk the last couple of years, as you can see by the chart on the following page, it really hasn’t been an issue for us since the late 1970s and early 80s. However, with all our spending, inflation has really increased as well – reaching a high of 9% in 2022. Last week we got some good news that the inflation rate is now around 5% (year over year), but still much higher than the Fed would like it to be, which is closer to 2%. We have some real progress to make in order to bring it down, and the fears are real that inflation will remain much higher than both the Fed and consumers would like.
The good news for me was that mom never really charged a high interest rate on the ledger balance back in the late 80s/early 90s – it was always around 1-2%. Cheap back then, and frankly by today’s standards as well. She was such a saint.
Looking back to the second chart, what happens to our annual deficit when the cost of servicing our annual debt increases due to interest rates? It’s one thing when you are paying 2% on debt, but what happens when that doubles – now we are paying twice as much just to cover the interest cost. If we are already using debt to pay for our annual budget, how do we cover the increased shortfall? Do we borrow even more? Not a good answer.
Clearly, we have some serious financial issues facing our country. In the coming weeks we need to solve the near-term issue with our debt ceiling, not to mention the much more difficult long-term issue of spending more than we make as a county. We have kicked that can down the road for far too long, and some hard decisions need to be made soon.
I wish my mom was still here – maybe she could help us fix these problems. She fixed so many other things for me growing up. She was the best mom I could ask for.
To all the children out there, please remember to acknowledge all the hard work your mother does for you, and all the lessons she teaches you. She works hard so many days of the year, she deserves at least one day for herself. Remind her of that, and how much you appreciate her. It’s never too often to tell her what she means to you. To all the moms, Happy Mother’s Day!
Author: Michael Novak, CPA/PFS, AEP®, President & CEO, Wellspring Financial Advisors, LLC
Information as of May 14, 2023
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