In Debt? Think Like Germany

THE HISTORY

NPR reported two weeks ago that Germany has paid off the last of its World War I debts.

Their latest payment was the twentieth in a series of twenty installments spread out over twenty years. It was an aggressive payment plan designed to rid them of the interest accumulated from the severe financial penalties imposed on them after their defeat ninety years ago.

This debt-free euphoria coincides with the twenty-year anniversary of Germany’s reunification. While we applaud the Germans and celebrate alongside them, there are lessons to be learned here about the nature of interest and the values of attacking debt aggressively that need not be lost in the festivities.

First, let’s take a moment to contemplate the sheer size of their debt. This most recent payment clocked in at roughly US $100 million. That’s a lot of cash, folks. Try to imagine how much money you owe if a mere one-twentieth of the interest on that borrowed money is US $100 million.

I’ll stress this point again: that gigantic figure wasn’t even part of the original debt. That was paid off back in 1980 by the citizens of West Germany. We’re talking about the interest on that debt, people.

Can you see now why interest is so “interesting” to creditors? As long as you owe them money, you also owe them interest. Sometimes, after seventy years of deferral, you owe them US $2 billion worth.

That’s the first lesson we can take from this piece of international news: the longer you stay in debt, the more it will cost you. It’s a basic lesson, but it’s a powerful one.

Now, we could choose to attack the Germany of past days for being irresponsible and ambitious. But this isn’t a story that casts Germany in the role of the villain. This is actually a story where Germany comes out on top as the hero. This is a story about how hard work and smart living can lead to total redemption and prosperity.

Let’s take a look at the situation Germany faced twenty years ago. Berliners tear down the wall that splits their city in two. The rest of Germany follows in the reunification process. People cheer. Families gather together to see what the years have done to their faces and lives. People shed tears. It’s a fantastic moment in German history.

Unfortunately, German reunification also activates the interest payments still due on their outstanding World War I debts. Konrad Adenauer, the first chancellor of West Germany, managed to defer interest payments until reunification. Now, after seventy years, it was time to make good on that interest.

Germany had a newly reunified country, $2 billion dollars worth of debt interest, and twenty years to pull it all off.

How does this apply to you? Imagine you’re dressed in cap and gown on the football field of your university. The sun is shining, a diploma is in your hand, and the future is bursting with possibilities.

At the exact same time, payments and interest on your sizable student loans that were deferred during your college years are now active. Creditors would like your first payment a few short months from now and you still haven’t found a steady job. Is this not a similar mixture of euphoria and crushing debt?

We can learn from what the Germans did to meet their debt-free goals in so timely a manner. Join me next week as I examine the steps they took to succeed and apply them to our own personal, financial lives!

THE LESSONS

Germany wasted no time concentrating on a highly qualified citizenry that was committed to maximum productivity. They also made sure to develop razor-sharp budgets that encouraged growth while reducing the size of their debts. I don’t know about you, but I am getting weak in the knees just writing about this stuff.

How can we become more like Germany? First and foremost, we need a sharp budget. Figure out how much you earn each month and go from there. Make room for fixed expenses like rent and utilities, then move on to variable expenses like groceries and gasoline.

If you run out of room, start cutting. Drive less, unsubscribe from cable television, or skip this weekend’s round of golf. When tackling personal debt aggressively, it is not acceptable under any circumstances to spend more than you earn.

Next, target your spending towards “growth.” You may not be able to engineer a massive national infrastructure that promotes a healthy export economy, but you can set money aside for investments. It shouldn’t be a large portion of your budget just yet (considering the lion’s share should be diverted towards your debts), but remember: Germany emerged from their situation both debt-free and financially stable. If you don’t know where you want to invest right away, you can start by just stashing some of your money in a savings account. Long-term wealth calls for long-term investments.

Granted, “growth” doesn’t come in only one flavor. Investments are desirable, but remember that highly qualified citizenry we were talking about? If you choose to invest in your own personal “growth,” that could be you. If you need an advanced degree to climb the next few rungs on your chosen ladder, enroll today. If you need to learn a foreign language to stay competitive in a global marketplace, break out your flash cards and get to work.

All this motivational talk about working hard leads neatly to my next point: maximal productivity. All the degrees and personal growth in the world don’t mean anything if you don’t apply yourself. The Germans have degrees and they work hard. Now, they’re smart and wealthy. Oxen work hard and have giant flexing muscles to prove it. Mules make oxen and the Germans look like lazy people who quit early to drink lemon grass smoothies at the spa. Mules are unbeatable, stubborn, fantastic animals that work until you get tired just watching them.

Learn from these examples and be productive. If you’re in a financial bind, don’t sit on the couch worrying about how you’re going to solve the problem. Get up on your feet and solve the problem. If you need more money and your boss allows overtime, snatch it up. If you feel tired all the time and breathe hard going up the stairs, hit the floor, do some push-ups, then drink a bunch of water (you are taking the stairs, aren’t you?). Then run out and get a pull-up bar.

Above all, use your renewed mental and physical energy to reduce the size of your debt. Germany didn’t balk at US $2 billion in 20 years. Don’t buckle your knees at $7000 in seven months. Channel your German. Channel your ox. Better yet, channel your mule.

The Germans weren’t afraid to attack their debt aggressively. You shouldn’t be, either.

Live well, live well within your means, and remember – that’s how the Solvency Shark seas it!

Stewart Pelto

Stewart Pelto

Stewart Pelto is a recent graduate from the University of North Carolina at Chapel Hill. He is now the proud recipient of a Master’s degree in French Literature – a degree that honed the same researching and writing skills he uses to write informative articles today. While pursuing this degree, he taught French courses to undergraduate students for two years. What he enjoyed most about the position was the challenge of making difficult concepts readily understandable and accessible to all.

He served as a Senator for the Graduate and Professional Student Federation, fighting to keep tuition costs down for graduate students struggling with their finances and student loans. He also developed his budgeting skills during his time as a Treasurer for the Graduate Romance Association. He enjoyed becoming more active in his local community and working to make a positive effect on his surroundings.

While an undergraduate himself, he spent a year abroad in Europe earning his degree in Spanish and French. While studying in both Sevilla, Spain, and Montpellier, France, he was exposed to the everyday reality of living under different economic and financial systems. Among other interesting travels he has made is a financial pilgrimage to the Spanish stock market in Madrid.

Stewart Pelto brings his rigorous academic education and his international experience to the problem of raising credit awareness and promoting financial responsibility. He hopes that his articles will teach his readers about debt and credit in an easily accessible and readily understandable way.
Stewart Pelto