What the Greek economic collapse teaches us

The other day I had a coffee with someone who was expressing concern about the strife in Greece with people lining up at ATMs. She was trying to understand why Greece is in so much trouble. I tried to explain it in simple economic terms.

Margaret Thatcher once said, “The problem with socialism is that eventually you run out of other people’s money”. In Greece’s case, “the goose that laid the golden egg”, is sterile. The “goose” is the IMF and the European Union. With a total debt of 352 billion euros and failing to make a 1.6 billion payment, Greece has defaulted. It is a bit like having a car loan balance of $50,000, and you did not make an $800 monthly payment.

As a country, Greece has been irresponsible. They have handed out all the perks of socialism with early paid retirement – at age 50 in many cases. At the same time, the workers try to do everything in their power to avoid paying taxes.

An Australian reporter some time ago, related how swimming pool owners in Athens put covers over their pools that look like grass. It is so helicopters flying overhead will not identify pool owners. You see, there is a pool tax. Then there is the issue of unemployment; overall it is 26% of adults and 51% of youths.

The viability of a country is dependent not only on the total debt but the ratio of tax money (revenue) coming in and expenditure going out. It is not dissimilar to our personal expenses. The greater the debt, the greater the interest payments and if there is a budget deficit, there is more and more shortfall, with more and more debt. The result is a vicious downward spiral.

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Greece is not the only country with a huge debt. America is almost at Greek-like levels except that it has a huge economy and has been printing money. Here again, America is incurring more debt and postponing the day when it will have to deal with the debt and the resultant crisis.

It is not dissimilar to what happens on the personal level. Let’s say you incur debt on your credit card and have maxed it out. If you manage to get another credit card and add more debt, you will be in a financial crisis much as Greece is. To make matters worse, you make the minimal monthly payment on the card. By doing so and continuing to spend, your debt keeps piling up. How much sense does that make? Unfortunately, many people do so.

 

Live within your means

The state of your finances is a balance between your income and your outgoings. It is important that you budget for your lifestyle and allow some extra for savings if possible. If you need a new car at age 60, consider putting it off until you have saved the money. If you want to finance a $40,000 car, the interest payments will approximate $7500 over five years at current interest rates. That money has gone into the coffers of the bank. It could have been used to pay for most of a year’s supermarket bill. Don’t acquire “things” that are not within your means. If you buy on credit make sure that you can afford the item.

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Decide on your retirement lifestyle

One of the major reasons people do not succeed in life is a lack of planning. You would not think of going on a road trip without looking at a road map, would you? You have to know where you are starting from and what is your ultimate destination.

What are you going to do in your “retirement”? Will you travel, start a part time business, look after grandchildren or do volunteer work? Once you have determined that, you can decide how much money you will need. After accounting for fixed costs such as housing, food and clothing, what else do you need? It is only then that you can determine how much income you need. The amount going out in expenditure needs to be less than this. Whether it is $40,000 or $100,000 a year, you must figure it out and write it down. Otherwise, you are guessing.

 

Planning is imperative, whether you are on a part pension or with no pension. Remember, statistically you have plenty of years ahead of you. Don’t end up like Greece into forced austerity.

 

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