Tag Archives: Budgeting

Consumer Debt and the Economy (Revised)

Everyone has had that one credit card bill that they’ve opened up and cringed at the amount due. But how can such small purchases add up so quickly in only a month? Most people don’t realize just how much money they are spending when they use a credit card to buy their purchases. However, most of the debt in our country comes from consumer spending. Since consumer spending drives the economy and fuels nearly 70% of U.S. GDP, consumers must be in a sound financial position. If consumers become overburdened with debt, they will not be able to drive economic growth. The table below shows the total amount of household debt, total nominal GDP, total nominal disposable personal income, and the ratio of household debt to both GDP and disposable personal income; all the numbers are in billions of dollars:

econ

As you can see, over the past 30 years, U.S. consumers have increased both total household debt and the percentage of that debt relative to overall GDP and DPI. At some level, the total amount of debt can become so large that it can force consumers to slow their spending and thus begin to negatively affect the health of the economy. This is why in times of a recession, governments try to encourage consumer spending by lowering taxes and lowering interest rates. When consumers slow down their purchases, business’ profits are lowered which eventually lead to lay-offs; worsening the downward spiral. The more debt that is held, the less money is available to be put away in savings and reinvested in the economy.

After 2009, consumer debt began to slowly decline for the next few years. Recently however, since the beginning of 2013, Americans have been taking on debt at a rate not seen since the country spiraled into the Great Recession. Consumer debt increased in just the fourth quarter of 2013 by $241 billion, the largest quarter to quarter increase since 2007. Below is a graph of the quarter to quarter household debt balance since 2003 and its composition:

Household Debt 2013Q4A

This total debt balance was a combination of Americans boosting credit card balances, increasing borrowing to buy more homes and cars, and taking on more student debt. Balances on credit card accounts alone increased $11 billion during the fourth quarter, making it the third largest source of household indebtedness. Only the mortgage and student loan debt markets were larger.

You would have thought that after the chaos of the recession, we would have become better at keeping track of our debt. However, data shows otherwise. According to a survey released by Bankrate.com, 28% of Americans have more credit card debt today than they have in a savings fund. This means that over a quarter of Americans wouldn’t be able to pay off their debt even if they used their entire savings! But, despite consumers’ savings records, banks are loosening up their credit card limits to levels not seen since the recession. This easy access to credit along with low interest rates during boom years is what brings Americans to take on record levels of debt. This does not mean that we are on the road to a second recession however. Americans’ increase in household debt could actually have to do with increased consumer confidence in the economy as it relatively improves. Higher spending leads to more jobs and higher incomes, which ultimately leads to higher consumer spending. For consumers with extra money in their wallets, taking on more debt may not seem so risky. And, as we know, consumer spending puts the economy on a positive track.

So can this notion that “Americans are spending way too much” be curbed and should it be? Financial advisers offer several tips on how to stop spending so much money and get back on track financially. Two of these tips include tracking your cash flow and tapping into your feelings to restrain your urge to spend. There is a difference between needing something and wanting something, and budgeting helps you to see areas where you may be overspending. Therapist Nancy Irwin says that overspending tends to be a coping mechanism. “You need to find the underlying issue that is trying to be fixed by overspending and learn how to deal with it in a healthy manner. There is nothing wrong with keeping up with the latest trends or being indulgent from time to time, as long as the intent is in the right place.” There is a fine line between spurring growth and digging the nation deeper into an economic sinkhole if too many houses are burdened with debt. Before you hand over your credit card, you need to think twice. You should ask yourself what need you are trying to fulfill and if you are going to be able to pay it off when the bill comes in the mail.

 

Consumer Debt and the Economy

Everyone has had that one credit card bill that they’ve opened up and cringed at the amount due. But how can such small purchases add up so quickly in only a month? Most people don’t realize just how much money they are spending when they use a credit card to buy their purchases. However, most of the debt in our country comes from consumer spending: buying more than you can afford at the moment with the presumption that you will be able to pay it off later. Since consumer spending drives the economy and fuels nearly 70% of U.S. GDP, consumers must be in a sound financial position. If consumers become overburdened with debt, they will not be able to drive economic growth. The table below shows the total amount of household debt, total nominal GDP, total nominal disposable personal income, and the ratio of household debt to both GDP and disposable personal income; all the numbers are in billions of dollars:

econ

As you can see, over the past 30 years, U.S. consumers have increased both total household debt and the percentage of that debt relative to overall GDP and disposable income. At some level, the total amount of debt can become so large that it can force consumers to slow their spending and thus begin to negatively affect the health of the economy. This is why in times of a recession, governments try to encourage consumer spending by lowering taxes and lowering interest rates. When consumers slow down their purchases, business’ profits are lowered which eventually leads to lay-offs; worsening the downward spiral. The more debt that is held, the less money is available to be put away in savings and reinvested in the economy.

So can this notion that “Americans are spending way too much” be curbed? Financial advisers offer several tips on how to stop spending so much money and get back on track financially. Two of these tips include tracking your cash flow and tapping into your feelings to restrain your urge to spend. There is a difference between needing something and wanting something, and budgeting helps you to see areas where you may be overspending. Therapist Nancy Irwin says that overspending tends to be a coping mechanism. “You need to find the underlining issue that is trying to be fixed by overspending and learn how to deal with it in a healthy manner. There is nothing wrong with keeping up with the latest trends or being indulgent from time to time, as long as the intent is in the right place. It’s OK to keep up with the latest technology if you are into that or you enjoy giving your kids the biggest pool on the block as long as it comes from a creative place and serves your high consciousness and not just your ego.” There is a fine line between spurring growth and digging the nation deeper into an economic sinkhole if too many houses are burdened with debt. Before you hand over your credit card, you need to think twice. You should ask yourself what need you are trying to fulfill and if you are going to be able to pay it off when the bill comes in the mail.

How to Budget Holiday Spending and Should You Consumption Smooth?

It’s no secret that most of us tend to overspend during the holiday seasons. But why does this seem to ALWAYS happen? We know the holidays are coming around and yet many of us still make poor planning decisions year after year. Wouldn’t it be nice to stay under budget just once? As noted in the Wall Street Journal, there is a simple solution in which you can effectively manage your spending during the busy holidays and avoid making what is called the worst financial mistake people tend to make around these times of the year. That is, create a “spending strategy”, or in other words, create a holiday budget. While this may be a simple solution that takes little time and effort, the majority of people fail to do so and it can result in a huge financial mistake. Michelle Higgins recommends preparing a list of all your holiday expenses along with an estimated budget. By keeping track of your purchases, it allows you to see where you are overspending and what areas you need to cut back on.

Throughout the year, people receive raises and bonuses. While this is great news for anyone, some people do not make the wisest decisions on what to do with this extra income. Michael Kitces suggests one possible way to avoid overspending- simply do not spend more than half of your raise. That is, commit at least half of it toward saving for your future retirement. In this way, you increase your consumption today as well as your consumption tomorrow. That is, you are better off both now and in the future because you will have more money to spend after you retire. Some people like to call this strategy “consumption smoothing”. Consumption smoothing is simply balancing your spending with your savings in a way that allows you to have a relatively consistent standard of living throughout your working years and retirement years. It allows you to better prepare for the later years when you might incur unexpected expenses, such as those dealing with your health. In this way, people who consumption smooth are often better off because if they happen to be hit with a health emergency, their savings does not take as hard of a hit.

However, according to one recent article, over 3 million people believe that there is “no point in saving for old age because it will just be taken away later when they need it”. Many people like myself however, will disagree. The earlier you start saving for retirement, the more savings you will accumulate. The sooner you put aside a set amount of money, the more interest you will accrue and the more your savings will expand.