Americans are drowning in debt. We’re falling behind on our credit card payments, our car payments and our mortgages, largely because we’re not taking our personal expenses management seriously enough. Foreclosure rates are skyrocketing. Borrowed funds now equal 138 % of annual household income, a sign we have taken on way too much debt.
With the dreaded “R” word hanging over our collective heads, who can stop our country’s slide into debt? Is it the government’s job to stop the insanity or is it our responsibility to clean up our own messes? Shouldn’t we blame our debt issues on our inability to handle our personal finance management obligations?
The stock market is down, and we’re seeing more and more unfavorable news on the economy coming to light these past few months. It doesn’t help that the financial sector has been reporting earnings well below analyst’s expectations, as a result of consumer credit problems and loan write-offs.
Much of the downtrend has been attributed to the subprime mortgage crisis and uncollectible loans that proliferated during a time of loose credit and high spending. Credit losses have been worsening for brokerages, banks and financial institutions as they write off bad loans and suffer through trading losses during a period of economic contraction. Bank of America, for example, reported an earnings plunge of 77 percent this week, after stating that they are reserving over $6 billion towards bad loans.
Financial institutions are in this situation because they are writing off bad debt that their customers have run up. What we’re witnessing now are the consequences of poor personal expenses management by consumers and investors across the board.
This is an example of how our collective personal debt has done a number on our economy.
My opinion? Our personal debt is our personal responsibility. It’s not the government’s job to bail us out from our credit card or mortgage debt. The real questions are: “Why are people in this country so far in debt?” and “What principles of financial responsibility should people be following to avoid such debt?”
At first glance, these questions would not appear to have easy answers. After all, Amazon.com lists over 10,000 books written on the subject of personal finance. It’s confusing, and personal finance management is not something they teach in school.
In reality, all of personal finance can be distilled into three basic principles:
- Spend less than you earn: live beneath your means so you can save.
- Make the money you have work for you: invest what you’ve saved and watch it grow.
- Be prepared for the unexpected: have the right kinds of insurance, and diversify your assets.
Misapplication of these principles leads you into debt; successful application leads you to prosperity.
Most people get into trouble with the first principle, “spend less than you earn.” We each typically have 2-3 spending categories that are represent significant dollars and significant temptation. For lots of people, those include overspending on Housing, Cars, Monthly Services (cable? phone?) and Dining Out. The good news is that if you can make the tough decisions to cut back in those few areas, and have the discipline to stay under some lower budgets, you can make a dent in your debt, start to save and move forward with your financial plans.
Mint Tip: I designed Mint.com to help you readily identify your problem areas, suggest lower cost products and services, and give you all the automated tools available (web and email and SMS text alerts!) to help you keep on top of your money. And with minimal effort required (five minute set up) and for free. Mint is personal expense management made easy. I hope you’ll check out our online budget tool right now.