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The Personal Debt Problem

Updated: Apr 23

The Personal Debt Problem: Saving and Spending Habits

Personal debt is a persistent and growing problem. In fact, total debt numbers hit record highs this year. More Americans are flat-out broke. They are overspending money they don’t have with little to no savings. And it all comes down to personal choices and habits… These appear to be largely to blame for the situation more and more smart people find themselves in every day.

Last week, we began this continuing series on personal debt. We explored good versus bad debt in our last article. While good debt may seem like an oxymoron, there are some debts that add to your income and/or net worth. You can read more about what constitutes good and bad debt in last week’s article here.

Good or bad debt types aside, debt is primarily a result of spending. In this article, we’re going to take a closer look at some of those financial choices.

Spending and Savings Out of Balance

In the U.S., spending more than you make is normal. Don’t believe me? Unfortunately, it’s true. Over half of Americans spend more than they make every month. That means one of the most basic budgeting principals—earn more than you spend—is being ignored. Also, if people are overspending, it means that they aren’t saving money.

Between 1960 and 1984, people put away no less than 8 percent of their disposable income. In 2017, the personal savings rate hit a new low of 2.4 percent. If faced with an unexpected expense, many would flounder. Lack of savings puts them more at risk for suddenly being unable to pay their bills. In fact, nearly 40 percent of adults would have to borrow money, sell something, charge it, or would simply be unable to cover a $400 emergency.

Too many fall back on credit cards when their spending outstrips their earnings. The modern-day credit card evolved in the late 1950’s as a form of revolving debt—meaning the balance is meant to be paid off each month. But the average American has four credit cards and carries over $8,000 in household debt. Debt that remains on the card accrues interest, and credit card interest rates have never been higher. The average is 17.41 percent, increasing by over 1 percent per year over the last two years. This increasing interest rate combined with balances carried on their cards leave many on unstable footing.

I have to wonder, all of these people standing on a crumbling ledge and praying they won’t fall… How did they wind up in their precarious position?

Overspending on Non-Essentials

It’s tempting to assume that this glut of spending is about student loans, mortgages, cars, and increased medical costs. But while those things are certainly contributing to the problem, people are also spending too much money on non-essentials.

In fact, a JP Morgan Chase Institute study identified over 4 thousand consumers who experienced a drop in their mortgage interest rates. On average these people saved an average of $8,964. What did they do with that extra money? They went shopping! Credit card usage increased in excess of their savings by 4 percent.

Another study found that the average person spends around $1,497 per month on non-essential items. So what exactly is “non-essential” spending? It’s the monthly purchases like: $20 on coffee drinks, around $200 on dinners out, and over $100 spent on cable and streaming services, and an average of five impulse purchases a month to name a few.

All that spending adds up to over a million dollars of unnecessary money spent over the course of an adult’s lifetime! And all that money is being spent on things they don’t need. But at the same time, over half of those surveyed felt they couldn’t afford important things like saving for retirement and life insurance.

Spend Less and Save More

There is an illusion perpetrated by the media that we can have whatever we want. This is only further fueled by the ease of available credit. The trap is sprung when we spend beyond our means without considering if we can repay the debt accumulated.

And year after year, Americans fail to pay down their credit cards. Over the last ten years, two out of three with credit cards have maintained or increased their balance. Between the glut on overspending, high interest rates, and a lack of savings, financial disaster can feel like it is just one misstep away… because it is. Perhaps it is time to rethink our spending habits, pay off debts, and begin to save money again.

In two weeks, we’ll continue talking about the personal debt problem with a closer look at the top three individual debt sources: mortgages, auto loans, and the student loan problem. We expect a home, automobile, and college to cost, but for many these large debts can feel mountainous and crushing. We will explore trends and how much is too much.

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