Hello, and welcome to Your Money 2.0. I’m
Thomas Fox, Community Outreach Director at
Cambridge Credit Counseling. As we’ve learned
in hindsight, there were a number of factors
that brought about the Great Recession. We’ve
discovered that the boom and bust cycle of
the housing market was created by Wall Street’s
insatiable appetite for mortgage-backed securities,
and that no one who suspected it was unsustainable
bothered to do anything about it. We also
learned that you and I lived somewhat beyond
our means.
Consumer debt in America currently stands
as $12.5 trillion. That includes mortgage
loans, home equity lines of credit, auto and
student loans, etc. Credit card debt accounts
for roughly $826 billion of the total. Although
those figures seem high, they’re actually
lower than they were just a few years ago.
As it turns out, throughout the Great Recession,
we've done a pretty good job paying down our
debt. According to the Federal Reserve Bank
of New York, Americans have reduced their
mortgage debt by 7%, auto loans by 12%, and
credit card debt by 15%. We’ve also increased
our savings to 5.3% of our disposable income
 – a figure that still falls shy of the
recommended 10%, but at least we’re moving
in the right direction again. For a few years,
personal savings was in the negatives!
It’s difficult to compare our recent Recession
with the Great Depression of the 1930’s,
but it’s certainly the most challenging
economic event most of us have endured. Many
of our friends and family members have been
met with un- or underemployment, or foreclosure.
We’ve seen our retirement accounts dwindle
from stock losses, our home values plummet
as the housing bubble burst, and there’s
still a fair amount of uncertainty about when
we’ll return to economic prosperity. We
may not have stood in long breadlines like
they did during the Great Depression, but
what we endured should have left a lasting
impression. Well, as it turns out, not everyone
has learned their lesson.
Consumer debt inched up recently, the result
of increased credit card use. There's also
been a recent increase in articles describing
a “pent-up consumerism” or “frugal fatigue,”
essentially suggesting that Americans are
consumers by nature, and when we’re unable
to spend, we get upset. According to these
articles, we are eager to spend. I believe
there’s more to it than that. I think that
much of our discomfort comes from the fact
that many of us have never had to run our
lives on a budget – the lynchpin of financial
success. Until now.
Over the last three decades Americans have
had almost unlimited access to capital. We
never had to budget because we could always
get our hands on money. If we didn't have
funds in savings, we could always use our
credit cards, or take out a home equity loan.
Many of the repayment terms were reasonably
cost-effective and didn’t interfere with
our continued access to credit. As long as
we had enough money to make the purchases
we wanted and enough left to pay the bills
at the end of the month, we were complacent.
When access to credit became more difficult
during the recession, people saved. Just because
the economy has shown signs of turning around,
it doesn’t mean that you should resume the
same bad habits that left you so vulnerable
when the recession first took hold.
Successful businesses can be a useful role
model as we look to develop better financial
habits. That’s because all successful businesses
plan their spending, and the best ones do
it for years in advance, not months. Every
financial decision is balanced against the
goals of the business. In order to succeed
in our personal finances, we should apply
the same logic. “Living within your means”
is more than having the income to support
your expenses. It also includes developing
a realistic approach to savings, investing,
and creating a comprehensive financial plan
that can help you achieve your goals and see
you through a crisis.
If we are to learn anything from the Recession
it’s that when things were down, most Americans
dug into their finances and regained control
of our spending. As we begin to emerge from
our downturn, we should carry that lesson
with us to ensure we’re better prepared
the next time we face a serious financial
challenge. More important, we can use the
principle of “living within our means”
to rebuild our own personal “businesses.”
Well, that’s it for this edition. As always,
we welcome your feedback and ask for your
thoughts and suggestions by e-mailing us at
yourmoney2@cambridgecredit.org. Thank you
for watching. Until next time, I’m Thomas
Fox for Cambridge Credit Counseling.
