Debt in America: What's the True Cause?

I found this article on MSNBC. It states that high costs of housing, health care, and education are spurring borrowing and debt in America. Conversely, the piece concludes that debt is not being generated by Americans spending vast sums of money on frivolous consumer goods and other non-essentials. While this might make a good "news angle", I'm sure you can imagine my suspicion at the conclusion. Especially when the MSNBC article states what the real problem (in my opinion) is:

Many families, particularly middle-income households, aren't acknowledging that declining incomes mean they must radically adjust their standards of living, according to Weller and Warren. Warren suggested that families that can no longer realistically afford their single-family houses should move to condominiums, consider limiting their families to a single automobile, get second jobs to pay off debt, or move to less expensive school districts that may not have the highest test scores but where children perform acceptably well.

In the end, people aren't paying attention to simple, basic money guidelines and as such, they have to borrow more and more money. What guidelines am I talking about? Mainly these:

1. No matter what your income, you have to spend less than you earn. So if your earning power stays the same and some of your main expenses go up, you need to start saving money in other areas of your budget. You can't just keep spending at your regular rate.

2. You need to buy a house you can afford. As I've said time and time again, people over-extend themselves when it comes to buying a house, and then they get into a financial pickle when other expenses increase. That's why I have a specific formula for buying a house -- a key part of which is to buy a place you can truly afford.

3. You have to save IN ADVANCE for a college education. If you wait until your child is a teenager before you start saving, you'll be forced to borrow. That said, we all know that a college education is a great investment -- well worth the money.

My summary of this situation is that most Americans simply don't have the financial discipline to make the tough money choices they need to make. They go along on cruise control, spending more than they really can afford, then borrow like fiends when it's "needed." What they should really do is be more conservative in how they handle their money. Then, when financial issues like increased housing and college costs come along, they'll have enough cushion to pay for these without having to go into debt.

Comments

[Dale G.]

There are two very important ideas that are closely interrelated to each other and well worth remembering.

First, never believe that you already know everything you need to know. That isn't true in your personal finances, your career or your personal relationships. If you do your homework, it is possible to know as much as you need to know for the next decision in front of you, but not always.

Second, is that the world and your circumstances are always changing. What worked yesterday may not be what works today or tomorrow because the situation has changed. Life is change. Embrace that idea and focus your energy on changing your life in the ways that you want.

So, how are these points related to this article or these guidelines? The connection is very simple. I'm already doing well with my personal finances. I've managed to stay out of debt for the most part and I'm saving for retirement and my children's educations. I want to do better. Reading FMF has already pointed me to a lot of information I hadn't see before.

The guidelines above are part of a formula for being prepared for change. Being financially prepared for the expected changes in your life such as retirement and educational expenses helps. Having emergency savings for dealing with unexpected changes expands your range of options when those occur.

[Steve "The Credit Card Debt Man" B]

I believe this article is right in a sense. From being in the business of debt relief, I find that many people who are caught up in high debts used their credit cards as a way of living way beyong their means. Not so much just bad spending habits. The majority of people I speak with use their cards to pay for the large bills they already have that they really could'nt afford in the first place. Not truly realizing that now they are just creating a very horrible debt to the credit card company that will charge them large sums of interest. They walk a very tight rope, any kind of financial downfall in their life at this point can have a huge negative impact.

Unfortunately last year was a record breaking year for the credit card industry they earned over 17 billion alone in penalty fees and there is no reason to believe that this year 2007 is going to get any better.