Following are excerpts from the latest debt report in Bloomberg Business. The numbers aren’t pretty but I have solutions, so please read on:
Accelerating increases in auto loan debt and mortgage credit helped propel total borrowings of U.S. households to the highest level in more than five years, the Federal Reserve Bank of New York said Thursday.
Household debt rose by 1.8 percent, or $212 billion, in the third quarter to $12.07 trillion, the most since the first quarter of 2010, according to the New York Fed’s quarterly report on household debt and credit…
Auto loan balances rose 11.9 percent from a year earlier to $1.05 trillion, reaching the highest level since the survey began in 1999…
The level of overall household debt was 3 percent, or $355 billion, higher than a year ago in the third quarter of 2015, though it remains 4.9 percent below the peak of $12.68 trillion reached in the third quarter of 2008, the report showed…
Mortgage debt jumped 1.8 percent, or $144 billion, from the second quarter, according to the report. Mortgage originations increased to $502 billion from July to September.
Credit card debt rose 1.6 percent, or $11 billion, in the third quarter to $714 billion. Student loan balances increased 1.1 percent, or $13 billion, from the second quarter to a new high of $1.2 trillion.
While this is a lot of new debt, it is expected. Our nation’s economy relies on debt in order to do anything. When you bring that down to a personal level with individual families, you will see that the total debt here is bigger because at home, more families have less and less money and at the same time expenses are going up and up.
What can be done?
If a family will simply build a Spending Plan, then track their money according to that plan, they will find 1% of their annual income that they are wasting each and every month. Example: If a family is making $60,000 a year, multiply this income by 1% and you get $600. This is how much, on average, a family earning $60,000 a year is wasting each month due to lack of planning and tracking.
Suppose you want to argue this point with me. You may say you are the exception as you have unusual expenses this month because of a recent car accident. Okay, I still won’t let you off the hook. Since you know there is a chance you could be in a car accident then you must have a spending category set aside for these kinds of problems. It’s called Emergency Savings and you should be “spending” money into this category every month just as you spend
money for groceries or gas. Don’t believe it? Just look at the Bloomberg report… the numbers on individual household debt are clear and they are coming up that way because people are spending more than they make and have no plan to control that spending.
Let’s go to the subject of eating out. When anyone will track their eating out, they will find they are spending a lot on this kind of expense. How do I know this? Because I’ve watched hundreds of clients calculate how much they’ve spent in a year on eating out and they are always floored by the number. Plus, I also watch my five children and see what they do. Then I ask them about their friends. They all say it is amazing how much money goes to restaurants. I know why this happens. It is so convenient to let someone else cook for you, or to just grab something on the go. Maybe eating out is really important to you and you don’t want to cut back in this category. That’s fine, but you’ll need to cut back in another expense category that you don’t care about as much because you can’t have everything you want and still keep spending and debt under control. And if, like I suspect you will be, are appalled by how much you’re spending on eating out, it’s time to reduce that amount. Want proof that not cutting back in this category is causing you personal problems? Re-read the Bloomberg report.
Another big place people waste money is in term life insurance. For sure we need life insurance, but in reviewing a client’s policy this week, he was paying $123 a month for 30-year level term insurance with a $500,000 death benefit. I checked with Met Life and got a quote for a healthy 38-year-old male, non-smoker of $15 per month. This is a savings of $108 each and every month. Inflated costs like these are driving up the debt levels in U.S. households as the Bloomberg report makes clear.
Vacation planning is another area to look at. Some people take their families to Disneyland and use airfare and hotels. Millions of people do this. I have done this a few times with my family. But if you don’t have the money and have to use a credit card, this can be disastrous to your financial health. If you cannot afford Disney, then stay home and go camping instead or take a day and go for a hike. If you keep reading the Bloomberg report, you will see what I am saying.
There are many more examples of how money is spent for things we can’t afford, but just building a spending plan and tracking expenses according to that plan will awaken your senses. When you have built a spending plan, then the next time you go to the store you will re-think how you spend money while you are there. A plan and tracking the plan change your decision-making… drastically! Being aware is a wonderful teacher.
As I mentioned earlier in this post, if you will put forth the effort to build and track a spending plan, you will find 1 percent of your annual income each and every month that you are wasting. You can use this “wasted” money to pay down debt, build up emergency and emotional savings and build confidence you didn’t know you had. You CAN get your spending, and eventually your debt under control.
Does our nation have a spending plan? And does our nation track spending against this plan? The answer, of course, is NO! Is it possible our nation’s leaders can build and track a spending plan? Hm-m-m-m-m-m, I am thinking . . . . . I don’t think this will ever happen.
But it can happen for you! You CAN build a spending plan and track your spending according to that plan. No one should complain about our nation’s leaders without first being in control of their own spending. You can make the changes today, to make certain next year will be a huge debt reduction year for you, whether it is for our country or not.