The new figures are in – American consumers paid down more than they charged last quarter to the tune of $72 billion. This outcome may augur well for households getting their affairs in order by reducing their dependence on debt, but it does not help the economy when consumers do not have the confidence to spend their disposable income. Our economy is nearly 70% service driven, meaning that consumer spending is the main driver of domestic growth and domestic hiring soon thereafter.
The American public, however, is seriously beyond the curve when it comes to borrowing now to enjoy what should still be a dream for the future. Our government debate over the deficit and debt ceiling are but reflections on a larger scale of our general disregard for the impact of an ever-increasing mountain of debt. At some point, as many families have recently discovered to their dismay, the ability to pay down our loans must be addressed, especially when we can no longer borrow against the equity in our homes.
As with our government, the solution must be a “balanced” approach – we must cut spending and look for more sources of income. With regards to the latter, many Americans have found part-time work or found other ways sell their services or goods from the home. In order to start a small business from home,small business loans may be required to set up shop. For working capital, unsecured loans may also be a necessity to cover cash flow needs early in the process.
In today’s economy, generating new income may be a formidable task, but every family can reign in spending habits. Debt counseling and management services are worthwhile efforts that can reduce monthly payments down to something reasonable. You will lock the door on credit for a period of time, but learning to live within the cash available becomes the new challenge to address.
Living frugally does not mean being cheap about everything and becoming angrier by the minute. It does mean getting the most value out of your hard-earned dollars, so that you can enjoy a simple pleasure every now and then. In order to proceed with this new “mission”, one must understand the nature of their current spending tendencies. An analysis of the past six months of receipts, checks, and credit card statements will yield valuable information on this front. Be sure to break down cash and food into more discreet expense categories. For example, you do need to know what your eating out pattern is, along with entertainment use of alcoholic beverages.
The result of your analysis will set the stage for setting new spending priorities for the household budget. After deducting a respectable amount (“15%”) from your monthly income for savings, the remainder becomes your new monthly budget that must be allocated amongst your various spending categories. Attack each line item, starting with the largest first and working your way down.
It may be tough to set aside a regular savings amount, but your future financial security depends on it. Take advantage of company sponsored savings plans, and put the excess in the bank for an emergency fund for those unexpected medical bills or car repairs, or worse yet, a decline in monthly income for whatever reason. The rule of thumb for an emergency fund is 3 to 6 months of monthly net income. Investing comes after this accumulation.
Reprioritizing the household budget is not easy, but the challenge is worth it!
