A lot of people who remember the Great Depression won’t buy anything on credit. Even many of the Greatest Generation (WWII era) somehow saved enough to avoid home loans and car loans and never let credit card bills, if they acquired plastic later in life, carry over to a second month.
Today though, most of us have found home ownership possible only through mortgages, a staple of post World War II American life. Few can write a check for $100,000 or more for a house. Few can write a check or bring cash for a $30,000 auto, and untold families rely on credit card limits to take vacations, remodel their house or cover expenses in the short term.
But somewhere in the past 30 to 40 years, and often at the urging of economists, the idea of borrowing and spending became an entrenched way of life. Last year household debt in America peaked at $13.9 trillion, double the amount of debt in 2000.
Much of this was in mortgages and what might be termed investment debt. But as we have seen in this current recession, a personal finance plan designed to “keep borrowing against home prices that will keep rising,” wasn’t much of a plan at all.
Failed mortgages aside, the credit card debt problem (we won’t use the term crisis for now) has not yet unfolded in full. Even as industry and government try to jumpstart the economy, they are dealing with a group of people who are deeply in debt – and that would be us. According to CardWeb.com, the average household owes $10,678 to credit card companies. As with most everything else, this figure is up dramatically from all previous eras.
Ironically, many financial experts say more consumer spending is needed to get the nation’s cash registers back ringing. At the same time, credit card companies, banks and even Congress (experts on deficit spending) have now grown leery of sustained debt.
In 2007, households had debts running 133 percent of their disposable income. In the 1980s, that was more like 65 percent, according to a recent series in USA Today. In other words, personal debt has climbed from a point in the mid 80s when it was a little over half a family’s disposable income to a point last year where it stacked considerably higher than their monthly spending money.
It doesn’t take a financial planner to realize it’s unsupportable to have average debts this out of line with incomes. People can never catch up with payments, especially as unemployment rises and paychecks slow. An estimate published in USA Today, said banks may be forced to write off more than $96 billion in credit card debt by the end of this year.
At some point, whether we’re talking about the federal government or your family, debt must be repaid or we’re looking at foreclosure, repossession or bankruptcy. In the past year, household debt has dropped but slightly from $13.9 trillion the previous year to $13.8 trillion.
But that mere drop in the bucket marks the first decrease in household debt since the 1940s. And something else happened: personal savings jumped to 6.9 percent of total income. Nothing like that ever happened before this financial crisis. That savings increase did little to spur the economy, but it’s a sign people have suddenly realized that budgeting, solid management and keeping money in the bank are smart ideas.
There is little the average Jasper family can do about the overall financial crisis, but one thing each person can do is assess and address their debt level.
We would all do well to remember individual strengths that led to the strong American economy of the past: saving, personal responsibility and keeping bills paid.
It wasn’t fancy financial schemes on Wall Street or stimulus plans that made America great. Our forebears got ahead the old-fashioned way. They earned it.
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