Personal Fiscal Responsibility

The amount of money owed out by the average person is growing daily. This is proven by the government statistic that shows that America has a negative savings rate. This confirms what we all are afraid to admit; we are spending more than we make to support our lifestyles.

We can’t influence other people’s decisions but we owe it to ourselves to evaluate our own financial position. Are we making poor spending decisions? Are we prepared to deal with what the future has in store for us? Do we find ourselves moving from one crisis to another? What steps can be taken to bring order to our fiscal well-being?

These are the things I want to address today with the goal of giving you something to think about that can help you reach your long term needs.

Let’s start by looking at debt. There are 3 types of debt. We have Good, Bad and Emergency Debt.

Good Debt is money you borrow with the intent that you will get a greater return on your investment than the interest rate you are paying. An example of this would be a student loan. You take a student loan to pay for an education that will yield you a higher income in the future. Another example would be a mortgage. You want to buy a home today instead of paying rent because you believe that in the future, when the time comes to sell your home, you will sell it for substantially more than you paid for it.

There are no guarantees that you will finish your education and land a better paying job and there is no guarantee that when the time comes to sell your home you will make a profit. What makes Good Debt good is that you take it on with a reasonable expectation that the decision will be profitable in the future.

Bad Debt is money you borrow to feed your need for instant gratification. We purchase cloths today on a credit card. We don’t expect the cloths to have a higher value in the future but we’re willing to take on the debt, along with the interest charges, because we want the clothes now. We will at times justify doing this because what we’re purchasing is “on sale”. We conveniently forget to add the interest charges on the sales price, because if we did, it would become obvious that there is no bargain here.

Emergency Debt is debt we take on due to unforeseen circumstances. You lose your job and you are out of work for a month before taking a new position. You will be forced to take on addition debt during this time. You may be faced with an unforeseen car repair or home repair. These are examples than can require you to borrow money unexpectedly.

Money borrowed to bridge you through a rough period (Emergency Debt) tends to be paid off in as short a period of time as possible. This is probably due to psychological reasons. You want to get past the problem as quickly as possible and eliminate all references to the problem.

Good Debt generally is kept around for a long period. Student loans or mortgages are usually for large amounts and can’t be paid off quickly. In addition, this type of debt enables you to increase your net worth. These are two good reasons for you to pay off this debt only after all other debt is retired.

Credit card debt in this country has increased from 3.2 percent of the median family income in 1980 to 12.5 percent in 2004. Student loans, mortgages and any other Good Debt is typically not appearing on credit cards. This debt is held in long-term mortgages or loans. Emergency Debt by definition is not increasing regularly either s it is only bridge funding during unforeseen problems with cash flow.

Conclusively then, Bad Debt is the main source of this increase in credit card debt and the primary cause of this nation’s negative savings rate. Take a close look at your own debt position. Are you falling deeper and deeper into debt every month? Do you make only the minimum payment on your credit card bills? Are things getting so tight that you are afraid you may need to borrow from one credit card to pay the minimum payment on another? Are you afraid to even look at your total debt position?

Reaching out for help in personal financial matters is the last taboo. We are more likely to discuss health problems or sexual issues with others than we are to discuss our financial matters. By being afraid to analyse our own finances and at the same time, afraid to discuss solutions among our family, friends or professionals, we are boxing ourselves into a corner with no way out.

We need to begin to take responsibility for our fiscal well-being. We need to begin by reversing the trend of increasing our monthly debt and begin to reduce the amount of debt we are carrying. We need to change our attitude towards purchases. Instead of buying now and paying later we need to do what our parents did. Save up and make the purchase when we have the money. Changes like this are not going to be easy and will take time. Adjusting our spending habits is a part-time job and needs the same level of attention we give to our 9 to 5 jobs if we want to be successful.

The root of all the financial turmoil this economy is dealing with right now is our attitude of spending tomorrow’s money, today. This is the day of reckoning. The well of tomorrow’s money that every person, company and every level of government has been drawing from, is running dry. How is the leadership of this country addressing the problem? By borrowing even more money so every American receives a check. Then encourage everyone to go out and spend it. This is after forcing interest rates to drop in the hope of encouraging businesses to spend more!

We certainly are not finding long-term solutions from the government. The only thing we can do is to clean up our own financial house so as individuals we can better weather this financial storm.