By John Packard
After years of living large, U.S. households are finally learning what financial experts thought they never would: to live within their means.
Economists have long warned that the U.S. consumer was on an unsustainable spending frenzy and that savings rates were dangerously low. Now, families are being forced into financial responsibility by the housing downturn and a weakening economy.
My question is, why has it taken so long. The media, credit companies, and other culprits have perpetuated this myth that there should be no limit to our spending. Well.. no longer.
The big problem the country is facing is the amount of debt at every level. I.E. government, corporate, and personal. The country call ill afford a slow down in spending, as the consumer drives 70% of the economy.
The powers that be have tried everything to get people to spend, spend and spend some more. We have reached a breaking point. Things will change and it will be painful. The torrid spending spree has stopped, and the adjustment will take time.
The question is not whether we are in a recession, but how long will it be and how deep. It could be rough. Things would not be so bad if our economy was not financed so much by credit.
According to some studies, 30% of consumer spending is discretionary, that is, optional. If this is true, then there is no excuse for us to be in the shape we are in. Individuals have spent their money instead of save it.
Although we cannot control what the national economy does, we can control what are personal economy is. We need to educate ourselves about money management. This is what Prosper is for. We teach our students how to avoid a recession in our personal financial lives.
Most people have never prepared a budget. But people are going to have to if they want to keep their homes.
As a coach, what has been amazing to me is see how many people refuse to cut back on their unnecessary items. What is truly a want is considered essential and cannot be sacrificed. This mindset will be forced to change, and being forced to do anything is not a good thing.
As the U.S. housing crisis deepens, many more Americans will be forced to budget to avoid foreclosure, with serious implications for an economy on the brink of deeper recession.
We are now starting to see the results of the wreckless behavior of both lenders and consumers. Some major supposed reputable firms have either gone under or have been on the verge, Foreclosures are up 60% over last year. One thing I find pathetic is the government is willing to help and bail out the big guy. (the banks) but the people this crisis has hurt the most, former homeowners will get not much more than a token “economic stimulus� check. Does this seem right? I certainly don’t think so. Why should the tax payer be responsible for the dishonest and greedy actions of others?
There are already signs that American consumers are “trading down” in the search for bargains, with February same-store retail sales showing customers favoring discounters like Wal-Mart Stores Inc over higher-end retailers.
One statistic said that in the fourth quarter of 2007, Americans’ household debt almost equaled 140 percent of their after-tax income and that they were spending 14.3 percent of their after-tax income paying down that debt. Which means that means Americans are spending more on servicing their debt than they do on food.
This is estimated to shave off 1% of consumer spending for the next several years. Undeniably, this will affect the economy.
The real question is for how much and how long?
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