The Great Recession is over. Unemployment is down. Heck, it’s even summer, and the sun is shining! But don’t be fooled, not everything that glimmers is gold, especially when it comes to consumer spending. There has been a lot of talk about people cutting back, saving, and paying down debt as a result of the downturn, but the truth is, we’re actually adding debt at a record rate. In fact, we’re headed down a dangerous road, and if we don’t make some fundamental changes to how we approach spending, it will take us ever closer to a double-dip recession.
During the first quarter of 2012, US consumers paid down nearly $36 billion in credit card debt. No, that’s not a typo, and it’s not contrary to the point being made above, though it could easily be taken as such without proper context. You see, it’s actually uncommon for a debt pay down not to occur during the first quarter of the year, as this is when people tend to pay off lingering amounts owed from the holiday shopping season with recently-received salary bonuses and tax refunds. That’s what has happened for at least the past three years, and in each of those years, we celebrated a first-quarter debt pay down with three consecutive quarters of debt additions.
It’s the net change in debt over the course of the entire year that truly matters, and much like 2011 when we ended the year with a $53 billion debt increase, we project that we’ll end 2012 with roughly $50 billion more credit card debt than we began it with. Since our bad habits show no signs of slowing down, the question is what to do about the debt problem.
It’s easy to say that people should just cut back, but how? Budgeting is obviously in order, but to make it truly effective, we also need to change the way we think about certain types of purchases. According to the most recent iteration of the Pew Charitable Trusts’ study on what consumers consider necessities, a car and a landline top the list at 86% and 62%, respectively. That’s not too worrisome if those were the only two things of note, but the study also reveals that 34% of us believe we cannot live without high-speed Internet, 23% consider cable or satellite TV to be necessary, and 10% feel the same way about a flat-screen TV.
We seem to forget that we’re supposed to live within our means, and that means spending less than what we bring in each month. In other words, while it’s nice to have the latest gadgets and technology, if you can’t afford them, you shouldn’t spend money on them. With this in mind, an effective way to develop a budget is to rank your monthly expenses in order of importance (with things like food, housing, healthcare, and emergency fund contributions topping the list) and add them up until you hit your monthly spending goal. Any expense that will take you over this amount should be eliminated.
Perhaps even more important in the long-run, however, is an increased emphasis on financial literacy. Not only did 42% of consumers give their knowledge of personal finance a grade of “C” or worse, according to the National Foundation for Credit Counseling’s 2012 Consumer Financial Literacy Survey, but the 2012 Global Financial Literacy Barometer also revealed that more than 70% of US parents feel that their children do not know the basics of money management.
Financial literacy programs are increasingly being offered by state and federal agencies as well as non-profits and private organizations, but it all starts at home. As parents bring their own spending under control, they must advise their children of the efficacy in doing so, so that they don’t remake our mistakes and their economic future is truly bright.
Odysseas Papadimitriou is the CEO of Evolution Finance, the parent company of Wallet Hub, a personal finance social network where consumers can review financial companies and professionals.