Financial Reflections

While there’s very little doubt that Americans are sinking deeper in debt, I haven’t heard much controversy about why people are going backwards financially.  The Washington Post just ran a story on a study about the trend of high consumer debt, and I feel the need to comment.

The article as study done by the self-described “progressive” think tank, Center for American Progress, based on Federal Reserve data.  Rather than a penchant for an ever larger plasma screen or Starbucks lattes, the study states that the key factors for our financial woes are:

• Stagnation of our real wages - I can’t argue this point, espcecially given my own experience.  I’m making less than I did in the dot-com days, which is understandable, but when adjusted for inflation, I’m not sure if I was making any more than I was 10 years ago - and I’m in a hot profession.
• Rising housing prices - Again, this is well documented.  My personal theory is that the exotic mortgages have fueled this trend.  People are willing to pay too much for a house, because the payments are made artificially low by adjustable rate and/or interest-only loans.
• Higher medical costs - No debate here.
• Other costs, such as cars, utilities, and even food are up - fuel prices are higher for sure.

But is this all that accounts for our heavy debt?  Sure, times are tight, but I know enough about advertising to know that companies won’t consistently run ads unless those ads are working.  I’ve seen far too many commercials for consumer electronics and car dealerships offering low-low-low payments and 0% teaser rates to think that everyone in a tough situation is turning those deals down.  I also know that the lines in Starbucks don’t seem any shorter.

Even with all the grumbling about the current situation, the Post does state that ”Warren (author of the cited study) suggested that families that can no longer realistically afford their single-family houses should move to condominiums, consider limiting their families to a single automobile, get second jobs to pay off debt, or move to less expensive school districts that may not have the highest test scores but where children perform acceptably well.”  Aside from the school advice, this makes sense, and gives consumers something they can control.  I’m not interested in short changing my children, so that’s where the other cuts in my budget have come.

But in a news conference, the study author and a partner both “urged Washington policymakers to consider the implications of consumer debt before families are crushed by rising costs and damaged credit.”  I think educating govenment officials on debt (especially on predatory loan and collection practices) is indeed important, but what I think is more important is to educate consumers of the costs of their decisions and how important it is to work on the fundamentals - to budget, stay (or get) out of debt and build an emergency fund.