Our Record Debt Only Tells Half the Story

Congrats 'Merica, once again we have hit a new debt record, $12.84 trillion. While this alone may not be an...

Congrats ‘Merica, once again we have hit a new debt record, $12.84 trillion. While this alone may not be an issue, there are couple data points that may be red flags from the Federal Reserve.

The first red flag that comes from the Bank of New York Quarterly Report on Household Debt and Credit (August 2017) shows that auto loan delinquencies have been rising for several years while credit card balances with greater than 30 day delinquencies jumped over 1.1% to 6.2%.

The second red flag from the Federal Reserve Bank of St. Louis on savings shows that the personal savings rate fell to 3.8%; that alone is awful. Post financial crisis, the rate was rising from 6% into the double digits, but it has since cratered.

For some perspective you should be saving roughly 10% of your gross income for retirement, that is if you are starting in your 20s to mid-30s. If you delayed saving for retirement or if you have more than one financial goal, your savings rate should be even higher. This is obviously a problem.

The fact that the personal savings rate is falling as debt levels are rising in our country should not come as a shock. It is a natural reaction to increased debt levels. As we spend more money we don’t have, our credit balances balloon, we pay more and more interest on these increased balances. That leaves less and less for savings.

Eventually, we either shut down our spending and focus on paying our debts back, we default on the loan or we file for bankruptcy protection. None of the options is optimal for your personal finances. While the first option seems OK, it isn’t, you are taking all of the money you should be saving and using it to pay off your debts. The other two are just bad.

It seemed like coming out of the financial crisis we learned a valuable lesson about biting off more debt than we could chew. I guess that lesson has already been forgotten by many.

If you haven’t recently reviewed your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.

If you aren’t currently working with a CERTIFIED FINANCIAL PLANNER™ Practitioner you can find one HERE.


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