Are you blowing your financial diet?
October 12, 2011
Have you ever seen someone blow a diet because they can't resist splurging occasionally?
It's easy to make the same mistake with your budget--you save carefully day-in and day-out, only to undermine that saving with a big purchase. Judging from Federal Reserve figures on consumer debt, Americans in aggregate are making just this kind of mistake.
Trading one kind of debt for another
Figures show that consumers cut back on both revolving and non-revolving debt in August. That means credit card debt and other forms of non-mortgage borrowing, such as car loans. The cutback in credit card debt continues a trend that has been in place since the recession. Unfortunately, the slowing in non-revolving debt is only a recent phenomenon.
Consumer revolving debt in the U.S. has dropped from a peak of $957.5 billion in 2008 to $790.1 billion in August. However, the extra money hasn't gone into people's savings accounts; instead, it seems to have transferred into loans for big-ticket items like cars and boats. While revolving debt has been decreasing, non-revolving debt has grown overall since the recession.
The more Americans have borrowed in the past, the less they are able to spend now. This is one reason the economic recovery is running out of steam.
Abandoned savings accounts
If Americans are putting their money into big-ticket purchases rather than their savings accounts, it's understandable in some ways. After all, the system right now is geared to encourage borrowing more than saving.
Desperate to jump-start the economy, the Federal Reserve has done everything it can think of to drive interest rates down. This makes it easier to borrow money. Unfortunately, by pushing CD, savings, and money market rates near zero, it also squelches the incentive to save.
Remember, though, that the Federal Reserve isn't responsible for your savings. There may not be much immediate incentive to save these days, but if you start to think of what your future will look like without a nest egg to fall back on, you can find the motivation. You owe it to yourself to do more saving and less splurging.
