Hello, and welcome to Your Money 2.0. I’m
Thomas Fox, Community Outreach Director at Cambridge Credit Counseling. As we’ve learned
in hindsight, there were a number of factors that brought about the Great Recession. We’ve
discovered that the boom and bust cycle of the housing market was created by Wall Street’s
insatiable appetite for mortgage-backed securities, and that no one who suspected it was unsustainable
bothered to do anything about it. We also learned that you and I lived somewhat beyond
our means. Consumer debt in America currently stands
as $12.5 trillion. That includes mortgage loans, home equity lines of credit, auto and
student loans, etc. Credit card debt accounts for roughly $826 billion of the total. Although
those figures seem high, they’re actually lower than they were just a few years ago.
As it turns out, throughout the Great Recession, we’ve done a pretty good job paying down our
debt. According to the Federal Reserve Bank of New York, Americans have reduced their
mortgage debt by 7%, auto loans by 12%, and credit card debt by 15%. We’ve also increased
our savings to 5.3% of our disposable income – a figure that still falls shy of the
recommended 10%, but at least we’re moving in the right direction again. For a few years,
personal savings was in the negatives! It’s difficult to compare our recent Recession
with the Great Depression of the 1930’s, but it’s certainly the most challenging
economic event most of us have endured. Many of our friends and family members have been
met with un- or underemployment, or foreclosure. We’ve seen our retirement accounts dwindle
from stock losses, our home values plummet as the housing bubble burst, and there’s
still a fair amount of uncertainty about when we’ll return to economic prosperity. We
may not have stood in long breadlines like they did during the Great Depression, but
what we endured should have left a lasting impression. Well, as it turns out, not everyone
has learned their lesson. Consumer debt inched up recently, the result
of increased credit card use. There’s also been a recent increase in articles describing
a “pent-up consumerism” or “frugal fatigue,” essentially suggesting that Americans are
consumers by nature, and when we’re unable to spend, we get upset. According to these
articles, we are eager to spend. I believe there’s more to it than that. I think that
much of our discomfort comes from the fact that many of us have never had to run our
lives on a budget – the lynchpin of financial success. Until now. Over the last three decades Americans have
had almost unlimited access to capital. We never had to budget because we could always
get our hands on money. If we didn’t have funds in savings, we could always use our
credit cards, or take out a home equity loan. Many of the repayment terms were reasonably
cost-effective and didn’t interfere with our continued access to credit. As long as
we had enough money to make the purchases we wanted and enough left to pay the bills
at the end of the month, we were complacent. When access to credit became more difficult
during the recession, people saved. Just because the economy has shown signs of turning around,
it doesn’t mean that you should resume the same bad habits that left you so vulnerable
when the recession first took hold. Successful businesses can be a useful role
model as we look to develop better financial habits. That’s because all successful businesses
plan their spending, and the best ones do it for years in advance, not months. Every
financial decision is balanced against the goals of the business. In order to succeed
in our personal finances, we should apply the same logic. “Living within your means”
is more than having the income to support your expenses. It also includes developing
a realistic approach to savings, investing, and creating a comprehensive financial plan
that can help you achieve your goals and see you through a crisis. If we are to learn anything from the Recession
it’s that when things were down, most Americans dug into their finances and regained control
of our spending. As we begin to emerge from our downturn, we should carry that lesson
with us to ensure we’re better prepared the next time we face a serious financial
challenge. More important, we can use the principle of “living within our means”
to rebuild our own personal “businesses.” Well, that’s it for this edition. As always,
we welcome your feedback and ask for your thoughts and suggestions by e-mailing us at
[email protected] Thank you for watching. Until next time, I’m Thomas
Fox for Cambridge Credit Counseling.

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