Who recalls when folks got along without something if it cost too much?
~ Kin Hubbard
Update: This article is included in the Carnival of Personal Finance #257 – Canadian Bank Notes Edition posted at Canadian Finance Blog. Thanks!
The sovereign debt crisis has been front and centre lately in light of the recent market earthquakes emanating from the European Union. Sunday’s EU bailout seems to have settled markets for now. But the problems have not gone away and if you look at the U.S. Debt Clock , the U.K. Debt Clock, or even the Canadian Debt Clock, you’ll notice that they are all still ticking higher by the second. There is even a debt clock that contends that the true U.S. debt is more than 6 times the reported number if you factor in unfunded liabilities.
Yesterday Big Cajun Man at Canadian Personal Finance Blog wrote Of Debts and Deficits. In the comments section, he proposed a new country with a no debt clause in the constitution and I offered to take the citizenship oath. Who’s with me? 
| U.S. National Debt Clock |
Your Personal Debt Clock
The spotlight shining on the high debt levels of many countries across the globe may have temporarily blinded us to another debt hot spot – one that we can actually do something about. I’m talking about personal debt. Do you know exactly how much debt you’re carrying? Do you know how much it’s growing (or shrinking) each month? The CGA (Certified General Accountants) released a study that has gotten a lot of play in the media. There have been a number of articles out lately that have literally brought home the fact that the growing personal debt problem is every bit as important as the sovereign debt issue:
- Tavia Grant reports in the Globe and Mail that Canadian household debt has soared during the course of the recession. Far from taking advantage of low interest rates to pay down debt, we have instead elected to take on more. In fact, with our debt to financial assets ratio hitting 144% at the end of last year, we are first in that category for 20 OECD countries. Oh Canada!
Didn’t we used to rank near the top in terms of wise fiscal stewardship? What happened? The study quoted here says a lot of it has to do with the “culture of consumption”. Perhaps we are close to finding out exactly how ugly the ugly part of low low interest rates might get. - Chaya Cooperberg’s Home Cents blog announced that Financial Reality Bites for Generation X. As a Gen Xer myself, this one hit close to home. The portraits of people in their late 30s and early 40s with kids, a huge mortgage, credit card debt, and little to no retirement savings looked very familiar.
- Canadian Mortgage Trends also cited the CGA study, holding it up as The Latest Reality Check on Debt. They point out that a 2% mortgage rate hike would mean a 9% to 11% spending reduction for most middle to upper-middle income families. Given that a large number of us are currently living pay cheque to pay cheque, that puts our economy in a precarious position should a rise in any of the following occur: 1) unemployment, 2) interest rates, 3) taxes. (Incidentally, Kevin Press of Today’s Economy posted Another Look at Mortgage Rates, in which a mortgage pro questions the now-conventional wisdom that mortgage rates will rise a lot fairly soon. This analyst doesn’t think so, and I agree with him. More on that in a future post.)
- Angela Self’s Smart Cookies blog asked You’re Saving for What? This article also referenced the CGA study, pointing out that many of us are heaping up debt to pay for essentials rather than extras. That can’t be good for our economy for very long. There are some great ideas here on how to cut spending and redirect your income to areas that will help you reduce your debt. Check it out!
How to Defuse a Debt Time Bomb
If you want to set up a debt clock for yourself, you might want to look at The Cost of Debt: Doing the Math. There are some useful calculators and examples highlighted there that you might find helpful as you face your own debt reality. Go ahead. Look. How bad could it be?
OK, so maybe it doesn’t look great. The good news is that, by actually acknowledging your potential debt time bomb, you have taken the first step to defusing it. Here are a few “next steps” to consider:
1. Change Your Attitude: In order to get to work on defusing your debt bomb, you really have to want it. What are you willing to give up in order to enjoy debt freedom?
2. Cut Spending: Depending on how close you are to detonation, you may want to consider your own set of austerity measures. (Sit down and negotiate with all family members first in order to avoid riots. )
3. Reallocate Resources: Once you have cut spending, you need to make sure the money you’re saving is going where it’s needed most. Whether you choose a snowball, snowflake, or avalanche approach, attack your debt relentlessly until it reaches zero.
How About a Savings Clock?
Does that sound strange? Can you imagine a clock that’s running up ever-higher numbers that are actually tracking mounting savings? That’s what can happen when we eliminate debt and get our heads above water. The power of compounding can work for us rather than against us.
With storm clouds continuing to gather on both the national and personal debt horizons, it’s tempting to ask how this all happened. Why can’t we get it together either at the national or personal level? I’m not sure. But I think it has something to do with the fact that we’re all suffering from a kind of inertia. We’ve been doing this for a long time now, and nothing really bad has happened yet – at least nothing that couldn’t be fixed with another round of debt for all. Escalating debt seems normal.
The “reality check” theme was really prominent in a lot of the articles I highlighted here today. But I don’t think anyone administers a dose of reality better than Gail Vaz-Oxlade. If anyone can shake us out of our collective “it will all turn out OK somehow” stupor, it’s Gail. She recently summed it up like so: Debt Isn’t NORMAL. Take a moment to read the article and then start winding back your debt clock so that you can start up your savings clock – and hey, maybe your government will follow your example!
Have you looked at your debt clock lately? Is it counting down or rolling forward?
Thanks for the mention, the US debt dwarfs Canada’s but then again, they have wars to pay for Canada only “peace keeps”. Who would guess Peace could be so expensive?
.-= Big Balancing Cajun Man´s last blog ..Mortgage Insurance =-.
The wars have certainly not helped, but it seems like the costs of cleaning up after busts caused by malfeasance are even greater.
One problem, 2 cents, is that some folks can’t seem to snowball, snowflake, avalanche or anything for a sustained period of time. Fortunately there is a solution for that – . I’ve seen people really benefit from attending meetings.
.-= PureFi´s last blog ..Advice from Around the Globe =-.
You’re right. I guess that’s why we are where we are at the moment. I don’t know much about Debtors’ Anonymous. I wonder if anyone out there can enlighten us. Or maybe I’ll do a little research myself and write about it!
I read your post on advice from around the globe. I would highly recommend it to everyone. It’s a great read and the broken English somehow enhances the message.
Thanks for your comment!
A picture, a thousand words, etc. US debt, global debt, scary, etc.:
http://financialtactics.blogspot.com/2009/10/tricks-no-treats.html
.-= as´s last blog ..Annus mirabilis =-.
I’ve seen these debt clocks many times, but they still surprise me every time. The reality is undeniable when you dare to look at them. Thanks for your comment!
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