Recent headlines about the US economy have been pretty gloomy, with a variety of key indicators showing a slowdown in overall economic activity. These developments have caused many financial experts to warn of the possibility of a serious economic downturn in the near future, with some predicting a deep recession in 2008. While headlines often focus on the effects of this potential downturn on business interests and on Wall Street, individual consumers also feel the pain of poor economic conditions. With the growing signs of a possible recession on the horizon, the average consumer should pay attention and prepare a financial defense against the potential for economic difficulties ahead.
Much of today’s financial news focuses on the turmoil that has been created in the economy by the collapse of the housing bubble, the subprime foreclosure crisis, and the resulting credit crunch. These events have had far-reaching effects on the US economy, as well as affecting the economies of many other nations. Many investors in mortgage-backed securities, ranging from large investment banks, hedge funds, and pension funds to the individual investor, have experienced heavy losses as foreclosure rates rise, spreading turmoil. throughout the financial world. Personal bankruptcies are on the rise, as are business bankruptcies, especially in the mortgage lending industry. When these factors are combined with other economic data, such as rising oil prices, rising inflation, stock market volatility, and the declining value of the US dollar, there is potential for significant economic challenges. in the coming days.
Today’s consumer has much to fear from the recent problems in our economy. Many experts predict that the typical American family will feel the squeeze of this recession, if it takes hold, more than any other in recent history, as its roots will be in the turmoil that has occurred in the housing and credit markets, affecting older individuals. directly than most other economic sectors. Of course, homeowners who have found themselves in the midst of the wave of foreclosures and bankruptcies have already felt the pain, and many of those whose adjustable-rate mortgages will reset in 2008 and 2009 will soon follow. Even homeowners who are not in danger of foreclosure have been hit by this crisis, with home values falling at record rates, and the downward pressure on home prices is unlikely to ease in the near future. the near future, as high foreclosure rates continue to affect housing. market.
The typical consumer these days has a lot of debt and very little savings, a very vulnerable position if the forecasting experts prove the recession correct. Credit card debt is extremely high among Americans, with figures for 2007 showing the average consumer owns nine credit cards, with debt on those cards averaging about $8,500 per household. Mortgage statistics from the US Census Bureau indicate that 70 percent of owner-occupied homes are mortgaged. Of those homeowners, about 23 percent have a second mortgage or a home equity loan on their homes, and a very small percentage of them, 0.4 percent, have both a second mortgage and a home equity loan.
The savings rate among average Americans is at an all-time low, negative 1.2 percent at the end of 2006, down from negative 0.5 percent in 2005. To add a little perspective to those numbers, the last time the savings rate Savings were recorded in negative numbers was during the Great Depression, and the 1984 figures reflected a savings rate of 10.8 percent. Negative savings rates indicate a population living beyond their means, spending more money each year than they earn.
However, the average American can take steps to protect their finances from the recession. The first thing that must be achieved is an immediate commitment to live within one’s means and to refrain from taking on more debt, if possible. Making a spending plan will help direct household funds in the right direction. The next thing that should be a priority, and listed in the budget plan, is working to pay off existing debt.
When making a debt reduction plan, it is advisable to prioritize the debt. Obviously, the debt that is associated with keeping the roof over one’s head must come first. While many may feel that the car payment should be next in line, it may be worth taking a second look. It may be more practical in some circumstances to forgo an expensive, fuel-guzzling new vehicle and take a more affordable used vehicle instead. Once housing and commuting arrangements have been sorted out, focusing on the debt that carries the highest interest rate may be the smartest move to restore financial health and security.
While it can be tempting in some cases to take on loan consolidation debt, that’s something to consider very carefully. Credit counseling can help you get a handle on your financial situation without going deeper into debt. The appeal to debt consolidation loans is often that the loan will have a lower interest rate than the loans you are used to paying off. That may be true in some cases. However, it is also true that in many circumstances it is possible to negotiate a lower interest rate with creditors, and sometimes those creditors will be willing to drop the interest in hopes of securing the repayment of the principal.
Once progress is made in reducing debt, efforts, no matter how small at first, should be made to increase savings. As the amount of debt decreases, ideally, the amount of savings should increase. As principals on debt decline, so does the total amount of interest paid, and monthly savings can be set aside to grow into incremental savings against economic challenges that may be on the horizon.
The reason dealing with debt is an important part of protecting personal finances against recession is because in unstable economic times, personal situations can change suddenly and drastically. Layoffs and other interruptions in employment are common as companies struggle to maintain their own financial well-being and profit margins. Creditors are likely to become much more aggressive in collecting their debts as more consumers default, raising the possibility of legal action, such as asset repossessions or asset freezes, against those with outstanding balances. So working to reduce debt, improve credit ratings, and increase personal savings levels now, while income is relatively secure, makes sense. That way, if something happens that changes your financial status, like a layoff, there will be less debt pressure to manage.
Financial news is important news for the average consumer. Take cues from the headlines now to reorder financial priorities and move toward a fiscal position that will offer some protection if indeed recession analysts are right, it can only offer long-term benefits. In other words, even if the recession doesn’t hit, reducing debt and increasing savings is smart tax policy that will secure your financial future.