Is too much of your income vanishing due to interest payments on credit cards, car payments, mortgages and other debt? Perhaps the American family’s ever-increasing debt helps explain why 75% of Americans think that the economy is in bad shape, when unemployment is only at 5%, interest rates are close to historic lows, inflation is not (yet) spiraling out of control and the stock market is approaching its historic high.
In the past, my financial planning clients mainly came to me for investment advice, to help determine if they were saving enough for their children’s college expenses and their retirement and/or wondering if their retirement savings would last throughout their lifetimes. Recently however, more clients are seeking help in reducing their massive debts. These clients are unable to spend less than they earn due to the high cost of servicing their debt.
Many of my clients earn over $200,000 annually. After paying their taxes, home mortgages, home equity loans, car loans, credit card debt and vacation home payments, they often have less than 30% of their gross income remaining. They have no remaining income to save for educational expenses and retirement. Often, even paying their current bills puts them deeper in debt.
In the past 20 years, Americans have gone from saving 10% of their gross pay to saving less than 0%. Over the same time period, the average mortgage payment has increased from 15% to 30% of gross pay and average non-mortgage family debt has increased from 5% to 35% of gross pay.
After taxes, mortgage payments, non mortgage debt service (such as car loans and credit card interest payments) the average American family has less than 45% of their gross income remaining. Twenty years ago, the average family had 60% of gross income remaining after these payments.
Are you in the “debt danger zone?” To find out, calculate your total annual “debt,” including all taxes, mortgage payments, car payments, home equity loan payments, credit card interest payments, second home costs (net of income) and any other interest paid to service debt. If the sum of these payments exceeds 50% of your gross income you have entered the debt danger zone. If the sum exceeds 60% of your gross income, immediate action is critical.
If you are in the debt danger zone, consider the following:
Because our government and financial institutions encourage us to increase debt and reduce savings, it is easy to fall into the debt danger zone. By paying close attention to your personal finances, you can reject this path to financial scarcity and discover the “path less traveled” to financial abundance.
Henry “Bud” Hebeler is author of “Getting Started in a Financially Secure
Retirement” and founder of www.analyzenow.com. He is also wrote the Foreword of Financial Abundance Guide.
For the complete text of bankrate.com article click 20 years of spending saps savings
Concerned about how a business downturn will affect your personal finances? Here are some steps that may help you withstand an oncoming recession as well as any future recessions.
First, prepare an annual budget. For your estimated monthly expenses, track your expenditures for three months. Be sure to include federal, state and FICA taxes. To your estimated monthly expenses add quarterly, semiannual or yearly expenses, such as home and auto insurance, vacations and property taxes. The sum is an estimate of your annual expenses.
Determine your annual “non-retirement income.”
This is your total income less any contributions made to 401(k) plans, IRAs or other retirement accounts. Non-retirement income less annual expenses is the amount of savings that you have available to recession-proof your life.
Use savings to pay down one of the most expensive forms of debt available. If you have good credit and equity in your home, consider a home equity line of credit. Use this line to pay off your credit card debt and then pay off your home equity line as quickly as possible.
Get an “emergency fund.”
An emergency fund is a highly liquid account which provides coverage for between six months to one year of your current expenditures. With an emergency fund in place, you can survive a business downturn, job loss or short- term disability without invading your retirement accounts.
If you receive the $600 per person federal tax rebate, use it to pay off credit card debt, increase your emergency fund or to save for educational or retirement expenses. This income can be your first step in recession proofing your life.
Once your credit card debt is eliminated and your emergency fund is in place, use your savings to buy your first house, pay for your children’s education or to better insure an abundant retirement.
When saving for your first house, consider a Roth IRA. Even if you have a company retirement plan, you can contribute up to $5,000 annually to a Roth IRA if you are single and earn less than $101,000 or earn less than $159,000 if you file taxes jointly. Once your Roth IRA has been established for five years, you pay no taxes when withdrawing up to $10,000 of income plus all of your Roth contributions for a down payment on your first house.
By following these simple, powerful steps you can achieve financial security. If you do not feel that you can take these steps by yourself, find a knowledgeable and trustworthy financial planner to help you with this journey. While lowering your current spending may cause some short term financial discomfort, the payoff of recession-proofing your life is a reduction of fear and stress.
I recently read an article by Henry K. (“Bud”) Hebeler at Bankrate.com. Bud, the former President of Boeing Aerospace, has spent his retirement years helping people prepare for retirement. His popular web site, analyzenow.com, has many helpful retirement tools. Bud was also kind enough to provide a technical edit of my book, before it was published, as well as to write my book’s Foreword.
Our President once said that we are addicted to oil. I would take that a step further and say we are addicted to consuming. Look at how often the media refers to you as a “consumer “ and see if you ever see the