“Consumer Economy” is a term that sends shivers up my spine. There’s some debate on whether or not the U.S. economy is predominantly consumer driven but there is little argument that our economy is MORE consumer driven now than it was for our parents. In the big picture its clear that we can’t simply spend our way to prosperity but this point is also important to remember in our personal lives, especially this time of year when many wear out their credit cards.
The problem is not that we are spending more, rather that we are spending above our means and saving less. A simple way to check your financial health when it comes to debt is a form of the Debt to Income calculation. Add up your total monthly debt payment including home, auto and credit card and divide by your total gross income before taxes. A score of 36% or less is good. If the result is more than 50% you should aggressively seek to lower your spending and debt. A second part of the financial health equation is savings. On average, the savings rate has decreased substantially from our parents’ generation which is no surprise given the increase in spending while income is stagnant or even down in inflation adjusted terms. If you are concerned about your personal situation, don’t be discouraged! It may seem daunting at first, but with more information and some financial discipline, you can start to get your debt under control and start to increase your savings. While the question of how much you have in savings that you can easily access is unique to your situation and will vary based on marital status, field of work and your spouse’s field of work, number of children as well as other factors, a good rule of thumb is to have as much money saved as it would take to live (service your debt, buy food, pay bills, etc) for at least 3 months, although 6 months would be better, especially in the current tight job market. I hope you’ve been able to keep your debt in check this Holiday season and here’s to a financially healthy 2010!
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