In the simplest terms, this economic "crisis" was caused because people spent more then what they could afford. Be that housing, "stuff" to go into the house, extra cars, and vacations. Credit was "cheap", car loans and credit card applications being approved by just signing your name to a piece of paper. Most never stopped to think that this bill would eventually have to be paid. Well, we all know the bill was finally presented, and what has happened since.
Somewhere I read a statistic that the average American spent 106% of their total income each year for the past 6 years. Now, that is average, so if you include someone like Morgan and myself (and I'm sure many of you reading) who actually save money each year, that number gets skewed much higher.
Since the "crash" of the market in September when people finally started to realize that this was a widespread problem, many Americans have actually cut back their spending and are actually saving a few dollars. Whether it be to actually save, or to pay off debt, people are not spending as much as they did before.
Hooray for savers, you say. Well, you would think so, but if you turn on the news, you keep seeing stories that because people are not spending, but that it is actually bad for the economy. Huh? If we spend, we get the mess we are currently in, and if we save, we make it worse?
For me, this is mostly "media hype" because we are in the Christmas season. People need to save, and should save. For as much as many went overboard in spending, they might go the opposite in their savings. In my mind, that is a good thing. It will all level out over time, and the country will eventually be OK, but I think these "bad times" are a good thing, if it gets people to change their habits, take some time before purchasing, and make adjustments in their lives.
Yes, less spending will keep the economy in a lull for a longer time, but I feel that this is the best way to get out of this mess. A smart, slow recovery to "normal" is more important and better in the long run than a speedy and reckless one. I fear that if we do recover from this too fast, people will forget, and get back into bad habits. Don't believe that, think about how much the talk for alternative fuels and autos has calmed down with gas under $2 a gallon.
I feel it is irresponsible the way the government and the media are handling educating people on this economic situation. So, don't listen to the hype. Saving and spending less is a good thing. The economy will eventually recover (maybe slower than Washington and Wall Street want, but who cares) whether you spend frivolously on that iPod, or not. But, if it is frivolous, will your own economy recover?
Until the next time.....
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One of the things I like about my church is, not only do we talk about spiritual things, but practical things as well. We have been counseled often to stay out of debt.
There's a quote about interest that often gets cited in these discussions. I'm a little lazy to look it up, so I'll paraphrase. It goes something like: Interest becomes your constant companion. It never sleeps, it never takes a holiday, it never calls in sick, it never goes on vacation.
I remember when we were looking at buying a minivan. We looked at financing, and we decided it would just add too much to the cost of the car. The salesman then offered us another financing option which was a longer term for less money, and look at how much we'd save each month! I said no. He asked why, and I scribbled down the terms, multiplied the rate by the months, and circled the total cost, which was quite a bit higher than the previous terms. "That's why." He seemed genuinely shocked that I'd even consider that a problem, when the monthly cost was lower. *roll eyes*
(We did end up financing with another dealer — they had a deal going at an interest rate of 0%.)
In my opinion, there should only be three things you should ever go into debt for: a house, an education, and a car, if necessary.
Some people say you should destroy all your credit cards. I don't necessarily agree with that. I love credit cards. I don't have to carry cash; I can buy things online; I have a buffer between the merchants and my real money so if something goes wrong, I have time to fix it; I have a statement that shows me everything spent in case I lose a receipt. I just pay off the credit cards every month. I haven't carried a balance in I can't remember how long.
I certainly don't have an excess of cash, but at least I can say (outside of mortgage and student loan interest) I haven't thrown money away in interest, paying even more than retail price for the things I bought.
Yakko - perfectly stated. The car salesman makes me laugh, because you are correct, most people would not realize the difference.
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