Over the weekend the NYT ran an article of The Debt Trap a series of video and articles about various people in America who have ended up victims of the credit crisis. It is shocking to hear the stories of these people and how they tried to get ahead and despite their best efforts they ended up losing their homes. These people are hardworking Americans who were given too much credit. The greediness and profits of the investment banks and credit card companies allowed these people to borrow more than they could afford. Banks charged fees on everything: late payments, over limit charges, and of course interest. Is it right to blame the banks? Should we really feel sorry for these people? People have consistently lived beyond their means only thinking about today, and the banks have taken advantage of that. In the forums there are people on both sides of the discussion. I think the scariest part about the whole thing is that the repercussions we are starting to see is just the beginning.
Mortgages was the first thing, but pretty soon people aren’t going to be making car payments and other debt payments. Loans are already harder to get, but I believe that increasingly loans are beginning to fail. The Seattle housing market which was initially strong compared to the rest of the country is starting to see massive increases in unsold inventory. Pretty soon, prices are going to start to fall as there is a shortage of qualified buyers and excess inventory. I have also felt like consumer spending must be decreasing. I was shopping online last week and I have started to notice far more items on sale–and things are deeply discounted (I found a pair of Kate Spade pumps for $78 on ShopBop.com which is basically unheard for the most part). It really makes me start to worry. We are starting to see the effects of increased fuel prices and the lack of credit.
There are lots of articles about inflation running rampant, and there is new legislation being proposed to help bail out the banks that made the bad loans (at the expense of tax payers)–will any of these actually have an effect and change the outcome? With inflation heading near 5% most workers won’t even see pay increases high enough to compensate for the increase in their cost of living. This are all kind of scary when you think about it. Especially when you consider so many Americans have been living largely on credit and have little to no savings.
So what can you do:
- Start saving. For many people this is a lot like trying to be on a diet, easy to say but often hard to do in practice. However, if you don’t have an emergency fund now is the time to start saving one. Just listen to the videos in the NYT article on debt–the young couple could have likely saved their home if they had 2-3 months of income put away.
- Decrease your spending. If you have credit cards and can’t control your compulsive spending then cut them up, or pour them in a bowl of water and freeze them so you don’t use them except in a dire emergency (by the time the ice defrosts you can decide how much you really need to make the purchase). You should always spend less than you earn. And try to live by the rule that if you can’t pay for something in cash (i.e. you don’t have the money in your bank account) then you shouldn’t spend the money.
- Get out of debt. If you owe money then come up with a payment plan. Sit down with your bills and accounts (or have someone sit down with you–I have done this for lots of my friends) and figure out a plan on how to get ahead. Starting with small steps and having a clear goal will give you a better chance at success.
The most important thing is: do not ignore your situation. Make sure you have a clear plan on what to do if you lose your job or something bad happens and you lose your income. If the economy continues to decline make sure you have a plan and an emergency fund.