Archive for Thursday, November 12, 2009

Financial example

New generations of Americans might think about adopting some “old-fashioned” standards on money and debt.

November 12, 2009

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After living through the Great Depression and World War II, members of the Greatest Generation knew the importance of minimizing their debt and saving for a rainy day.

It seems that lesson hasn’t been passed down very well to subsequent generations of Americans.

An Associated Press story published in Sunday’s Journal-World reported on how much harder it is to be unemployed in 2009 than it was in 1982 when the nation’s jobless rate last climbed above 10 percent. Not only are unemployed Americans spending longer between jobs, but their financial situation when they lose their jobs makes it much harder for them to weather that storm.

According to figures from the U.S. Department of Commerce and the Federal Reserve, Americans now carry an average of about $46,000 in debt, including mortgages, credit card balances, auto loans and other debt. That’s more than three times as much as the average $14,000 (adjusted to today’s dollars) owed by each American in 1982.

When you lose your job, you can adjust your lifestyle but it’s too late to adjust your debt. You may be able to negotiate some leeway on your payments, but that debt is still waiting there to be paid, with interest piling up in the meantime.

Unfortunately, most Americans also can’t dip into their savings to help them get by temporarily without a salary. On average, Americans are saving 2.7 percent of their after-tax income, compared to a savings rate of 10.9 percent in 1982. So much for saving for a rainy day.

It all makes our financially conservative parents and grandparents look a little smarter. Having watched people lose everything in the Great Depression, they were leery of going into debt. They operated without credit cards and paid cash for their cars. They probably had a mortgage on their home, but it was an amount they were pretty sure they could handle.

They knew how to save. Instead of buying on credit, they saved their money to buy the things they wanted. If things got rough, the money they had saved might be used to pay a medical bill or fix the furnace instead of buying some “luxury” like a new television or furniture. It was too bad, but it was better than going into debt.

Facing a foreclosure or bankruptcy was a huge embarrassment, a sign that you didn’t know how to handle your money or live within your means. Things have changed. The foreclosure rate today is seven times greater than in 1982, and three times as many Americans are going bankrupt.

Sometimes we don’t appreciate the wisdom of generations that have gone before us, but there probably are plenty of unemployed Americans today who wish they owed a little less and had saved a little more.

Comments

canyon_wren 5 years, 6 months ago

On the other hand, a lot of the stuff we're buying now "frivolously" is absolute crap that is not recyclable and only fills our landfills with more junk. If people have to be a LITTLE more careful what we buy, the "crap-makers" may go out of business, which would be a good thing. I know that it will affect our economy negatively for a while, but the folks that make the junk can go to work for the folks that are making the stuff that is worthwhile, as the latter group will be expanding.

avoice 5 years, 6 months ago

Not to mention that prices on everything have been ridiculously inflated. By encouraging debt, automakers (just one example) have been able to charge for a vehicle what a house would have cost just 20 years ago. That is incredible to me! Over the past 15 or so years, people trying to stay out of debt and not jump on the bandwagon have just been swallowed up by everyone else just going ahead and "buying in." Literally, buying into the notion that we should be paying such high prices and that we can "afford" it because of "great" financing available.

Joshua Montgomery 5 years, 6 months ago

After their military service, the "Greatest Generation" received a free higher education, 100% paid for by the G.I. Bill.

Much of our society would be better off if they weren't forced to pursue the absolute highest paying job to pay of the tens of thousands of dollars in student loans that many college students graduate with today.

Any student who pursues national service (military or civil) should receive, as an investment in our nation's future, a free education care of Uncle Sam.

I'd also like to point out that in my grandparent's generation usury was illegal and credit was carefully regulated at the state level. All of that went by-by when this industry was deregulated.

Though the banking sector is not entirely to blame, easy credit with usurious terms plays a large roll in tempting average folks into the cycle of debt.

George Lippencott 5 years, 6 months ago

One more time we are told that we were evil because we spent too much money and incurred too much debt. How much of that may have been true is unclear as statistics hide the detail. Some people can afford to have higher debt as they have more income. Newer data suggests that we are spending less and paying down our debt. Most people are servicing their mortgages despites the much higher costs of houses today as compared with 1982.

To address the consequences (job loss) of our new found fiscal responsibility our Federal Government is spending immense sums and running up large almost unimaginable debt. Perhaps we should have an editorial about that. After all the money comes from the same source-us. I guess the government is better suited to decide what debt we should incur. The rest of us are just too stupid to apparently make decent choices.

Jimo 5 years, 6 months ago

"That’s more than three times as much as the average $14,000 (adjusted to today’s dollars) owed by each American in 1982."

But average personal income is 140% higher today than in 1982 (in today's dollars) so, while there's is a problem, it isn't quite as shocking as this editorial portrays it. That's in absolute terms. In relative terms, much of that additional income goes to lifestyle spending rather than true necessities - no, the Season 1-7 Dvd of Buffy the Vampire Slayer for $75.58 isn't a necessity. (This leaves aside that some number of Americans also have personal savings for retirement that didn't exist in 1982.)

George Lippencott 5 years, 6 months ago

Jimo (Anonymous) says…

IMHO one of the problems with the minimalist notion expressed in some of the responses above is defining wants from needs. Is the computer we use to input our comments a need. Is that cell phone a need. In 62 only a few teenagers had cars. Look at the lots at the high schools now. Seems like a numbers of the true believers define what they want as needs and what others have as wants.

headdoctor 5 years, 6 months ago

Jimo (Anonymous) says… “That’s more than three times as much as the average $14,000 (adjusted to today’s dollars) owed by each American in 1982.” But average personal income is 140% higher today than in 1982 (in today's dollars) so, while there's is a problem, it isn't quite as shocking as this editorial portrays it. That's in absolute terms. In relative terms, much of that additional income goes to lifestyle spending rather than true necessities - no, the Season 1-7 Dvd of Buffy the Vampire Slayer for $75.58 isn't a necessity. (This leaves aside that some number of Americans also have personal savings for retirement that didn't exist in 1982.)


I am not so sure much has changed when it comes to retirement. In 1970 there were only around 10% of the population that had more than $300 in savings when they hit retirement age. With all the education and tools available I would doubt that in adjusted dollars things are much different today.

Jimo 5 years, 6 months ago

"10% of the population that had more than $300 in savings when they hit retirement age."

That would make a fascinating additional detail for LJW to follow up on.

That said, it is important to keep in mind, regardless of what middle year is used, 1970, 1982, that when Social Security was established long ago, senior citizens made up the poorest demographic segment in the country (and had always been thus - old age and poverty had always gone hand-in-hand). Today, senior citizens make up the wealthiest demographic segment with poverty barely known among them. Yet 1 in 4 children today live in poverty. While the country is indisputably wealthier today, children are poorer. Something to keep in mind then next time Congress falls over itself to give the elderly a $250 bonus to "tide them over the recession" that doesn't affect them. Quite literally food out of the mouths of babes.

MyName 5 years, 6 months ago

While it's easy to point to some personal fault and say that people shouldn't have asked for alot of the credit and loans that they did, the credit industry was even more hungry to give out these loans.

At the height of the bubble, I had companies cold calling me or sending junk mail offering an equity loan when I didn't even own a house. People who shouldn't have been able to get a loan were snuck through, and alot of the home offers were much more complicated than anything a normal person would be able to read or understand.

I'm not blaming this mess solely on "the corporations", but it was in their financial interest to make as many of these questionable loans as possible before the interest rates crept up and normalcy was restored. So it's not just a situation where you can put all blame on the consumers.

average 5 years, 6 months ago

George -

On the cars at high school. I'll agree wholeheartedly that most of them aren't necessary. On the other side, in '62 it was impossible to be 3 full miles on foot from LHS and still be in town. In '09, half the students at the two high schools are at least 3 miles from them, and it's possible to be more than 6 miles from your assigned school and still in town. Should many of them walk or take the bus regardless? Sure. But, don't pretend it's exactly the same as it ever was.

George Lippencott 5 years, 6 months ago

average (Anonymous) says…

Actually, I am not moralizing just observing. Comparisons are good only if you recognize the differences. I suspect that some would argue for public transportation.

MyName (Anonymous) says…

I am a personal responsibility guy. I know how to say no. Remember, it was public policy to make higher risk loans in order to increase home ownership. Also, remember this is a 10% problem - at least at this point. If we continue to talk down home values, we can surely make it a 25-50% problem

Where were our government appointed oversight actors? I believe our Congressional oversight fell to campaign contributions.

I just resent the broad-brush approach to blame. I bet more than half of us bear no guilt.

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