Are you addicted to debt?

American Personal Savings Rates

It’s no secret that we love to spend. Our personal savings rates have dropped into the negative range meaning that we are spending money faster than we can save it.

At the same time, the amount of consumer debt has increased dramatically over the last 50 years.

Just look closely at the charts on the left.

Over the past several weeks, I have noticed a disturbing trend that confirms the data depicted here. In each case, the amount owed on mortgages and credit card debt far exceeded my client’s income and cost of their residence.

Increase in American Consumer Credit

Try this exercise: First, write down the balances of the mortgages on your home and the balances of all your outstanding credit card debt. Add them all together.

Now write down the original purchase price of your home and the cost of real improvements to it (such as kitchens, bathrooms or additions - don’t count paint and wallpaper). If you have other substantial assets like retirement account or large bank accounts, add those in too. Don’t count automobiles. Add the purchase price, the improvements and your other assets together.

Is the first number larger than the second number? If it is, then you have spent more money than you have earned. Or put another way, your savings is negative and your spending has grown, just like these two charts. This may be an overly simplistic way of looking at things, but it may also be a warning sign that your personal finances are out of whack. It’s not be too late to save your finances, but it will take a serious change in lifestyle and spending habits to reverse the trend.