Debt Crisis: 5 Money Lessons Individuals Can Learn from the Debate

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Financial planners say families and individuals can learn vital lessons from the federal government's budget deficit and debt ceiling quandary. They note that if families were to behave the way the government does, the road to ruin would soon follow.

Although comparisons between a nation's debt and that of an individual are difficult, think about it this way:

The U.S. debt is roughly equal to its Gross Domestic Product -- the value of all goods and services produced in the country this year. It's a bit like making $100,000 a year and having that much in credit card debt. But that may be too gentle a comparison.

The goverment takes in $2.16 trillion in revenue each year, making the $14.3 trillion debt more than six times what's coming in. Viewed this way, you're making $100,000 a year but you've got over $600,000 on your credit cards. Ouch.

The U.S. spent $3.45 trillion in 2010 -- some 40 percent more than it collected. The fed's version of piling on more credit card debt is selling bonds -- that's what finances the deficit and creates the need to raise the debt ceiling once again so more bonds can be sold.

Paying down that gargantuan debt would take many years of sacrifice, especially when 40 percent of your income goes to servicing that debt. An individual, planners point out, would have to cut their spending severely to have any chance of digging out.

Mark Singer, certified financial planner and author of "The Changing Landscape of Retirement," said the most important lesson to be gleaned from the government's predicament is to not get to that position in the first place.

Singer says that if a new client in such a situation approached him for advice, he would first admonish, "You should have called me 30 years ago."

That brings us to our first and most important lesson for younger generations.

1. Plan ahead.

"We've been facing Social Security problems for the past 30 years. I would tell a new client, 'Why are you waiting until the last moment?'" Singer said.

Singer said there is not much a financial planner can advise if a new client wants guidance just before retiring.

"Come to me at least 5 to 10 years beforehand and we can be creative," he said.

2. Seek Professional Advice

"The only thing is that the client needs to accept the problem before they can solve it. I think we're still having arguments from both sides not accepting the reality of the situation," said Ted Schwartz, an ABC News columnist and Certified Financial Planner.

The U.S. government hasn't followed the simplest rule of financial planning: Don't spend what you don't have. The Treasury has warned the U.S. could breach its legal debt ceiling of $14.3 trillion on August 2.

Schwartz said if an individual spent 40 percent of their income toward debt as the government is currently doing, "you would be in very dire straits."

"It might be time to reach out to credit counseling advisors if there was a structure to improve your position," he said. Schwartz said sometimes credit counselors can negotiate with credit card companies to re-structure one's debt position at lower rates and ease the burden on devoting so much of their income to debt repayment.

"But to take 40 percent of income just to cover your debt, you would be in the deep weeds and may have to choose another club to get out of there," Schwartz said.

Singer said if the government was his client, he would seek an immediate, temporary solution.

"As a client, we would have to go into triage," Singer said. "We have to do whatever is necessary. If we cannot go bankrupt, or go into default, we have to come up with band-aid solution now, whether it's another 10- or 30-day extension."

Singer said the government or a client would have "to stop the bleeding."

"Then take a breath. Come back in a week or two. What are the things are we going to address? Address the pain."

3. Every Little Bit Counts

Singer said younger people may have the most to learn from the debt crisis when it comes to the importance of savings.

He advised that those in their 20s and 30s should put a little at a time, even $50 a week, towards their retirement. He said those dollars will prevent a difficult situation later, when a client must play catch-up to have enough money to retire.

"We've been facing this for years," Singer said. "Don't wait until the last moment. Make at least minor contributions to your retirement."

4. Explore Your Options

Beverly Flaxington, principal of The Collaborative, an advisory firm for investment advisors, said it's important to determine financial goals to make tough decisions.

"Every individual has to make difficult choices," Flaxington said. "I can try to increase my revenue, by getting a second or third job, but at some point we run out of opportunities. That's what the government is facing. We want to do many things but at a certain point -- we can't raise revenue enough to cover what we want to do."

Flaxington said in theory, the government could print money or raise taxes, but like individuals under financial strain, there are corresponding costs to those choices.

Declaring chapter 7 bankruptcy or chapter 13 bankruptcy could be options for individuals who are getting into deeper trouble with each interest payment, Schwartz said. Chapter 13 bankruptcy, for example, allows you to make certain missed payments and restructure your debts, while those declaring chapter 7 bankruptcy could potentially discharge debt for federal income taxes.

"The problem is it's not just a person, it's the largest person in the world," Singer said. "I have told clients they may be better off to declare bankruptcy. But it only affects them. If we declare bankruptcy, it has unbelievable catastrophic repercussions – not only for their family members but their cousins around the world."

5. Compromise

In order to reach a goal, Flaxington said it is important a family, or the government, reach a compromise about its spending and income.

"We aren't approaching this as families and some companies do -- with the same value set," she said. "We have to figure out what is the common ground on which we stand. What things can we agree on? I don't think we're seeing any of that with the debt process."