Feb. 15, 2009 -- There's no doubt that the average American lives beyond his or her means.
We spend $1.33 for every dollar earned, according to the Census Bureau. We carry an average of $8,700 in credit card debt per household, according to the Federal Reserve. And 4.79 percent of our credit cards were delinquent at the end of 2008.
And we might not even be saving despite the fact that the economy is in recession. Even though in December 2008, Americans saved nearly $80 billion more than in the previous month, according to the Commerce Department, we might not be putting away more cash each pay period at all. That $80 billion is likely much smaller when subtracting money saved because of sold assets, such as stocks.
While consumers are losing on the market, we're encouraged to spend more as the economy worsens -- we're made to feel obligated to buy when we hear that a dip in consumer spending hurts the overall economy. Sure enough, sales at retailers, discounts on vacation packages and other never-before-seen deals all equate to many of us spending too much money.
Why do we have such a strong urge to overindulge?
Lingering Credit Problem
For starters, credit is still too easily available to those who can't afford it, according to Andrew Schiff, an investment consultant at Darien, Conn.-based Euro Pacific Capital.
In theory, consumer credit should be a function of savings--hence the old-fashioned savings-and-loan bank. The concept is, essentially, that some people save, allowing others to borrow, while the bank charges the borrowers interest, adding earned interest to the saver's account. Unfortunately, that's rarely how it works these days.
"Americans don't really have any savings," says Schiff. "The negative savings rate, combined with growing consumer credit, has broken the link between savings and credit."
Indeed, relying on credit is one of the main reasons we're in this financial mess. From the subprime mortgage fiasco to the demise of Wall Street, the current recession can only be blamed on irresponsible lending.
"We've been on a binge," says J. Scott Spiker, chief executive of Fort Worth, Texas-based financial services firm First Command. "And the hangover is going to be very painful."
Spiker says there are several other reasons behind overspending, explained in First Command's January 2009 Financial Behaviors Index, a quarterly report based on a monthly survey of 1,000 U.S. consumers, aged 25 to 70 with a household income of at least $50,000. The simple explanation is that consumers make too many assumptions.
One of our most pressing problems is an inability to look ahead, says Spiker. We assume our financial future is set, thanks to corporate and federal benefits. But paying social security for 40 years doesn't mean a swift return.
Once the baby boomers retire, public funds will be quickly used up because of the size of this generation, which exceeds 70 million, Spiker says. Right now, just 50 million people receive retirement benefits from social security, according to the U.S. government. What's more, small contributions to a 401(k), while beneficial, won't be enough to support a long retirement.
And even if we are saving up for a lengthy retirement, other big expenses pop up along the way, such as college tuition, cars and mortgages. Many people focus on one area of finances, neglecting the other so badly that there's not enough money to go around once these life events arise. People then rely on credit to get by.
All of these factors put together result in overspending. The only way to avoid it is for consumers to change their mindset. The old rule of thumb, while uninspired, might be the only thing that truly works: Pay yourself first, says Spiker.
"Spending less than you make is what's important."