The temptations of consumerism coupled with the availability of easy credit may be the single most significant cause of financial failure in middle-class American families.
There are good reasons to take on long-term debt (buying a home, paying for a college education, etc.). But credit card and other forms of short-term debt can become a harmful habit, particularly in the current economic crisis.
Individuals and families who are most concerned about the cost of everyday goods are also the most uncomfortable with the balances on their credit cards, personal loans and other short-term debt, according to an ongoing research effort we have been pursuing since 2006. Our research, which assessed the financial behaviors, intentions and attitudes of thousands of American families making at least $50,000 a year, found that in 2008 only about one-third (35 percent) of survey participants overall said they feel very or extremely financially secure from month to month. And about one-third (34 percent) expressed optimism for their financial future.
But among those with high short-term credit debt, expressions of financial optimism sank to 20 percent. What's more, those most concerned about their debt are more likely to feel financially "stretched" from month to month.
Asking yourself these questions may help you make a more responsible decision when it comes to borrowing money:
- Is it necessary?
- Do the benefits justify the cost?
- Is it truly an investment?
Will it increase in value to justify the cost of borrowing?The reality of borrowing is the high cost of debt. Interest payments represent a double loss. There is the compounded interest on the loan, in addition to the compounded loss of earnings.
Debt exacts an emotional cost, too. Our lives are riddled with stress. The nature of debt acts to compound that stress. We forfeit our flexibility when we borrow, and this is truly the highest cost of debt.
Military families demonstrate a greater sense of emotional financial security than other middle-income Americans. Our research shows that in the throes of the current economic crisis about one in five military families say they intend to increase debt payments. In the third quarter of 2008, 22 percent of military respondents reported they will increase the amount they pay on debt, up 5 points from the first quarter.
If you feel that you've taken on more debt than you can handle, here are some helpful suggestions:
- Get a debt liquidation schedule
- Consolidate your debts
- Establish a budget and stick to it
- Stop unnecessary spending
Develop a plan for the futureMake a commitment to yourself. If it means short-term pain, try to visualize the long-term gain. Our need for immediate gratification is a strong force. We gain financial health by having financial balance. That is the key to financial freedom.
To get more advice on how to reduce your debt or use your credit wisely, visit Military.com's Credit and Debt center.