AmericansLiving Beyond Their Means
AmericansLiving Beyond Their Means
Dueto the increasing consumer credit in the United States, majority ofthe poor and the middle class Americans are now living beyond theirmeans, marked by an increased level of debt (Garon, 2012). Accordingto the U.S Bureau of Economic Analysis, it estimated an increasingnumber of people living above their means. From the year 1993 to2008, there has been a decreasing trend in personal savings as seenin the majority Americans. It was noted to have reached the lowestlevels falling for the first into negative territory since the greatdepression in 2006 (Garon, 2012).
Thispaper seeks to find out the effects caused as a result of Americansliving beyond their means in order to fit a particular lifestyle. Itexamines in great detail the series of consequences brought about bythe extreme levels of expenditure assumed by the majority of Americanpopulation according to the past and the present statistics (Garon,2012).
Theresearch method used is case study and books. For instance, in a bookauthored by Kelly (2008) shows that the prevailing financial mess islinked to the heavy reliance on use of credit. Currently the highrate of irresponsible lending has caused the fall of subprimemortgage fiasco and the Wall Street. Several factors facilitateoverspending which stems from the fact that consumers make too manyassumptions. American consumers pressing problems arise because ofan inability to look ahead and an increasing trend to assume that thefinancial future is already set thanks to the federal and corporatebenefits (Kelly, 2008).
Beforethe great depression the saving rates had significantly reduced butthe household savings rates increased up to 6.9% in May 2009, thehighest recorded since 1993. This improvement was attributed to ahigh amount of consumer debt following major borrowing binge duringrecession period, it came as a great lesson to Americans to stoptheir spending and close their wallets (Garon, 2012).
Despitethe understanding by the majority to increase savings and reducedunnecessary expenditure Americans still fall prey of overexpenditure. They are yet to come to terms with their spendinghabits. A recent poll of about 3000 Americans showed that half ofthem spend more than what they earn a number of months each year(Garon, 2012). In turn, about 10% claimed to live beyond their meansand therefore they are facing a number of effects brought about bythis kind of lifestyle (Garon, 2012).
Itis more than obvious that the average Americans are living beyondtheir means. It is estimated that majority spend $1.33 for everydollar they earn according to the Census Bureau and an average creditcard debt of $8,700 per household according to the Federal Reservestatistics (Kelly, 2008). At the end of the depression period in2008, approximately 4.79% of the Americans credit cards were notrepaid. Even though most learn the importance of savings and livingwithin their means, the tendency by the majority of Americansreverted back into costly lifestyles which made saving an uphill taskdespite the fact that the economy is undergoing recession periods(Kelly, 2008). Currently majority of Americans are putting away lessmoney in saving at every pay period, even though they had saved arecord of nearly $80 billion in December 2008 when compared with anypreceding months, as seen from the data contained in the CommerceDepartment (Kelly, 2008).
Theconsumers are losing more on the market and the trend is set to spendfurther due to the prevailing poor economic times. An obligation iscreated to buy as much at the point a campaign is made that lowconsumer spending negatively affects the economy (Garon, 2012).Majority of the consumers are enticed by the retail sales, theoffered discounts leverage on the vacation packages and other gooddeals to engage in an enormous spending spree.
Themain cause of too much spending is caused by the creditaccessibility. Credit is considered a lingering problem due to itseasy accessibility by majority of the starters who cannot afford it.Consumer credit is perceived to enhance savings in theory, termed asold-fashioned savings-and-loan bank (Garon, 2012). It is understoodthat people save, and in turn allows others to borrow, the bankslevies the borrowers interests and in effect add the earned intereststo the saver’s account. Principally it worked this way in the past,but nevertheless rarely does it function that way currently (Garon,2012). According to Schiff, an economist by profession has termedthat Americans do not encourage savings which in turn has broken thelink between savings and credit resulting from the negative savingrate coupled with the growing consumer credit (Garon, 2012).
Thebaby boomers expected retirement, will see the complete usage ofpublic funds due to a large number exhibited by this generationreaching approximately over 70 million. At the moment about 50million people have received retirement benefits from social securityas determined by the government of the United States (Kelly, 2008). What is more is the fact that even the small contributions made tothe 401(k) will offer less benefits to support a long term retirementlife (Kelly, 2008).
Thesavings made as the retirement package plan are often used by suddenbig expenses which pop up along the way in such activities asmortgages, cars and college tuition. Majority of people focus on asingle area of their finances and altogether neglect the otherimportant areas to the point they will be severely affected with nomoney to use for this life event once they arise (Kelly, 2008). Thuspeople find it easy to rely on credit to survive those times. Theseand other factors leads to overspending and perhaps the only way outof the trap is to learn the rule of paying oneself first beforespending, consequently spending less than what is earned(Kelly,2008).
Thehabit of overspending and living beyond what one cannot optimallyafford leads to a number of consequences. Payment of additionalinterest is the obvious effect of overspending, it implies that anindividual continue to add new debt to an already existing debt load,this makes it a burden to be repaid in full once the bill arrives(Kelly, 2008). It leads to an increase in the amount of dollarcharged as the interest as a result of surging outstanding balance tobe repaid. The situation is worsened when the balance is continuallycarried forward from month-to-month on an individual account. Thisis seen when people boast about their ability to purchase an item onsale in order to pay for it overtime, forgetting the fact this woulddeplete any of their available savings (Garon, 2012).
Theexcessive spending habit by the majority of people will ultimatelylead to a diminished future borrowing power. Owing to an increasedlevel of debt, the Money lenders would prevent further applicationsby new creditors. That in essence would act as a stumbling block tocredit access by the genuine Americans set to establish well-payinginvestment or further expand the existing ones and thus able toincrease the amount of revenue. A situation where the citizens in acountry are not able to tap into new credit marks a hard time thatsignifies an economic slump. It is a situation that must be watchedcarefully and avoided by all means (Garon, 2012).
Onthe other hand, the increased expenditure leads to a diminishedfuture buying power. An agreement to purchase a product on creditmeans that the customer will be able to settle the debt at a latertime using the money that is yet to be earned (Kelly, 2008). It isthe utility of tomorrow’s money to carry out the expenses of todayand this makes up what is termed as the future spending (Kelly,2008). When one Lives beyond their own means for a long period oftime leads to lower credit score. This is characterized by latepayment, skipping of payments and using a high percentage of opencredit which in combination brings about a decrease of theall-important credit score (Garon, 2012) .
Gettingnew lines of credit in an attempt to save more money on any newpurchase serves to decrease the credit score in addition it raisesthe temptation of an individual to increase spending. A life markedby an increased level of debt interferes with the quality of life.This is because debt is a daily problem which disturbs people fromeffectively performing their jobs and their home-life, potentiallyaffects marital strife and often interrupts sleep (Garon, 2012).
Individualswith a high level of overspending have been termed as the number onecause of personal bankruptcy. Upon occurrence of medical emergenciesoften can easily leads to a household becoming bankrupt when it isalready ailing from financial problems due to overspending. Manyeconomists believe that the leading cause of bankruptcy in the UnitedStates is overspending and generally the tendency by many householdsto live beyond their means (Garon, 2012). It is wrecking both theindividuals and households finances which set a fertile ground forbankruptcy cases when adverse events such as illness or layoffstretch the budgets beyond sustainable limits.
Topon the list is the debt to income ratio, which raises the probabilityof one filing bankruptcy by about 50 percent upon occurrence ofmedical conditions and illnesses. After an excessive overspending theconsumers strategically choose to file bankruptcy rather than beingforced into doing so by adverse events (Kelly, 2008). From theanalysis it follows that majority of the people do not generallyadjust spending in a bid to avoid bankruptcy. The households thatoften file bankruptcy have been found to live high standard lavishliving that requires more resources to sustain. Studies indicatethat more than five percent of the households that file bankruptcyown at least one luxury vehicle (Kelly, 2008). It is closely followedby the mortgage debt which rises in bankrupt households and creditcard debt usually is equivalent to an individual entire year income(Kelly, 2008). In the event consumers overspend and live beyond theirmeans generally would lead to bankruptcy because of their inabilityto repay their debts (Kelly, 2008).
Inessence overspending in today society will ultimately leads todevelopment of stress to an individual in the long term (Garon,2012). It often occurs when an individual spend money on purelysomething which is impulsive and unnecessarily required that leaveslittle money to be spend on something altogether important intomorrow’s life (Garon, 2012) . For instance, $30 impulse buyingtoday implies that one would stay in debt a little longer and wouldbe required to pay an additional interest along the way.
Oncean individual is stressed as a result of spiraling debt, one wouldnot be mindful as otherwise would be. Under normal circumstances whenan individual is making purchases, as a consumer they would bemindful and able to recognize the temptations of making more therequired purchases (Kelly, 2008). But when an individual is stressedthe prudent judgment used when making purchases is replaced by littlesubtle cues that sap the full attention and in effect moreunnecessary purchases are made (Garon, 2012)..
Livinga life that exceeds the ability of an individual to afford normallybrings about this stress, owing to the increased level of debt thattranslates to little savings. The stressful state of an individualleads to more unplanned expenditure. On the contrary wise spending istrue when an individual is experiencing low level of stress (Kelly,2008).
Itis apparent from this analysis that majority of Americans are yet tolive a life of saving for the future. The main reason for the lowlevel of saving is the perception by Americans that they are notmaking as much money as before. Currently, the issue of most livingbeyond their means is still a pressing one they have increased thelevel of debt and consequently have no savings because of morespending to sustain their lavish lifestyle (Garon, 2012). Going bythe statistics conducted by the University of Michigan, that almost aquarter of all families have no liquid assets, the savings requiredto be quickly converted into cash, shows there a need to sensitizefamilies and individuals the importance of savings and living withinthe means of an individual’s (Garon, 2012).
Itshould be understood by most the dangers of overspending. Thus it isa prudent move for Americans to understand the means with whichfinancial challenges arise primarily due to unwise spending of money.The Americans should be wary of overreliance on use of credit, by allmeans they should minimize purchase of products on credit (Garon,2012). Much emphasis should be placed on planning, that is to obtainonly the required needs and avoids acquisition of luxurious itemsthat would need the use of credit.
Therefore,when one fails to put in place appropriate plans to prevent lavishliving, it would result ultimately to overspending which has severalnegative effects to the life of an individual. These consequencesinclude the increased debts levels, increased amount of interest tobe repaid, diminished future borrowing power and decreased futurebuying power among other effects (Garon, 2012). Therefore, Americansmust master the art of savings and prudent use of credit to avert theresultant consequences of overspending.
Garon,S. M. (2012). Beyondour means: Why America spends while the world saves.Princeton, N.J: Princeton University Press.
Kelly,R. (2008). Thenational debt of the United States, 1941 to 2008. Jefferson,N.C.: McFarland & Co.