Bankruptcy. Foreclosure. Three years ago, these words would rarely appear on the front page of a newspaper; now, it is a daily occurrence. Let the finger-pointing begin. It was the bank's fault for lending to the now bankrupt borrower. It was the car dealership's fault for selling the car to the consumer that couldn't afford it. The credit card company suckered cardholders in with teaser rates.
Who is really to blame for Americans over-leveraging themselves with debt? I want to introduce you to the person responsible for your financial mess most of the time. OK, go to a room with a mirror. I will wait. Found one? Look closely at the person staring back at you —- the reflection is just as surprised as you are. Most Americans have made poor financial decisions and entered into transactions they could not afford and clearly did not understand. These purchase decisions were made as independent transactions, not an accumulation of events.
My dad was a Depression-era child —- not what we have now, but the real Depression when unemployment was at 25 percent and soup kitchens with long lines of men in suits waiting for a meal. My dad taught me that we cannot spend money we do not have. He had a simple system using envelopes. He would get paid, cash his check and divvy up the money into a series of envelopes. Cash he had budgeted for the week went into envelopes for necessities and other envelopes for saving for things he wanted. If there wasn't any money in the "wants" envelope, we did without. Debt was only used for long-lived assets. Houses. Cars. Period.
Comparatively, our generation has not seen debt it did not like. We have one of the highest levels of home ownership, yet many new homeowners have very little equity in their houses. Putting 5 percent down on a house does not make us homeowners. In essence, the bank is the risk-taker in these purchases. We buy a new car before we pay off the car we already have —- a car we already cannot afford. We simply roll the amount we owe in excess of the value of the trade-in into our new higher loan balances. And, our big-screen TVs look great in our houses we don't own. Do you get my point? As we entered into these transactions, we never checked our envelopes to see if we had any money to pay for the items we wanted. We did not check to see how much we were spending monthly and if we could afford the additional payment. We want, so we buy.
Before everyone gets angry with me for my opinion, I need to say that some people who did the right things up front still find themselves in bankruptcy or foreclosure. These are unfortunate circumstances. They did not plan on getting sick, losing their job or being asked to reduce their hours. This is not what I'm talking about.
In the face of such circumstances, we need to react to the new situation. Many of us are resistant to take a step back —- revisiting our priorities and changing our lifestyle. It is time to go back to our envelopes. Maybe going out to dinner is not an option? Cable is not a utility . . . it is a luxury. Does every member of your family really need a cellphone?
It is time to reprioritize and understand the difference between needs and wants. We need to learn from this recent severe downturn in the economy. We need to learn what our parents and grandparents already knew about managing cash flow. And after we learn these new skills, we need to teach our children and our government so that we can prevent it from happening again in the future.
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