US Credit Card Debt Hits $1 Trillion - Analyst says YAY! CONSUMER CONFIDENCE!

originally posted by: Aazadan

originally posted by: tinner07
Yep that's me. I dont live beyond my means though just paycheck to paycheck it seems. Plan on correcting that though. I have a used truck with 323k miles on it, I used Cadillac CTS thats almost paid off.

Paycheck to paychek is beyond your means. You should be living far enough below your means that you can make the following budget:

Saving - 30%
Housing - 18% (if you own, this should include 3 mortgage payments per month)
Utilities - 8%
Food - 15%
Tranportation - 8% (gas, insurance, maintenance, and car payment)
Insurance - 15%
Other - 6%

In addition you should be sitting on two years living expenses in available credit, one years expenses in semi liquid assets, and another 6 months expenses in cash.

Less than that is living well beyond your means.

Completely unrealistic, I doubt 1% of the population would have anything like that.

originally posted by: ScepticScot
Completely unrealistic, I doubt 1% of the population would have anything like that.

Why is that unrealistic?

Because very few people will be in a position to save 30% of net salary or hold 18 months of living expenses in liquid assets.

Also unrealistic to have access to that much usable credit. You would expecting the average UK person to have access to about 30k credit. No one living on, the budget you suggest would get that.

originally posted by: ScepticScot
Because very few people will be in a position to save 30% of net salary or hold 18 months of living expenses in liquid assets.

Also unrealistic to have access to that much usable credit. You would expecting the average UK person to have access to about 30k credit. No one living on, the budget you suggest would get that.

People with good jobs can do it easily. Maybe the problem then is that people are going into the wrong careers or leave school too early with too little education to be able to get a proper wage?

originally posted by: Aazadan

originally posted by: ScepticScot
Because very few people will be in a position to save 30% of net salary or hold 18 months of living expenses in liquid assets.

Also unrealistic to have access to that much usable credit. You would expecting the average UK person to have access to about 30k credit. No one living on, the budget you suggest would get that.

People with good jobs can do it easily. Maybe the problem then is that people are going into the wrong careers or leave school too early with too little education to be able to get a proper wage?

That is based on median UK Salary.

If your suggested budget is for only those significantly above that then I am not sure its much use.

originally posted by: incoserv
Am I weird? I mean, I only go into credit card debt when I am in a pinch.

Credit is a tool, I am in the process of remodeling my kitchen, Home Depot gave me two years interest free and the appliance store did the same thing. Instead of taking the money out of my account I can use their free money and pay it back at my leisure. Now my money can still work for me while I use theirs at no cost.

originally posted by: ScepticScot
If your suggested budget is for only those significantly above that then I am not sure its much use.

No, everyone should follow it. I get that at a certain point it becomes impossible, for example if you're making $15,000 per year in the US you cannot get away with 18% of income as rent because even a cheap place with roommates will likely run $6000/year. But, that's only true of people at very low incomes. By the time you start hitting the 33rd percentile or above (which doesn't take much) such a budget can be utilized provided you don't succumb to lifestyle inflation.

Lifestyle inflation, which is what happens when you use additional income to fund a fancier lifestyle, is the real budget killer. If you can live on $15,000 then you can live on $30,000 and put 15k of that into savings, or even increase your lifestyle slightly to $20k and put 10k of it into savings which would fit that budget just fine.

originally posted by: schuyler

It's a completely misleading statistic. I put $1K on my credit card this month. It's counted as debt. At the end of the month I'll pay it in full, like I always do. No more debt. No interest paid.

Good point.

'Rachel from Card Services' likes to robo-call me about my absurd travel-related charges (some times up to $12K a month) to pay them down when the company does this automatically. it shows as debt but never accrues interest.

originally posted by: AugustusMasonicus
Credit is a tool, I am in the process of remodeling my kitchen, Home Depot gave me two years interest free and the appliance store did the same thing. Instead of taking the money out of my account I can use their free money and pay it back at my leisure. Now my money can still work for me while I use theirs at no cost.

Credit is very convenient. My biggest problem with taking debt like that is that I like the freedom of being debt free. If I were to have a big kitchen remodeling bill coming up, it locks me into needing to keep my current job or finding a better paying one. I like my job now, but a big part of why I like it is that I have the freedom to choose to do it, I don't carry any debts that force me to work it. If I wanted to I could walk away from my job today, travel the world for a couple years, and not have any financial obligations holding me down.

That freedom tends to cost me more money, but it keeps me happier.

originally posted by: Aazadan
That freedom tends to cost me more money, but it keeps me happier.

I had the freedom to pay cash for the material and install, they both just happened to be handing out free money, so instead of paying cash I took the credit like any smart person would. A couple of quick credit checks was all it took.

originally posted by: Aazadan

originally posted by: ScepticScot
If your suggested budget is for only those significantly above that then I am not sure its much use.

No, everyone should follow it. I get that at a certain point it becomes impossible, for example if you're making $15,000 per year in the US you cannot get away with 18% of income as rent because even a cheap place with roommates will likely run $6000/year. But, that's only true of people at very low incomes. By the time you start hitting the 33rd percentile or above (which doesn't take much) such a budget can be utilized provided you don't succumb to lifestyle inflation.

Lifestyle inflation, which is what happens when you use additional income to fund a fancier lifestyle, is the real budget killer. If you can live on $15,000 then you can live on $30,000 and put 15k of that into savings, or even increase your lifestyle slightly to $20k and put 10k of it into savings which would fit that budget just fine.

Sorry but I think your figured are completely unrealistic.

Take housing at 18%. For the average UK person this would give a budget of about £345 a month. The only places in the UK where you would find a 1 bedroom for that you would have little chance of earning near the median salary.

Similar with the rest of your figures.

The only saving I can see is that the average UK person would pay less in insurance.

a reply to: ScepticScot

Rent is really the biggest item that busts the budget, that's no different in the US. There are cheap places to live though, you just tend to give up things like safe neighborhoods and yards. But that means my argument is that most people cannot reliably afford those things in the first place.

originally posted by: Aazadan
a reply to: ScepticScot

Rent is really the biggest item that busts the budget, that's no different in the US. There are cheap places to live though, you just tend to give up things like safe neighborhoods and yards. But that means my argument is that most people cannot reliably afford those things in the first place.

Don't get me wrong, in an ideal, situation I think people should be able to save a significant % of income.

However if having the capability to financially protect your lifestyle means your lifestyle sucks, even at above average earnings, then I think there is something significantly wrong with the system that individuals budgeting better will do nothing to address.

a reply to: ScepticScot

It's not so that you can financially protect your lifestyle. The idea is to prevent lifestyle inflation. In an era where purchasing power is declining by at least 7% per year (and possibly more) as is the case in the US it's a bad idea to increase your living expenses if you ever want to do things like travel, retire, own property, or increase your socioeconomic status.

It's a bit different in the UK, you have an actual social safety net. In the US we have a limited unemployment system, an even more limited welfare system, and little to no free health care, to say nothing of education. If you want your kids to get a good education you need to start saving before they're born. In todays dollars you need about $250,000 for a good college and $150,000 for grade school so that's $400,000 you need to come up with. If you start when your child is born that's $20,000 per year you need to set aside for education. Then you've got health care which will cost you at least 1 million out of pocket that insurance won't cover over your lifetime, in addition to your premiums. Then there's random unplanned expenses that pop up like your car going bad or needing massive repairs that cost 10's of thousands.

If anything I'm underselling how much one needs to put aside in savings.

a reply to: Aazadan

A fair point that in the US your savings would include buffer for medical expenses and potentially further education funding.

I still think you are probably unrealistically high for, savings, but not by as much as I was calculating.

The problem is that individuals have very little ability to protect themselves from either economic downturns or gradual real erosion.

Paradox of thrift kicks in. If you think your real income will decline over next few years the rational thing is to start saving more. However if two many people start doing the same then real incomes decline faster as the economy goes into downturn.