The nation's nagging recession and high unemployment rate seem to be exacerbating a problem Americans have been grappling with for decades: How to handle their credit.
For the first time, the bankruptcies filed are expected to hit the 1 million mark--up more than 20% from a year ago. About 90% of bankruptcies are personal, as opposed to business--filed by individuals who find themselves so indebted that they have no way of paying all of their bills. And industry experts maintain that individuals are getting into financial trouble more quickly--some before they even graduate from college.
The roots of these ills are wide-ranging. Credit is more readily offered to younger people. The recession has caused thousands of individuals to lose their jobs. And some, who are still working, have suffered pay cuts or loss of overtime hours as companies grapple with sluggish consumer spending and lackluster earnings.
But some industry experts contend that the biggest problem is simply that Americans don't bother with financial basics.
A recent survey by Visa U.S.A. shows that only about one in four people actually sets--and sticks to--a monthly budget. Only two in 10 bother to plan more than a year ahead when setting their financial goals. More than one in 10 "never" balance their checkbooks.
These facts have become so troubling that three of the nation's biggest credit card companies have launched consumer education programs in recent months. These programs are largely geared to high school students, but the basic concepts are applicable to nearly everyone. They almost always start with setting up a budget--"the cornerstone" of financial planning, experts say.
How do you establish a budget?
For most people, the process starts with writing down how much income they have coming in, what they spend it on and how much they have left to save. But some industry experts maintain that consumers would be better off starting the process backward, by looking at their savings and why they want to save.
In other words, first set long- and short-term financial goals. Figure out what those goals will cost, and then, when you start writing down your income and expenses, keep those goals in mind.
The point of this is motivation. Everyone has some discretionary spending. You go to the movies, out to dinner, or buy new clothes that aren't desperately needed. Individuals must remember that each penny spent today isn't available to meet tomorrow's goals, such as buying a house or a car or saving for school or retirement.
"You've got to get some kind of motivation to budget because it's tough," said Mitchell E. Kauffman, a certified financial planner based in Pasadena. "There is no right or wrong in what you spend. But people need to realize that if they make a decision to go to Las Vegas and blow $1,000 on a weekend, that money is going to come out of something else."
Kauffman suggested that when you start writing your budget, you should put expenses into five categories. The first should consist of basic operating expenditures--the amount you spend on rent (or a mortgage), utilities, home maintenance, car payments or transportation to get to and from work.
The second category is insurance and debt payments. Some would consider these basic operating expenditures as well, but they should be listed separately because some of these costs are negotiable. You might be able, for example, to lower your car or home insurance premiums by boosting your deductibles. Your total debt expenses may be reduced by consolidation of all the bills into one loan at a lower interest rate.
The third category is recreation and "advancement," Kauffman said. This includes entertainment-- going to dinner and the movies--gifts, vacations and travel, as well as charitable contributions, magazine subscriptions, tuition for continuing education and the like.
The fourth category is reserved for tax payments. Most people have the bulk of their taxes withheld from their paychecks, which makes some forget how much they're paying, Kauffman said. "People have told me they don't pay taxes because they get a refund every year," Kauffman said. When you keep track of exactly how much is paid out, you have a good idea of how much you can save through tax planning, he noted. And tax planning, he said, can be as simple as putting your long-term savings in a 401(k) or Individual Retirement Account instead of a certificate of deposit.
The final category is savings, not usually considered an expense. But financial planners say you should put a specific amount of money into savings--budgeted ahead--or you will never meet your financial goals.
After compiling a budget, you should keep a journal for a few months to see how accurately it reflects your actual expenditures. Use that journal to find areas where you should be saving more or places where your original estimates were faulty.
If you are disciplined about following your budget, you'll be far more likely to avoid future credit problems and meet your financial goals.