Don’t raise your personal debt ceilingPublished 5:59pm Friday, October 7, 2011
Unless you’ve been hiding under a rock, I don’t have to tell you that the issue of the federal debt ceiling and our out of control spending have put our nation in a serious bind.
So, what happens when we bring those cash flow and spending problems down to a personal level?
Today many boomers and seniors are struggling with these same issues but on a much smaller individual and family level.
Unemployment, underemployment, rising food and gas prices, and the steady stream of our monthly financial obligations can make our lives very challenging.
Many people have already depleted current savings or spent retirement savings trying to meet their expenses and a growing number are again turning to use of high interest credit cards to keep things afloat.
What’s also sad is that some people are behaving like the government.
They are raising their personal debt ceiling by borrowing from their future by using their IRAs, 401(k)s, bonds and retirement savings to maintain their current lifestyles rather than reducing expenses wherever possible. The problem with doing that is that individuals, unlike the federal government, will eventually run out of money.
According to the U.S. Census Bureau, the average credit card holder has approximately $5,100 in credit card debt, and based on an 18 percent interest rate, pays $800 or more per year in interest on that debt. That’s about $66 per month per cardholder, and wouldn’t that money be better spent on food and household bills than on interest?
What about home equity loans?
If you are fortunate enough to be in a home that is now worth more than you owe on it, borrowing against the equity to pay off credit cards, make a large purchase or meet monthly expenses might seem like an easy way to deal with temporary financial challenges.
Actually, you’re trading unsecured for secured debt and putting your home in jeopardy in the event you are unable to repay the loan.
Tap into your home equity only for maintenance and repair projects that are absolutely necessary, such as repairing a leaky roof or replacing a broken heating or air conditioning unit.
Avoid borrowing against retirement. Withdrawals from your IRA or 401k accounts before reaching the age of 59½ are almost never a good idea. In addition to early withdrawal penalties and that the amount you withdraw may be taxable income, you also reduce the money you will have available to you at retirement time.
Here are some alternative ideas to raising your personal debt ceiling:
Give up name brands for generics at the grocery store when possible
Compare prices at grocery and discount stores to maximize savings on necessities.
Bring your lunch to work and skip the morning $4 specialty coffee stop
To some people, these measures may seem draconian. But if the alternative to living within your means is the difference between keeping your home, having food on the table and a car to drive, versus bankruptcy or foreclosure, belt tightening may not be too much to ask of yourself and your family.
These are tough times, and there are, unfortunately, no simple answers.
Ron Kauffman is a Geriatric Consultant & Planner in private practice in Henderson & Polk Counties. He is the author of Caring for a Loved One with Alzheimer’s Disease, available at the Polk County Senior Center. His podcasts can be heard weekly at www.seniorlifestyles.net. You can reach him at 828-626-9799 or by email at firstname.lastname@example.org