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Economics

National averages for credit card and other consumer debt can be a good barometer of consumers’ financial capacity and goals. For instance, when debt decreases, Americans, as a whole, may be spending less and saving more. Of course, that’s a good thing.

So, when SmartAsset released its average credit card debt study recently, we took notice. The survey looked at median individual income and credit card data from 2006 to 2016. It even broke down the data by state!

trend

What did the survey find? Here are some of the topline results and what they might mean for consumers like you:

Americans were dropping credit card debt… but now they’re reversing that trend.

The data show that from 2006 to 2015, the average total credit card debt went from about $3,175 per person to $2,800 per person. Total credit card debt dropped — in every region except Virginia, Maryland, and Washington, D.C. — during this time period.

What does that 11.6% decrease mean? It’s hard to say exactly. But it could have been a result of the financial crisis, and people understanding how dangerous credit card debt can be during a time of personal financial upheaval.

During this time, though, there was a peak in the average credit card debt. In 2008, the average debt was $3,670, and the average American had debt equal to about 14% of their annual income! From that high point, we started cutting back on credit card debt quickly and efficiently. This is definitely a good thing.

So for several years, Americans were dropping debt at a significant rate. But then, a new trend happened.

The average credit card debt bottomed out at $2,730 in 2014, bouncing back up to $2,800 in 2015. Over this same time period, the total national credit card debt rose from $733 billion to $799 billion. So, is this the new normal?

It’s hard to say. But the report speculates that the Great Recession incentivized Americans to lower their credit card debt. But once the recession turned around, Americans seem to have forgotten the struggle and gone back to their old ways… taking on significant amounts of credit card debt.

What does it mean for consumers?

Boiling complex statistics, in a survey like this one, down to a few talking points is risky. The challenge is to avoid reading too much into the results. With that said, I think there are a few lessons that financially savvy consumers could take away from this study.

 

It’s all too easy to go back to bad habits.

What we see here in these trends is that, when given a big enough push, Americans are capable of buckling down and paying off debt. In some states, credit card debt levels shrunk by 30% or more, during and right after the Great Recession!

Necessity tends to breed discipline, in finances as in everything else. But when that necessity is no longer spurring you on, what happens? It’s way too easy to go back to former bad habits.

Time will tell whether the recent uptick in debt levels is a trend that will continue. But it does show that once the worst of the crisis is over, people may be willing to slide back to where they were before.

If you really want to change your habits, whether in the realm of personal finance, your health, or elsewhere, you have to keep going. And that means even after the crisis that spurred your change has passed!

 

We should all be prepared for the worst, at any time.

If consumers had known beforehand that the Great Recession was coming, do you think they would have had thousands of dollars in credit card debt lying around? For many, probably not!

It’s easy to live large when things are good, and not to worry too much about things like credit card debt. After all, you can afford the payments, so what’s the big deal? The problem is that you never know what’s just around the bend.

Illness, stock market crashes, job loss, and other disasters can strike at any time. While you don’t want to live in a doom-and-gloom mindset, it’s best to be prepared. And, financially, this means being as debt-free as possible and having emergency savings available.

 

Focusing on staying out of credit card debt is still important.

Personal finance blogs like this one have been around for decades now, but many people still need to go back to the basics. One of those basics is the importance of paying off credit card debt.

Sure, sometimes taking on credit card debt can be justified. But it’s important to pay it off as quickly and efficiently as possible. Otherwise, you run the risk of trying to pay down such debt while you’re already in the middle of a crisis.

So, what’s your story from the Great Recession? Did your credit card debt go down? Are you letting it slide back up again? Tell us in the comments.

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After a lull in the price of a barrel, we are seeing the cost of oil begin to once again increase. With it comes increased revenue and, in turn, money being pumped into both the stock market and the economy. So, is this good news for the average person? Well, the immediate answer is no, probably not.

It’s All Part of the Plan

Just a few weeks ago, the Organization of the Petroleum Exporting Countries (OPEC) — and even some countries who are not members of OPEC —  was able to create an agreement that reaches far beyond what many economists thought they could accomplish.  The goal? To reduce the supply of oil around the globe by at least 1.2 million barrels a day. Assuming the demand for oil remains unchanged (at least initially), the reduced supply will create a rise in price. This will, in turn, jump-start the oil industry.

As the price of oil continues to rise, it’s suspected that some of the countries involved will jump ship on the agreement. They may see the profits in front of them and begin pumping out more barrels than initially agree. So far, though, everyone is sticking to the arrangement and the price of oil has consistently risen since the start of the month.

No commodity is more discussed in the world of finance than oil. No commodity has more of an impact on your day-to-day personal finances than oil. Turn on any market-driven television channel, and I’m willing to wager that within 10 minutes, the analyst will have brought up oil at least five times. It’s a true driving force behind the global economy, and its shift in price can have drastic changes on you and your family.

Some economists are extremely bullish on oil predictions, saying it will reach $75/barrel before the end of the year. However, even the bears don’t see oil going anywhere but up (albeit slowly) for the next few months.

Now that the price of oil has stabilized and is steadily rising, is this good for your wallet?  Your future?

The Bad News

When the price of oil goes up, it affects the American buying consumer primarily in three negative ways:

The Price of Gasoline Rises – According to AAA, this week’s average price of unleaded regular gas is $2.21 per gallon.  This time last year, that price was $2.02. At its lowest point this year, the price was $1.62.  If you’re someone who takes an hour round-trip commute to work or drives the kids to football practice in the minivan, you will notice more money coming out of your wallet when you fill the tank.

Average Americans fill up w/ roughly 700 gallons of gas per vehicle, per year. Because of this, even a small increase of 25 cents per gallon will put you out an extra $200 or so per vehicle. You can mitigate this loss by owning a cashback credit card (some of which offer up to 5% rewards on gas purchases). Even after saving a little bit more there, though, rising gas prices are an inevitability of higher oil prices.

Price of Travel and Other Goods Rises – When the cost of gasoline goes up, the cost of goods also goes up. This is to coincide with businesses having to pay more money to get their goods to them.  And of course, that cost is passed on to you, the American consumer.

For example, a round-trip flight from LA to Chicago may be $110 today, but closer to $120 in two months when oil goes up another $5.  Truckers moving products across the country, grocery stores taking in daily shipments of produce… there is no shortage of consumer goods affected by a higher cost for oil.

Price of Heating Oil Rises – This is the one that impacts me the most, but overall impacts the fewest number of consumers.  I live in central Connecticut and every year, I buy between 700 and 800 gallons of oil to heat my home through the winter. My parents, who own a much older (and slightly smaller) home, purchase over 1,300 gallons of oil per winter. When oil prices go up, the price per gallon of heating oil also goes up.  The cost of oil is very similar to the cost of gasoline per gallon.

To combat these prices, I locked in a rate of $1.89 per gallon in July and prepaid for the winter. This should help me avoid having to pay inflated costs when the cold weather hits. However, I also lose the ability to pay lower costs should the price of oil go down.

The Good News

It’s not all bad, though, I promise.  When the price of oil goes up, there is a lot of good that comes from it, too.

Retirement Savings Accounts Increase – Because oil is a heavily traded commodity, it’s likely included in any retirement portfolio you own.  Whether it’s in a commodity mutual fund, or a direct stock ownership of Exxon Mobile, Chesapeake Oil, etc., higher prices in oil mean higher value in your portfolio.  As rising oil prices generally (and I say that loosely) means a stronger economy, it would also likely have an impact on the other investments you’ve made. So if the world is paying more for oil, and the demand for oil remains high, most investments are happy.

The Economy Grows – The oil industry is one of the largest in the world, and higher prices mean higher profits for oil companies.  These profits lead to the hiring of more employees to produce more oil (or expand the business in other ways, still hiring more employees). This means more jobs for not only American citizens but also abroad.

With more people employed, more money is spent inside the US economy. Goods that would not normally be purchased are now starting to move off the shelves.  My example is the most basic way in which the economy will see a positive effect of higher oil prices. However, there are countless other ways to quantify it as well. (For an added example of global wealth, Goldman Sachs provides perspective.)

The Government Doesn’t Get the Extra Revenue – When you see the price of $2.25 for a gallon of gas, you might assume that the money you pay the gas station stays with the gas station.  However, inside of that gallon is heavy taxes collected by both the US government and the state government.  Below is a map that shows just how much money you pay in “tax” when you buy a gallon of gasoline (as of January 2016).  The good news here is that these taxes are not based on a percentage of the gallon, but a flat amount. For example, the US government gets a flat 18.40 cents per gallon, no matter the cost of a barrel.  So, the added revenues earned by the gas station are revenues passed economically, without additional government taxes.

gas-tax-map

You’ll notice that the good news is very macro-themed while the bad news is very micro-themed.  When the cost of goods goes up, there’s just no way around having it immediately and negatively impact the day-to-day spending of the consumer.  So, whether or not the price of oil going up is good or bad for you likely depends on your current financial situation.

If you’re well-to-do with money in the bank, savings for retirement, and are secure in your employment (or your employment is oil pump-related), oil prices going up is a good thing.  It goes a long way to secure a stronger economy in the long-run and boost retirement savings.  However, if you’re currently struggling to make ends meet, and things like retirement seem like a dream versus a real goal, then higher oil only means less spending money in the near future. Either way, the rise in oil prices is likely to garner mixed emotions nationwide.

 

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Currencies work as a means of storing and trading value because the people who use them have faith in their value. Faith involves putting trust in an entity more powerful than oneself, whether that entity is a market or a government. Even when the value of money was based on a commodity like gold, its value required faith that everyone would value the commodity similarly. This is still a step removed from when money was based on something that had a value in its use to everyone in the community, like wheat.

Our willingness to put faith in almost any medium of exchange has led to interesting developments. The same concepts that allow us to use legal tender, dollars and cents in the United States, allow different communities to develop their own currencies. If you spend time in computer games — and many people spend a good portion of their lives socializing in virtual environments and “worlds” created just for entertainment — you might need to trade your “real” money for virtual currency that can be used in the game.

The developers who control the game also have control over the exchange rate — how much one unit of game currency costs in the “real world.” If the world is big enough, they can let the market determine the exchange rate. Virtual currencies are popping up everywhere, because from a commercial perspective, whoever controls the currency can pull profit from the exchange.

  • Facebook Credits operate in a manner similar to currency in virtual reality games. You can buy Credits to use in games and to trade for gifts online. Facebook determines the exchange rate and is also the “bank” where you store your Credits.
  • Bitcoin is likely the most popular virtual currency because it is invading on the territory of actual, legal tender. You can buy products and services in the real world using Bitcoins, often as a secondary option to cash and credit.

As long as everyone agrees on the value of a bitcoin or of any other manner of currency, does it make a difference whether people use a currency backed by the government or not for private transactions? Should anyone be concerned that transactions occur using a currency not produced and maintained by the government in power in the land or lands where the transactions take place? After all, if I wanted to buy, for example, a printer worth $100 from a friend, I could give him $100 in cash or I could trade with him using, for another example, a mobile phone we agree is worth about the same as the printer. Why not transfer $100 worth of bitcoins to him, as long as we agree on the amount?

Virtual currencies open the door for manipulation and money laundering, so the government wants to apply the same financial regulations to these virtual currencies. Traditional banks — entities that deal with the currency supported by the United States government — need to file financial reports to the government for transactions exceeding $10,000 or otherwise suspicious activity and keep accurate records of their business. So far, companies that buy and sell virtual currencies have no such regulations, and are thus more inviting towards criminals who would use such currencies for nefarious purposes.

In fact, transfers using virtual currencies can be anonymous, unlike large transfers of money using government-backed securities. You can “follow the money” to trace transactions back to a source, most of the time without difficulty, when dollars are in use; with currencies that allow anonymous transfers, it’s easier to hide the true source of the funds.

There’s no evidence of Bitcoin-funded terrorism or any large cases of money laundering that have been public so far, but the Treasury Department isn’t waiting around. They will start applying anti-money-laundering rules to virtual currencies and the companies that deal with them. The financial industry, through the American Bankers Association, is keen to ensure that regulations that restrict the free flow of money to and from all sources apply to all vehicles the same. That’s a concern that comes not out of overall security for the country and the well-being of innocent citizens who might be harmed by financial fraud, but for the sake of their own firms who don’t have to face competitors in an unregulated financial Wild West.

The Bitcoin Foundation is fighting the move by the Treasury Department to regulate virtual currency, citing the burden it would be for bitcoin merchants to comply with the new regulations.

My use of bitcoins extended to a few hours when the currency was gaining popularity. I tried using the service, which required running an application on my computer continuously. This seemed to be more that what would be necessary to use a currency, so I uninstalled the program and didn’t think much of it. Also, I haven’t played any games that required depositing “real” money to convert to credits to be used within the game — I always figured getting my money back would be more of a hassle than it’s worth to play the game. But “kids these days” are more apt than I to use their money — or their parents’ money — to advance their characters in these role-playing games that use virtual currency.

Should the government have the power to regulate virtual currencies? Are national security and the protection of citizens from financial scams good enough reasons to require the government’s involvement with these transactions? I see little functional difference between a transaction in dollars and a transaction in bitcoins, for example, so if we must abide by regulations for one, we should need to for the other.

Wall Street Journal

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Do you reward your children with money for performing well in school? Do you use the promise of an allowance to ancourage appropriate behavior in the family? These are big issues, because they take appropriate behavior and can turn the incentive to financial gain. Children growing up believing that financial gain is the reward for correct social behavior rather than seeing the intrinsic benefit.

The idea that everything has a financial value seems to have become more prevalent over the last two decades, according to a new book. In What Money Can’t Buy: The Moral Limits of Markets by Michael J. Sandel, the author argues that our trend of attributing market thinking to an increasing array of behavior could be detrimental to society.

The book has not yet been released as of the time of writing this article, so I haven’t read it yet. A review in Fortune Magazine is inspiring me to pre-order the book before its release.

The author notes how Americans are now more comfortable with marketing or selling things they might have not in the past. Selling ad space on foreheads, accepting money for branded tattoos, and paying students for each book they read are a few examples of things that might have been unthinkable a few years ago. I would add that the pervasiveness of the Internet has made some of this possible, when it comes to selling ourselves. Through the democratized ability to self-publish, people can easily market themselves without much effort. If you get enough attention, some company also looking for attention would be happy to pay you to do something newsworthy, like slapping a brand on your car for a year.

With the popularity reality television, the idea that anyone can become famous — not just for fifteen minutes but for an entire television season — and wealthy (think: Kardashians) is enticing.

Here are some thoughts from the Fortune Magazine review of the book:

The price we pay for this behavior plays out in several ways, Sandel argues. First off, poorer people are impacted disproportionately by the commercialization of personal space. How many affluent people are lining up to turn their houses or bodies into billboards? In this way, the decision to sell isn’t necessarily as independent and free as it may look. In a society increasingly driven by financial power, moreover, the wealthy hold even better hands than they would otherwise. Why bother encouraging your kid to study hard if you can simply grease his path into Harvard or Yale with the promise of a massive donation?

The more emphasis we place on money in society, the more power society gives to those who have it. I don’t think that today’s plutocratic oligarchy is too much different than western society in most of recent history, however. Those with money have always had the power. We like to think of government in the United States as “of the people, for the people, by the people,” but the Founding Fathers were mostly wealthy and mostly represented the wealthy, though several did their best to be sympathetic to those who were not as fortunate.

It was difficult to leave all old-world philosophies behind; property owners were afforded more rights than those who did not own property. A subtle class distinction still persists between homeowners and renters today.

Political and societal power has always been focused on an elite group of people who have the most money. This is why social change — giving the right to vote to all adults rather than a select few, extending human rights to all citizens rather than a select few, etc. — is only successful through revolution. Those with power and money aren’t much interested in sharing.

At times, market principles put in place to make an altruistic act look even more attractive do just the opposite. Sandel cites the case of a small village in the Swiss mountains called Wolfenschiessen that was once a candidate to house a nuclear waste site. When surveyed by economists, a majority of residents said they’d accept the site as an act of civic duty. The economists then added money to the equation, offering the residents as much as $8,700 each to accept the waste site. At this point, support for the deal plummeted among the villagers. From their perspective, the cash turned a sacrifice for the greater good into a plain old bribe.

Money changes the equation, whether used to encourage someone to do the right thing — who then learns that doing the right thing should always be rewarded the compensation — or to encourage someone to do something that would otherwise give him or her pause.

Fortune Magazine laments that the book does not offer any alternatives for a way of living that does not suffer from over-commercialization. Were wealth not to provide an individual so much power, it couldn’t be used as an effective incentive for changing someone’s behavior. Is there a way for the United States to hold onto the capitalism that’s such an important piece of the success of its individuals and the nation as a whole while taking money out of the power equation?

Also, how far will you go for money? Everyone has his price. Would you sell your body parts? Your kidney for $1,000? Your foot for $100,000? Your arm for $1 million? Would you kill someone for $100,000? For $50 million? For $1 billion? Morals may stand in the way to an extent — but that extent is most likely broken at some level.

Fortune Magazine

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Local Currencies to Replace the Dollar in Communities

by Luke Landes
Dollar currency

It may be illegal for states to print money for commerce, but local communities have no such restriction from the federal government. And in some communities, local currencies have been successful, at least in gaining the support of some retailers and consumers. There’s no law of nature that says that an economy functions best when […]

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Buy a Meal at Panera, Pay What You Want

by Luke Landes

In the movie Clerks, the convenience store cashier, Dante, occasionally takes a break from manning the counter. Rather than ensuring every customer paid for his or her items, he leaves a sign: “Please leave money on the counter. Take change when applicable. Be honest.” Dante believes customers assume they are being watched and will leave […]

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Thinking is Not Enough

by Frank Curmudgeon

This is a guest article by Frank Curmudgeon, author of the Bad Money Advice blog. For updates from Frank, subscribe to the Bad Money Advice RSS feed. We often see the struggle to get control of our spending as being the conflict between our emotional and logical selves. Emotion wants to go out to that […]

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