According to a recent article by Reuters, the total revolving or installment debt charged by American consumers recently reached a staggering record of $2.8 trillion. This record level of debt was reached after an increase of $19.6 billion in just one month - the sharpest one month increase in over a year. Having survived a job loss during the "Great Recession," this rapid return to the use of credit by consumers is one trend I will not follow.
Prior to the recession and my job loss, I did carry some balances on a few credit cards. After an extended illness and lengthy unemployment, I exhausted all of my savings, including my retirement savings. I also narrowly escaped the loss of my home after my lender accelerated my mortgage and began the foreclosure process when I ran out of money to make my payments.
Thankfully, we were able to save our home by contacting our lender and making a one-time catch up payment. The money for this came from what little was left of my retirement savings. Even with this last bit of savings, we would not have been able to make future payments and would have still lost our home if I hadn't finally found a new job after being unemployed for two years.
We are just now beginning to rebuild our lives after this financial catastrophe, and even though things are looking up, and even though I get tired of scrimping and saving, I can't see us returning to the lives that we once lived where we carried a balance on our credit cards and "treated" ourselves way too often. So, how are our lives different and what are we doing to not follow this recent trend of returning to credit card and other debt?
Keep One Credit Card for Rewards and Emergencies and Pay Off the Balance
We have one credit card now, which we only use on purchases we were going to make already, so that we earn rewards points. We make payments online within a day or so of the charge so that we are within the grace period. This way, we earn rewards points but aren't accessed any interest for carrying a balance.
Create and Stick to a Reasonable Budget
The illness and unemployment truly wrecked our finances. To get back on track, my husband and I sat down together and created a budget for each week and month. We do things that we all know that we should do to save money. We've stopped eating out and we bring lunch from home to eat at work. We've changed the types of things that we do for entertainment, and now we go on more walking or hiking trips where we can enjoy a picnic with food we cook ourselves rather than eat out at an expensive restaurant. We've looked into free cultural activities in our area, such as the weekly movie night that is offered for free in the park in our town and other similar events.
Plan for a Rainy Day because When it Rains it Pours
By strictly following a reasonable budget, we've been able to work on re-establishing some of our savings goals. The first goal was to save enough for an emergency fund of $500 to be used for unexpected repairs. We were able to fully fund this after just 6 weeks of following our new budget.
I am now self-employed, so I don't have the benefit of an employer sponsored 401(k) or retirement. We've worked on increasing my husband's contributions to 20% of his pre-tax pay.
Even with increasing his retirement contributions, we've also opened separate savings accounts to save for my retirement, a fund that will eventually contain 6 months' worth of our living expenses, a fund for housing maintenance and a modest fund for a trip to the beach next year. Each of these accounts is slowly growing, but it's a lot easier to find money to save when we aren't carrying a balance on our credit card and having to pay the interest charges.
Like many Americans, things are looking up for us financially, but this change for the better isn't a green light for us to resume the conspicuous spending that was so commonplace for many before the recession. Surviving the loss of my job taught us that it pays to go "against the herd" if that herd is resuming its charge over a financial cliff.
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