How To Break Your Bad Financial Habits

Author: Daniel Harris

While the U.S. economy may be distinguished by contradictory data and trends, there is a perception that it is beginning to showcase tangible signs of growth. The statistics concerning consumer debt in the U.S. best reflect this expansion, with households managing to reduce their liability by 1% during the first financial quarter of 2013.

This drove cumulative household debt down to its lowest level since 2006, and has helped to dramatically improve the economic sentiment in the U.S. Tentative growth in the labor market has also created a more positive outlook among consumers, as the national rate of unemployment fell from 7.9% to 7.6% between January and April this year.

The Dangers Posed by Soaring Consumer Confidence
Questions concerning the validity of job market growth in the U.S. have provided cause for concern, however, especially in terms of its capacity to sustain the current rate of consumer spending. According to statistics released by the Department of Labor, low-paid temporary jobs accounted for more than 55% of the 175,000 employment positions created in May, as the ranks of the rising poor have continued to swell. Despite this, consumer confidence has soared from 69 to 81.4 during the second financial quarter, which suggests that some households may be spending disproportionately to the amounts that they earn and their long-term financial prospects.

With this in mind, it is important that consumers spend within their means and work hard to correct any errant financial behavior. If the current level of economic growth is to be maintained and improved upon, citizens must play their part by heeding the lessons that were taught by the Great Recession and subsequent periods of austerity.

Eliminate Emotion and Sentiment from Financial Decision Making
It is clear that improving economic sentiment has an impact on households, as it introduces emotion and impulse into the typical consumer's financial decision making. For individuals who like to indulge in emotional spending as a way of improving their mood or self-esteem, positive economic sentiment encourages them to act on impulse and purchase big-ticket or unnecessary items. As the current state of the U.S. economy proves, however, positive sentiment can be slightly misleading, as it may mask underlying issues in the labor and financial markets. It is therefore wise to make expenditure decisions based solely on your own financial circumstances, paying particular attention to your annual income, expenses, nature of employment and long-term fiscal goals.

Distinguish Between Actual Wealth and Credit
During the peak of the recent recession, revolving credit card debt accounted for approximately 98% of all household liability. While consumers have strived hard to diminish this debt and use their plastic wealth more responsibly, credit card borrowing has risen by $6.6 billion since May and even triggered a 4.1% rise in retail sales during the last month alone. This news is largely positive for the economy, although recent history suggests that today's consumers must make the clear distinction between corporeal wealth and credit if they are to avoid incurring cyclical debt. More specifically, citizens should avoid making short-term credit card purchases that are disproportionate to their monthly salaries, as this ensures that they can repay their balance each month and avoid the accrual of long-term debt and interest.

Embrace a Frugal and Sustainable Lifestyle
There are often clear parallels between government and consumer spending during periods of recession, as harsh austerity measures may often be applied to compensate for spells of irresponsible and disproportionate spending. These two extremes are likely to trigger fluctuating periods of boom and bust in an economy, or leave households struggling to accumulate wealth and achieve long-term financial stability. There are some economies that may offer an example to consumers, however, with the Australian model renowned for its resilience and capacity to sustain growth during periods of stagnation. This was most evident during the recent recession, when banking institutions were managed conservatively and capital was invested into supporting long-term reforms rather than short-term solutions. Consumers can learn a lot from this, as responsible lending and the development of a long-term, frugal lifestyles can help to create financial security.

The Bottom Line
If the global economy is to achieve long-term growth and avoid the unenviable cycle of boom and bust, it is vital that government bodies and citizens heed the harsh lessons of the previous recession. The approach to spending is particularly important, especially among consumers who have previously borrowed money irresponsibly or spent outside of their existing means. By being responsible in their approach and basing spending decisions on relevant facts and personal circumstances, however, it is possible for citizens to correct their behavior and enjoy a more financially secure existence.