Many economists look at the state of the economy with cautious optimism. Certain macroeconomic indicators such as unemployment or inflation have improved in 2023. The problem lies in the microeconomic indicators, with a decrease in consumer savings and an increase in credit card debt. According to a recent study, in cities, seven out of ten people live paycheck to paycheck. Can we put a stop to this mounting indebtedness?
Paycheck to paycheck
Although inflation has decreased, the prices of certain products remain high. This, combined with low wages, makes it more difficult to cover monthly expenses such as rent and basic utilities. Many families are using their savings to make ends meet.
By May of this year, 69% of consumers in urban areas were living paycheck to paycheck, which is 25% more than their suburban counterparts, of whom 55% live this way, according to a new report by LendingClub.
The alluring credit cards
Carrying cash is becoming less common, and obtaining a credit card is relatively straightforward, which is convenient for consumers, but it comes at a price.
In an attempt to curb inflation at the macroeconomic level, the Federal Reserve (FED) has raised benchmark interest rates, which makes money more expensive, i.e., loan and credit card rates increase.
By July, the average credit card interest rate was 22.5% for new customers and 20.7% for existing accounts, according to WalletHub. These are extremely high rates, and they can multiply if the customer falls behind on payments. Last year, these figures were 18.9% and 14.6%, respectively.
What's the problem? Many households, in order to maintain their lifestyle, have resorted to depleting their savings or increasing their credit card debt, leaving them in a vulnerable economic situation. Living paycheck to paycheck puts families at risk of bankruptcy if an unexpected event occurs.
The idea of continuing to spend as usual and paying “later” is tempting but dangerous for a family's financial health.
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How much do you know about saving, investing, and finance?
A problem associated with excessive or unnecessary spending is the lack of a family budget. Having a clear understanding of available funds and spending limits is crucial, but why do many households neglect to create a budget? Perhaps the key lies in our limited financial education.
According to the 2021 Financial Education Survey by the National Foundation for Credit Counseling, almost half (44%) of adults in the country rated their personal finance knowledge as poor, a 5% increase compared to the results of the same survey in 2009.
What to do?
There are many websites on the internet where we can learn about personal finance for free, one of them being www.mymoney.gov/es, which provides valuable information in English and Spanish.
Organize your debts, know how much interest you are being charged, and with this information, create a plan to pay off high-interest debts as soon as possible.
Let's resist the temptation to use credit cards excessively or make purchases that we cannot afford in a single payment. Proper financial education is essential to avoid being caught in an unforgiving financial system, which often prioritizes profits over people.