Only a few weeks ago I was talking about the Australian household being overloaded with debt.
I imagine running up that debt has probably been a lot of fun, but paying it back becomes another story.
It’s not just hard on the borrower as they readjust their finances and finally cough up the dough for their purchases.
It can be very hard on us all because it can be the beginnings of deflation.
As people become concerned with the wider economic landscape, the more likely they’ll consider their own finances, meaning they pay down debt and forget spending.
A survey by ING Direct recently revealed this to be happening.
Between the March and June quarter, the ING Financial Wellbeing Index revealed credit card debt had fallen.
Which is good, but that’s the problem with growth based on large amounts of debt – it has to be paid back and when it’s paid back, then comes the fall out.
Money is diverted away from spending at previous levels; retailers slash prices to entice consumers to return, which then keeps a lid on wage growth.
Recent sluggish retail figures seem to confirm this.
Australian personal debt to yearly income is over 150%; in the US it peaked at 136% and now currently sits at 126%.
The US is currently going no where fast because people scared to spend are chipping away at their debt overhang, at the expense of the economy.
And it becomes a vicious cycle.
US house prices have fallen since 2006 and now can’t find bottom because buyers sit on the sidelines hoping to get an even better bargain.
Desperate sellers slash prices; while patient buyers wait it out.
Fingers crossed it doesn’t accelerate in Australia.
Sadly we often have to endure a practical lesson in financial turmoil before understanding saving will protect you, while debt can devour you.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we think we’re Australia’s best financial advisor. Want to learn more about the value of financial advice?
