Over-Consumption of Personal Finance - Essay Example

Essay of the of the Number Over-consumption of personal finance The tendency of middle families and individuals sinking in debt at an alarming rate has earned criticism from various economists and sociologists all over the world. According to Frank, growing luxury fever has forced middle-class individuals and families to finance their over-consumption, resulting in depleting savings and increased debt. It has been observed that presently people exhibit inclination towards spending extravagantly on designer clothes and shoes, electronic equipments and automobiles and holidays and outing. They have no control over their desire, which shows that in event of over-consumption, individuals suffer from a complete deficiency of willpower. Among all countries, the situation has become very common and continues to worsen in America. According to various researchers, millions of American families are on the verge of bankruptcy because of huge unpaid bills. It was observed that those who manage within their means are saved from this situation, while those with a carefree life with luxurious indulgence are deep in debt. The over-consumption of personal and family earnings has led to deterioration of public services such as, education, social services, public safety and recreation. Critics suggest that with this sort of spending, these families can never recover from the debt pitfall. Economic studies show that even a generation ago, families did not have the over-spending tendency as that displayed presently. The over-consumption scenario aggravated with time, when employment increased and women as well as men started earning. Earlier, when men were only bread-earners of the family and women had taken care of house-hold activities, consumption was low while the savings were high. The trend indicates that if women from these families start working, then savings will improve. On the contrary, real data illustrates that with growth of employed couples, savings declined and frivolous expenditure had increased. The data from 1980s show that married women and mothers were more involved with their family and children and only few worked. These figures had reversed by 2000. Moreover, it was further observed that women started working within six months of child birth. According to Elizabeth Warren, while real income of men grew over years by about 1 percent, total household income got a boost of 75 percent because of working females (Zhu 1-37). It is ironical that even though total income of families has risen dramatically, propensity towards saving has reduced greatly. By 2000, individuals were saving a very meager amount of their earnings compared to that done a generation ago. The most surprising fact is that people are not only spending their earnings, but also that they are not. Currently, American families have turned out of to be a nation of spenders over a nation of savers. Studies show that saving and debt has become inversely proportional. People have not stopped spending even as their ability to do so have hit the bottom and presently, their purchase are mostly based on credit cards. It is a disturbing scenario that millions of people with proper education and full-time occupation are on the verge of financial breakdown. The consumption and spending pattern of families in recent years have proved the statement that excess in any aspect proves detrimental. When comparative analysis was done with data of about 20 years, it was noted that families are spending moderately well on designer products, fancy restaurant meals, expensive furniture and home décor; but to some extent, less than the amount they spent a generation ago. This fact raised questions regarding whereabouts of the spending and further study revealed that people are spending excessively on mortgages, health insurances and cars. It has been observed that the proportion of people who spend around 40 percent of their earnings on the mortgage of house has increased alarmingly over time. In developing countries like, America, it is quite difficult to afford a house on single person’s income and it takes that of two to support the charges. In addition, cost of health insurance has been on a consistent rise and majority of families do not opt for health insurance program, unless covered by their employers. The third reason for over-spending is personal vehicles. The amusing fact is that families and individuals despite having one car, are inclined towards purchasing a second car for almost no reason and also that the car have to be branded. In addition to big cars, families are also persistent on spending more on standard safety measures for their children. With rise in cost of living, the taxes have also increased, thereby greatly contributing towards high expenditure. According to the two-income trap model by Elizabeth Warren, middle-class families are on a financial cliff because of their subjective perception. They relentlessly increased their budgets (for house in sophisticated neighborhood, fancy schools and so on) considering two sources of income, while overlooking growing instability in the job market. Professor Warren suggested that in order to reverse the current situation, families should shift to less expensive neighborhoods that suit their budget, children can be sent to community colleges and state universities and individuals should take care of their health so as to avoid paying high health insurance charges (Warren, “The Over-Consumption Myth and Other Tales of Economics, Law and Morality”). Essay 2 Justification on paying down debt as a good investment For years, the choice between investing and paying down debt has bothered investors as it is a tough decision. Interestingly, it is one of the few easy decisions that an individual can make in his/her life. Every person has some debt in their life, ranging from house mortgage, credit card bill, insurance payments, educational loans, car loans to medicine bills. It has been often observed that individuals prefer to invest their money to earn a return than paying the same in reducing their debt value. Only recently, paying down debt has been considered as good as any investment. According to Forbes, a debt should be evaluated just like an investment. There are two main parameters on which debt can be evaluated: rate of after tax interest that is to be paid on an existing debt and the after tax rate of return that will be earned on a proposed investment. If the interest rate is higher than the rate of return, even if the return value is best by market standards, it is better to opt for payment of debt as this will only mean saving more for the future. During the tough call, one can always ask an introspective question that whether paying down the debt at present is a good decision, considering that in future, they would no longer have to make loan payments. It has been observed that with growing instability in the economy, every lending company is charging high interest on borrowed fund. With job insecurity and growing recession, it is never a good idea to let the debt value to grow. No one enjoys paying unpleasant amount of money to the lenders during their retirement. It is true that paying down debt is not a liquid option as investments. Then again, it is also not reasonable to use the returns of investment in future to pay off the debts. In addition, with growing days, debts become more expensive. Slowing down investment activities to pay down debt is not a bad idea as this also entails some return. One may ask about the nature of return, but avoiding interest is also a kind of indirect earning. In urban areas, financial misery is seen to occur because individuals borrow for supporting their generous expenditures, while their income is utilized for investment purpose. Often people indulge in huge investment without sufficient fund to meet their current debt. Hence, it is necessary that budget is prepared in such a way that current debt payments are met before investment is done. Keeping in view the growing job insecurity, it is necessary to pay off debts as early as possible as every day, companies retrench employees for cost cutting purpose. Failing to meet payments related to debt affect the credit rating of individuals and they become entitle to pay additional charges. Even so, investment can be preferred over paying down debt when either the rate of return is higher than interest rate or the amount of debt is less and payable by individuals. It is advisable that individuals invest more towards their retirement fund as opposed to mutual funds and others. It is a common trend in the market that for quick and high return, people make higher investment in equities and stocks. There are individuals who feel that they will utilize their highly anticipated return to pay off the present debt. As a result, they invest their current earnings. It has been noted that many people lose their money during market fluctuation and in the process, fail to meet the liabilities as well. People with high debt in the market should utilize debt snowball technique to pay off their debts. Debt snowball is a technique where an individual initiate with paying off small debts followed by bigger debts. Similar to huge gain on investment, this technique also makes individuals feel accomplished. Another important consideration is tax implications. The debt interest is tax deductible, which means that individuals usually pay less interest than the stated interest rate, whereas return that is earned by individuals on investment is received only after tax is paid on the earnings. Except for retirement investment, all other investments are subject to tax charges. Therefore, one needs to properly evaluate their earnings, keeping the realistic charges in view. There are a few considerations that individuals need to realize before selecting paying down debt over other investment options. Most investments are liquid in nature; that is, they can be converted in cash or cash equivalent when needed. In addition, some investments are flexible in nature, but paying down debt is comparatively inflexible. After making down payment in a loan, the same money cannot be borrowed at the same rate when needed. While taking payment of debt in account, an individual needs to look beyond the rate as explained by Forbes. According to Forbes, a number of benefits, such as, mortgage insurance and refinancing at lower rate, are often attached with loans and debts, which are waived off once down payment is initiated. Furthermore, individual tends to invest heavily in taxable income sources after paying off their debts without considering the tax factor. Hence, prior to considering paying down debt as an investment, it should be evaluated from different perspectives (“Paying down Debt: Often the Best Investment”). Works Cited “Paying Down Debt: Often the Best Investment.” Forbes. Forbes, 2012. Web. 06 June 2014. Warren, Elizabeth. “The Over-Consumption Myth and Other Tales of Economics, Law and Morality.” Yale. Yale, 2004. Web. 06 June 2014. Zhu, Ning. "Household consumption and personal bankruptcy." The Journal of Legal Studies 40.1 (2011): 1-37. JSTOR. Web. 06 June 2014. Read More