Debting: The American Way of Life

Increasingly, American consumers are finding themselves forced to use credit cards just to get by until the next paycheck arrives.

If it isn't the winter holidays, it's Mother's Day, or the back-to-school season. Throughout the year, consumers are pressured to spend money that they don't have. The experts say that consumer spending boosts the economy, but the writing is on the wall:  In the U.S., we're already spending way too much.

Credit cards out of control

According to the Federal Reserve, the average household had almost $8,500 of outstanding credit card debt in 2007. Assuming a 14.99 percent interest rate, that $8,500 means an obligation of $100 per month in interest alone. The debt also drains monthly cash flow to the tune of about $255, assuming that the credit card company requires a minimum payment of 3 percent of the outstanding balance. 

As if those numbers don't say enough, a recently released study conducted by BIGresearch indicates that many Americans are increasingly uncomfortable with their own debt levels.  Roughly 46 percent of respondents, whose annual household income was less than $50,000, said that their existing debt level was too high. At that same income level, more than 60 percent of respondents admitted that things get pretty tight between paychecks.

These consumers aren't making nearly enough money to save for emergencies; a good number also believe they don't make enough to meet regular obligations. Without an emergency fund or an income surplus to cover extra expenses, people are using credit cards just to make ends meet. It's a dangerous trend, particularly in the face of heightening concerns over the state of the U.S. economy.

Tough choices: Cutting costs and debt consolidation

Living the paycheck-to-paycheck lifestyle isn't workable for the long term. Consumers seeking greater financial stability will have to make some tough decisions going forward. In the most simplistic terms, they have three options: reduce expenses, earn more, or both.

Spending can be cut back in several ways.  People should look to cut or replace unnecessary habits first. Examples include packing a lunch instead of eating out, or keeping store-bought snacks on hand to avoid the vending machines. A next step can be to identify ways of reducing necessary expenses. Coupons can reduce grocery costs, for example, and carpooling can minimize gas pump stress.

For some, debt consolidation might also be an option. An appropriate debt consolidation program can reduce monthly financial obligations and free up cash that can be directed into a savings account.

If the spending cutbacks and debt consolidation don't create enough breathing room, some will have no choice but to work more. Earnings from an extra part-time job can be funneled into debt repayments. Eventually, the debt can be reduced to the point that the extra job is no longer necessary.

No matter what time of year it is, or which holiday is around the corner, consumers should remember to follow the golden rule of household finance: If you can't pay cash, you can't afford it.