There are a number of relevant variables to study for insight into economic health. On a large scale, nations look at productivity, credit availability, employment data and a host of additional factors that influence economics. This broad sampling of economic indicators paints a picture analysts can use to set policy and establish business practices. But families often use information found closer to home, like savings, income, and liquidity to measure personal financial well-being. One statistic that interests both economists and household money managers relates to outstanding debt.
Businesses, national economies and personal financial managers share an important financial feature known as debt. Each entity borrows for unique reasons. In business, capital is borrowed for building infrastructure and covering supply-chain needs. Sovereign countries borrow money to keep pace with national spending and to balance international markets. Individuals and families use credit to cover short-term cash flow shortages, but most major borrowing is for capital buys like homes and cars. Student financing and credit cards also account for a substantial share of outstanding family debt, as well as other forms of financing taken-on to pay for home improvements, holiday travel and even medical expenses.
As families come to terms with budgets and household income, many are finding too much debt on the books. Collectively, the trend is worrisome for UK analysts, because outstanding financial obligations have grown to their highest level in years.
Debt Trends Heading in the Wrong Direction – Or are they?
Borrowing is a natural part of personal money management. In part, financing enables consumers to cover the cost of big-ticket items they’d be otherwise unable to obtain. Smaller-scale borrowing, in the form of revolving credit and short-term loans represents another discretionary category consumers control. For many families saddled with excessive debt, runaway discretionary spending and poor cash management are often to blame.
Household debt levels are trending upward, and they are growing at a rate unseen for a decade. The data can be viewed in a number of ways. Optimistically, increased debt levels could be a sign of improving economic fortunes, as consumers feel less pressure and fewer spending constraints. On the other hand, borrowing more money sometimes indicates a family is experiencing cash flow difficulties. In truth there is likely a mixed-bag of influences driving the numbers. Increased mortgage debt, for example, might mean young buyers are assembling adequate deposits and entering the housing market. Even increasing credit card debt doesn’t necessarily signify major shortcomings. Card users are currently enjoying highly competitive rates, which often leaves them with no added interest charges. As a result, more shoppers are turning to credit cards out of convenience, rather than absolute necessity.
Responsible Management Keeps Crisis at Bay
While analysts are quick to point-out how personal debt could lead to national catastrophe, no one is in a better position to keep you family afloat than you are. Successful debt management is at the heart of any comprehensive household financial plan. In addition to curbing unnecessary spending, attentive citizens also take measures to reduce outstanding balances.
Freeze Spending – When financial difficulty strikes (ideally before) it is important to stop spending money on discretionary items. Once your budget is back on track, it becomes easier to allocate resources. But in the meantime, adding purchases only complicates your debt problem.
Prioritise Payback – If you are like most debtors, your outstanding balances derive from multiple loans. In some cases, consolidation is the best approach, to reduce the number of payments you make each month. At the very least, prioritise your debt repayment to wipe the most costly balances first. It doesn’t make sense to pay ahead on your mortgage, for example, if your monthly obligations also include high interest credit card payments.
Evaluate Loans – In addition to consolidation loans used to simplify repayment, some debtors also find relief by changing the terms of their existing loans. Refinancing your home, for example, could lead to significant monthly savings due to lower interest rates and longer payback periods.
Personal debt management is a crucial function of household cash control. And though UK debt is rising among individuals, the trend may not be due to entirely negative influences. In part, the uptick may relate to growing consumer confidence and willingness to take-on financing. Regardless of what is behind the surge, making the most of your money includes prudent payback and responsible financial management.