National disaster – when you read those words what comes to mind? Is it the US’ budget deficit, the raising of the debt ceiling, the floods, or the earthquakes happening in the US? Those are all national disasters, but to me the largest and by far the worst national disaster is the change in the savings system of Americans.
Back when our grandparents were young, Americans saved for what they wanted. They did not go to the local mall or store and pull out their MasterCard, Visa, or any other of the plethora of credit cards Americans have become accustomed to using. They pulled out cold hard cash and paid for the item. Theirs was not instant gratification. They saved and did not borrow. Their debt was low.
When did we become a nation that lived and depended on future earnings to pay for current wants? I think this happened right after World War II when the GI Bill was passed on June 22, 1944. Before then, the government stayed out of loan guarantees. Yes, the bill had some great intentions, but it also opened up the future for credit debt.
In 1950, Diner’s Club and American Express created something new “plastic money” better known today as the charge cards. In 1951, Diner’s Club issued the credit card to about 200 customers. The card could be used in 27 restaurants in New York.
In the early 1960’s, the London Transit Authority installed the magnetic stripe system. In 1970, with the establishment of standards for the magnetic strip, the credit cards became a part of the information age.
Americans embraced credit cards with a newfound passion! The beauty of the card was instant gratification. If you wanted a new TV, washer, clothes, whatever caught you fancy and you did not have the cash, why there’s the credit card. No longer did Americans have to save for their purchases, as their parents had done. They just used plastic money. Saving for these purchases was all but forgotten.
In 1944, Americans saved 26% of their income. By 1970, this savings dropped to about 14%. In the 1980’s, it dropped to 5-7%. In 1990, savings dropped to almost zero. Why the decline? It’s quite simple, really.
If Americans are charging everything their hearts desire, when the credit card bills come in they must pay those bills. Unfortunately, most Americans have several credit cards that are “maxed out”. When Americans receive their paychecks, they have to pay for their everyday living expenses (necessities) and their credit card bills. They end-up paying the minimum amount on their credit cards each month. This causes the credit card balance to never go down. They might also have student loan debt, high mortgages, home equity loans, car loans, unsecured loans, etc. After all the bills are paid, there is nothing left over to save.
Americans have mortgaged their future incomes by buying items on credit now instead of saving for them. We must learn to delay our instant gratification. We must go back to saving. Most importantly, Americans need to learn to get out of debt and to stay within a budget. Being debt-free is a liberating experience.
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