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Hitting Your Personal Debt Ceiling

BOSTON (MainStreet) -- While we chide government officials for how they have handled the nation's debt ceiling, many Americans are guilty of similar problems and have the opportunity to learn from Washington's mistakes.

While the government crashes into its $14.3 trillion borrowing limit, households across the nation are struggling with their own debt ceiling.

Households and governments both, generally speaking, spend too much, rely too heavily on borrowing and need to strike a balance between incoming and outgoing money. According to Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP, the issues elected officials must tackle to get public finances into shape are "distressingly similar to those faced by indebted consumers."

"The total amount of debt outstanding for American consumers -- and that takes into account mortgages as well as revolving debt, auto loans and so forth -- is up there in the double-digit trillions as well," Blayney says. "We've got debt on all sides of us. Our government owes money and we owe money. We are a nation of debtors."

As people look critically at Washington, "we are looking in the mirror and seeing ourselves," she adds.

All that debt leads to poor financial choices.

"When you get to the point where you are prioritizing the bills, having to make choices about what to pay, you know that you are in real trouble," Blayney says. "Even if we pay the minimum payment on time to allow us to pay our other bills, we are paying interest charges that are accruing. People are having to pay 18% or more for not being able to pay their bills on time."

Blayley offers five suggestions to rein in overspending and borrowing that can relate to people as well as to government:

1. Set a reasonable budget.
"Our leaders are in a wrestling match about budgeting, but most consumers, I would say, do not have good budgets," Blayney says. "It really does take some hard looking at."

While politicians argue over discretionary and nondiscretionary spending -- and what budgets should or should not be cut -- households face the same debate.

"One person's 'want' is another person's 'need,'" Blayley says. You really have to look at your budget and be scrupulously honest in terms of what are wants and what are needs."

For a personal budget, expenses need to be in sync with earnings.

"It may mean downsizing, it may mean selling, or a number of things," she says. "The point is that we all l need budgets. We all need balanced budgets. The answer always lies in balance."

Pointing out that the best, most rational decisions are seldom made in times of crisis or up against a deadline, she says that budget needs to provide for building savings and an "emergency" fund for a job loss or other financial calamity.

2. Keep the costs and benefits of borrowing in the same period.
Whether it's a night out on the town or keeping the lights on in federal offices, long-term debt should never be used to pay for things you enjoy or use today. These costs should be paid in full now, not carried forward into next month or a future election cycle.

3. Good credit is more than just the ability to borrow money.
"Credit has become synonymous with trustworthiness," Blayney says.

Without good credit it's difficult to get a job, rent an apartment or maintain status as a dependable trading partner or global economic power.

4. Manage the loopholes.
There is a lot of fine print to take into account, whether in tax code or your credit card agreements.

"We cannot keep our focus on just the going 'rates' when it comes to our debt -- the special situations matter, too," Blayney says. "For Congress, this requires careful examination of all the special deductions and allowances that limit our tax revenues. For consumers, it requires understanding all the hidden fees involved in using credit."

5. Take a multitiered approach to debt control.
The debate on Capitol Hill notwithstanding, there is no single solution to ongoing deficits; both more revenue and less spending need to be considered.

For consumers, reducing debt effectively may require several simultaneous strategies: managing income, investments, taxes and spending as well as revising overall financial goals.

Blayney adds that everyone should be mindful of how an eventual resolution to the debt ceiling debate -- and long-term policy moves -- might affect them.

"What they decide at the macro level could have a troubling impact on how we manage our own finances, especially if interest rates skyrocket for mortgages, credit cards and other forms of business and personal credit," she says. "The American government is not too big to fail, and the American consumer is not too small to listen."

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