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Certain behaviors are apt to catch up to consumers.
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If you’ve ever experienced an actual hangover, you may be aware that too much of a good thing can have negative consequences the morning after. Such is the fate many Americans are now at risk of from a financial standpoint, though.
In a recent interview, financial expert Suze Orman explained that she’s worried that Americans are suffering from a “financial hangover.” Here’s why.
Too much stimulus aid and spending could catch up to you
Lawmakers were pretty quick to send stimulus checks into Americans’ bank accounts during the early stages of the COVID-19 pandemic. In fact, a big reason inflation has been such a problem over the past year and a half is that consumers found themselves with extra money to spend at a time when supply chains were slowing down. That disconnect between supply and demand allowed prices to surge.
Meanwhile, the Federal Reserve has been trying to fight inflation by raising interest rates. The logic is that if it becomes more expensive for consumers to borrow money, whether in the form of a loan or a credit card balance, they might start to cut back on spending, thereby narrowing the gap between supply and demand and allowing inflation to finally cool off.
The problem, though, is that consumer spending hasn’t slowed to a notable degree in the wake of higher interest rates. And so now, Orman is worried that all of the spending and borrowing consumers have been doing over the past year or so is going to catch up to them hangover-style — and leave them sorely regretting their decisions.
Making matters worse is the fact that 67% of Americans don’t even have the money in savings to cover a $400 emergency expense, as per a recent SecureSave survey. That puts consumers in even greater danger of negative consequences should they lose their jobs or start struggling to keep up with the existing debt they’ve taken on.
It’s time to cut spending and focus on savings
At this point, it’s clear that the Federal Reserve is not going to back down on interest rate hikes, so consumers should expect the cost of borrowing to remain expensive and keep rising. And that should serve as a wake-up call to change some financial habits.
Those without money in a savings account should make every effort to boost their cash reserves so they have funds set aside for emergencies. Thankfully, companies like SecureSave make it easy for workers to build emergency savings via their employers, through automatic payroll deductions. (And if your company doesn’t offer a program like this, talk to someone in your benefits department about putting one in place.)
Meanwhile, the time for consumers to stop spending extra and borrowing money is now. Consumer credit card debt rose to $930 billion at the end of 2022, reports TransUnion. That’s up from $785 billion just one year prior. With interest rates climbing, consumers should focus on paying off the debt they have and shoring up their finances so that if broad economic conditions start to decline, they’re not totally left in the lurch.
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