THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.
Less than a month ago, the stock market seemed to be breaking all-time highs every day single day. Bitcoin had been on a tear through December, although it has fallen back to earth recently. But, it is still up 900% from a year ago.
Even though the market has recently tanked and risen again, the economy had been doing fairly well over the last couple months. Unemployment is low at 4.1%, according to the Bureau of Labor Statistics. Meanwhile, market wages are starting to rise. The average raise for 2017 was 3%, and appears that that figure may rise at a similar rate for 2018.
With the low unemployment and rising market wages, consumers are clearly feeling confident as credit card debt has reached a record high of $1.023 trillion. As most of you know, when people feel good about the future of the economy they are more than happy to spend money they don’t have. Conversely, when the market is uncertain, consumers tend to pull back.
Credit Card Usage
What do you think people were using their credit cards for? According to Google search trends, many people were looking to buy Bitcoin with their credit card, which peaked in mid-December. Don’t believe me? Check out the chart below.
Interestingly, the last time debt levels were this high was in 2008, when the U.S. economy was in the Great Recession. So, should we be worried that we’re headed back into a recession?
At the end of 2009, consumers were delinquent on 11.9% of their total debt. In contrast, today’s consumers are delinquent on 4.8% of their debt.
While consumer debt has risen, the delinquent rate isn’t nearly as high it was previously. However, that doesn’t mean that everything is okay.
According to the latest data as of December 2017, the average American household with credit card debt, had a balance of just under $16,000. On top of that, 35% of Americans only have a couple of hundred dollars in their savings account. 34% of Americans have no savings at all. It’s clear that if there is a hiccup at all in the economy, we could all be in for some bad news.
Heather Boushey, the executive director and chief economist at the Washington Center for Equitable Growth, says, “This is not a marker we should be super excited to get back to…in the abstract, more debt signals optimism. But in reality, families are using debt as a mechanism to pay for things their incomes don’t support.”
One of the tragic aspects of this is that nearly 1/3 of households in the U.S. report that they had a major unexpected expense within the last year. Of those that had a major expense, nearly 50% had an expense that was $2,500 or more. Nearly 30% had an expense that was $5,000 or more.
The biggest cause of these unexpected expenses were medical bills. In fact, medical bills are now the number one cause of personal bankruptcies in the U.S. today.
How can we avoid some of these hardships?
According to Greg McBride, chief financial analyst at Bankrate, “Everyone should strive to have at least six months’ expenses socked away for the unexpected.”
While the Great Recession is now close to 10 years behind us, I fear that we may be making some of the same mistakes by foregoing our emergency funds and borrowing money to invest in things like Bitcoin (versus borrowing money to invest in real estate in the 2000s). You may not be concerned that consumer debt is at a record high, but things can unravel really quickly.