Debt burdened Americans already struggling to find ways to make ends meet are forced to contend with further economic woe in the face of an economic decline notable for its unusual severity. On April 29, 2009, the Washington Post reported that “the U.S. economy contracted during the first three months of the year at one of the fastest rates in 27 years.” Unemployment is continuing to rise, reaching near crisis levels in some regions. Some experts predict yet another wave of foreclosures and credit card delinquencies and defaults are creeping upwards to record breaking levels. Despite these negative trends, however, careful planning and a proactive attitude can help consumers to weather this economic storm.

According to an April 29, 2009, article in the New York Times, the sharp first quarter decline is due to the fact that “companies cut their capital investment at an annual rate of 38 percent, and cut their inventories at a pace of $103.7 billion as they rushed to reduce their costs. Business investment in software and equipment declined by an annualized 33.8 percent, and investment in new structures was down 44.2 percent.” These factors have contributed to falling GDP numbers, with the last quarter of 2008 seeing a 6.3 percent decline and the first quarter of 2009 seeing a 6.1 percent fall. The New York Times article noted that a contraction of this degree hasn’t been seen in the United States since 1958 and said that, in light of these circumstances, unemployment can be expected to continue to rise from the current rate of 8.5 percent to a national figure of 10 percent.

However, a 10 percent national rate could mean much worse for various regions. While the current unemployment rate is said to be 8.5 percent, numerous regions are already experiencing double digit unemployment rates. In fact, California’s governor has formally issued a proclamation declaring the unemployment situation in California to be a state of emergency, as the rate pushed past 11 percent in March 2009. There are many who dispute the accuracy of current unemployment rates, considering them to be artificially low, as current statistics used to figure the unemployment rate do not include the broader measurements that used to be used, such as the number of people working part time because they cannot find full-time work.

Struggling consumers are having trouble paying their bills. Credit card debt delinquencies and defaults are on the rise, reaching record numbers, according to data recently released by Fitch’s Charge-Off Index. Kelly Edmiston, senior economist for the Federal Reserve Bank of Kansas City, according to an April 23, 2009, article in the Kansas City Star expects “a second, punishing wave of home foreclosures is poised to strike,” due to another set of adjustable rate mortgage resets due to soon occur. With the economic circumstances what they are, many simply cannot bear more.

One of the primary factors in the lack of resiliency in the budget of the average American, resiliency essential to being able to handle fluctuations in the economy at large, is the massive burden of debt that has been accumulated over the past decade. This record breaking level of debt, accompanied by some of the lowest rates of personal savings in recent history, has greatly reduced the financial freedom of movement of the average person. And, much of that debt burden isn’t even productive debt, but rather mere consumptive debt.

Thus, one of the best things a person can do in preparation for the economic challenges most expect that we are yet to face, is to restore financial freedom of movement by taking a proactive role in dealing with debt and spending patterns. Increasing personal savings and reducing debt should be high priority. Revamping the budget with an eye reducing spending in order to apply it to those goals is the first step. For those with high interest credit card debt, it may be worth considering debt consolidation, especially if a missed payment or two has pushed credit card interest rates up above 20 percent.

Current economic circumstances are indeed difficult, a state of affairs that is expected to be with us into the near future and, perhaps, even beyond. That makes it important to review spending habits with an eye on how best to minimize the effect of the overall economic situation on personal finances. Taking steps now to reduce debt and increase personal savings is a smart way to help increase the financial flexibility necessary for successfully dealing with economic challenges.

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