According to the latest report on consumer debt put out by the Federal Reserve, the US consumer debt is over $2.5 trillion. Each year the amount of credit card debt in America climbs higher and higher. Why is American credit card debt spiraling out of control? Well, there are several reasons for the yearly increase in the US consumer debt.

One reason Americans are going deeper into debt is because salaries have not increased enough to meet rising inflation. The 2007 Trends in Earnings Variability Over the Past 20 Years report by the U.S. Congressional Budget Office (CBO) stated that approximately “one-in-five saw their earnings fall 25 percent between 2002 and 2003, and about one-in-seven saw their earnings fall by” a decline of more than 40 percent. This significant decrease in earnings for Americans means while the price of gas, food, groceries, clothes, utilities and other basic necessities goes up, the average salary just isn’t keeping up.

Another reason the US consumer debt is rising is because credit card companies spend billions each year on gaining new customers and increasing rate limits for current customers. The average credit card debt for Americans is over $9,000 and even with the current credit crunch, the continuous stream of credit card offers continues to flow.

However, credit card offers don’t mean the recipients have to sign up. Credit card debt in America wouldn’t be growing at the rapid pace it is if consumers were more realistic with their budgets. The attitude of our society has become “I want it now, though I can’t afford it, so I’ll charge it.” If consumers exercised more discipline in their spending, the credit card debt in America would reverse its current course.

Regardless of the reason you may be in credit card debt, you need a solid debt reduction option. Credit card debt consolidation and debt consolidation loans are similar methods of debt relief that can benefit consumers with good credit. Debt settlement and bankruptcy are viable debt reduction options for consumers with bad credit.

US Public Debt in 2008

The US Public Debt (from the federal government) has been increasing for decades. The gross federal debt has increased greatly from $909 billion in 1980 to an estimated $9,575 B in 2008. (The federal debt was about $9,509 billion in July 2008.) In these 28 years the increase has been about $8,666 billion or about 10.53 times for an increase of around 953%. (Source: U.S. Office of Management and Budget, Budget of the United States Government, Historical Tables, annual.) In 2008, we find ourselves facing a federal deficit of from $560 billion to $900 B. (The official figure will be closer to $560 B for political and business reasons.) How much more will you owe if we only spend another $600 B than we collect in US federal taxes in 2008? If you divide $600 billion by 100 million workers then you get $6,000 per worker. If you divide a federal deficit of $600 billion by 160 million workers then you get $3,750 for each worker. The population of the US in mid-2008 was roughly 300 million citizens. Dividing $600 billion by 300 million equals $2,000 for each US citizen, including children under the age of 10 and people over 90.

Some of the increases in our US public debt (US national, federal debt) between 2003 and 2012 will be due to our wars in Iraq and Afghanistan, if the battles continue through 2012. What will be the costs? While hard numbers are hard to find and estimates are often off by 50% or more, the costs of these wars in 2007 was roughly $200 billion. This $200 billion for 10 years would equal $2,000 billion or $2 trillion. Since there were few years since 1965 that we paid off any national debt, we will probably not be able to pay off this $2,000 billion during the next 10 to 15 years. The interest on $2,000 billion at 6% for one year is $120 billion. Now you can begin to see the scope of the problem. The costs, including interest, from these wars could easily amount to at least $3 trillion from 2003 through 2022. The $3 trillion or $3,000 billion divided by 300 million equals $10,000 for each US citizen. Expensive wars for over 2 or 3 years tend to bring very large amounts of new debt to the US government and US citizens.

The US trade deficits are another huge source of increases in the US public debt. The following table is data from the US Census Bureau Web site (www.census.gov/foreign-trade/statistics/historical on July 15, 2008):

Annual Trade Balances

Year US Trade Percent

Balance of previous

in $ billions year

1994 -98.5

1995 -96.4 98

1996 -104.1 108

1997 -108.3 104

1998 -166.1 153

1999 -265.1 160

2000 -379.8 143

2001 -365.1 96

2002 -423.7 116

2003 -496.9 117

2004 -607.7 122

2005 -711.6 117

2006 -753.3 106

2007 -700.3 93

2008

Jan. -57.9

Feb. -60.6

Mar. -56.5

Apr. -60.5

May -59.8

Figures are seasonally adjusted.

Average per month for 2008 is -59

First 5 months annualized for 2008 $ -709 billion

You may notice that the foreign trade balance has increased from a deficit of -98.5 billion in 1994 to -379.8 B in 2000 to a projected trade deficit of around $-709 B in 2008. The total increase from 1994 to 2008 is likely to be around 620%! It is amazing that in about 14 years the US trade deficit will be greater than 7 times the amount in 1994. If inflation increased by 5% during 14 years then the factor would be only about 2 times.

According to the US Treasury (http://www.treasurydirect.gov/NP/NPGateway ) the US national debt on July 3, 2008 was about $9,492 billion or roughly $9.49 trillion. The national debt on July 3, 1998 was roughly $5.53 trillion. So in 10 years it has increased by about 72%. While the interest rate is unknown for the next 12 months, at 5% interest the dollar interest on the US national debt would be about $0.475 trillion or $475 billion. Dividing $475 billion by 100 million taxpayers equals $4,750 for each taxpayer. (I use the number 100 million because it is one-tenth of a billion so you can multiply an amount in billions by 10 and get the number of dollars per individual, and probably not more than 100 million individual taxpayers could afford to pay off things like interest on the national debt and trade deficits. So Dividing $475 billion by 100 million taxpayers equals $475 x 10 = $4,750 for each taxpayer.)

How does this affect you? In several ways; it would take a book to explain them. A few of the ways are the following:

Having a budget is the foundation of managing your money. Making budget is easy when you have a dependable income that’s the same every month. But what do you do when your income varies from one month to the next? This is the case for many contractors and freelancers. Your expenses remain the same, but your income doesn’t. You still need a budget and you can make one. You have to go about it differently.

Total your expenses

When you’re making a variable-income budget, start by totalling your income as you would if your income was fixed. Add up the things you spend money on every month. This includes rent/mortgage, utilities, car note, car insurance, health insurance, life insurance, phone bill, loan payments, credit card payments, and taxes. You should even calculate how much you’ll spend on variable expenses like gas and food.

Average your income

If you had a variable income last year, too, use your last tax return to come up with an average monthly income. Just divide your gross income by 12 to come up with an average monthly income. If you don’t have a year’s worth of income, average the months you have. For example, if you’ve been freelancing or contracting for 7 months, add up the last 7 months of income and divide it by 7. This will give you an average income to base your budget on.

Does your average monthly income exceed your expenses?

Your average monthly income needs to meet or exceed your expenses. If not, you’re going to run into a cash flow problem. Adjust your expenses to fall below your average monthly income. Some examples of places you can cut back are: gas, food, utilities (save on electricity), and entertainment. For more ways to cut your expenses, go through each category and decide whether it’s a need or a want. Wants can be cut out.

Your budget in practice

You’ll need to have at least three accounts – one checking account and two savings accounts.

The checking account will hold your monthly income that you use to cover bills and other expenses.

One savings account will hold your income then be used to “pay” yourself at the end of the month.

The other savings account will be for savings. You will only deposit money into this account. You will never withdraw money from it unless it’s to invest it in a higher interest rate account.

Start your budget at the beginning of the month. Your checking account needs to have enough in it to cover your expenses for the month.

As you get paid throughout the month, put the money into Savings Account #1. You shouldn’t have to touch your savings account during the month. If you do, then you didn’t budget enough for your expenses or you’re overspending (or you ended up getting paid less than average, see below). At the end of the month, around the 28th, transfer $2500 (or what you need to cover your expenses) into your checking account.

Less than average months vs. higher than average months

When your income varies, some months will be less than average and some will be higher than average. Once you’ve been using this variable-income budgeting method for a few months, you won’t notice the ups and downs of your budget as much. The surplus months will build up your savings account to help offset the “famine” months.

However, if you experience a “famine” month in the first 1-2 months of using this variable-income budgeting method, you might have trouble meeting all your financial obligations. In this case, you have a few options. Cut back on some of your expenses (the best option). Pull from your emergency fund (which ideally has 6-12 months of living expenses). Pull from your savings (only when options 1 & 2 don’t work).

Don’t let a famine month discourage you. Like I said earlier, once you have a couple of months where your income is at or above your average income, your savings will build up and the bumps will smooth out. Give it six months and you’ll be happy you did.