By Michelle

Americans are going broke. That seems like a ridiculous statement to describe people who live in the richest country in the world. Unfortunately, the statement is pretty much true. A recent report revealed that Americans are now spending 1% more than they earn. The savings rate for Americans now sits at -1%, the worst savings rate in over 73 years.

While people once strived to save 10% of their earnings, most Americans now want to spend what they have and sometimes what they do not have. The reasons for why Americans are going broke vary. Some go broke due to overusing credit cards, while others struggle to make monthly mortgages or car payments. Others are involved in divorces that leave them with next to nothing. Still others cannot keep up with the cost of living, which has greatly increased over the past 30 years—while salaries haven’t quite kept up with the change. Some are laid off by their employers, as is the case with many auto workers.

Credit Cards Ruin Lives

Practically every adult American has had or currently has a credit card. It’s easy to see why—they offer Americans the chance to buy things that they might otherwise not be able to afford. While credit cards can be a great way of establishing credit, they can also be quite lethal for Americans.

I’ve seen this first hand with my parents, both of whom have racked up big debts on credit cards. They both charged gifts and other things, ranging from gasoline to groceries, on their credit cards without much thought. Pretty soon, they charged more than they could afford to pay back. As they stopped making monthly payments, the late charges started to pile up. Eventually, it got to the point where they had minimum payments from $200 on up for each credit card. Most Americans cannot afford to pour that much into bills. My parents couldn’t. They were able to get into a credit counselor, which allowed them to pay off the debts.

Pretty much the same thing happens to a lot of Americans. They charge a lot of things on their credit cards without much thought. The minimum payment for each card they use slowly increases. After a while, the minimum payment is too difficult to maintain. That’s when the late fees begin to accumulate on each credit card, thus increasing the minimum payment even more. When the late charges hit, the credit rating is hurt and some Americans are forced to file for bankruptcy.

Monthly Mortgages Become Too Much to Bare

Remember the mortgage you got a few years back? The rate was quite low and it seemed doable on your salary. But then the interest rate increased and so did the monthly payments. Homeowners could no longer afford the mortgage that was previously affordable.

This harsh reality has led to many home foreclosures in the United States. Instead of buying a home and staying in it, some Americans are forced to hop from house to house, trying to find a mortgage that they can afford.

The American dream is, of course, to be successful. The way to be successful is to live big by buying a house that sometimes can cost as much as $300,000. With expenses factored in, a mortgage of $1,000 a month is simply too much for many American families to afford. Expensive mortgages are yet another reason for why Americans are going broke.

Car Payments are Too Expensive

Some Americans who drive big trucks or expensive cars are paying $300-$500 a month in car payments. That’s not even with insurance, which can cost another $100-$300 a month. Gas prices have also been on the rise recently, so buying gasoline for the vehicle can cost another $100-$250 a month. All told, an average American family may be spending a $1,000 a month on transportation. That’s simply too much of a strain on their salary, and so many people resort to using credit cards to pay for car payments or gas. Once the cards are maxed out, there is no way to make monthly payments.

Divorces Hurt Finances

When a couple enters into marriage, the finances typically become joint between the couple. This may be good for the marriage, but once the marriage falls apart and the couple divorces, the financial situation worsens.

With the high cost of divorce attorneys and divorce court, many Americans emerge from their divorces with little to no money. This can cause financial ruin for a person, which may lead to bankruptcy or bad credit that will be difficult to repair.

The Cost of Living Has Increased While Many Salaries Have Stayed Constant

It’s a fact that the cost of living has greatly increased over the past 30 years. Many salaries have stayed the same or even decreased in some ways. Things like groceries, utilities and the bare essentials are becoming harder and harder for Americans to afford.

When Americans are not able to afford the necessities, they usually turn to loans or credit cards to cover costs. In the short term, this may be OK, but in the long run, it greatly hurts credit—especially if the person who borrows or charges is unable to pay back the money. It is, thus, another reason why many Americans are going broke.

Workers Lose Jobs

Since many people lack adequate savings, when they lose their job, the results can often be catastrophic. People who have lost their jobs are often unable to pay the bills once they have received their last check. While looking for a new job, they may be forced to take out loans or use credit cards in order to make ends meet. When their credit limit has been reached, they are left with huge stacks of bills. If they haven’t found another job by this point, they are stuck in financial ruin. The last resort for them is to file for bankruptcy.

What Can Be Done?

The only logical solution to the problem of Americans going broke is for Americans to simply realize that they must have certain priorities for their money. They must realize that they cannot live beyond their means, even if they want to.

Priority number 1 should be to provide the things necessary to live a decent life.

Priority number 2 should be to pay the rent and utilities.

Priority number 3 should be to save at least 10% of the salary.

Priority number 4 should be to buy things that may be luxuries—iPods, computers, big screen TVs etc. This should only be done if there is enough income to afford these things and only after all other bills and necessities have been paid for.

Unfortunately, many Americans put the fourth priority at the top of the list and live beyond their means, which is why America is going broke.

Credit Counseling

If you are not disciplined enough to create a workable budget and stick to it, cannot work out a repayment plan with your creditors, or cannot keep track of mounting bills, consider contacting a credit counseling organization. Many credit-counseling organizations are nonprofit and work with you to solve your financial problems.

Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

Regardless of your particular need, selecting the right credit counselor is vital. Unfortunately, some organizations, including some that label themselves “nonprofit credit counseling agencies,” can be underhanded and more concerned with helping their own bank accounts than helping yours. An April 2005 report by a U.S. Senate investigating committee reported, “Some new entrants to the industry, however, have developed a completely different business model – a ‘for-profit model’ designed so that their non-profit credit counseling agencies generate massive revenues for for-profit affiliates.

Consumers need to know and understand the differences when selecting a credit counselor. They must know the warning signs. The following information can serve as a valuable guide to help consumers “know the difference” when choosing a credit counseling agency.

1. Ask the BBB (Better Business Bureau) and other third parties about the agency. A number of independent or government organizations work to protect consumers by collecting complaints and making the information public. The BBB is one such agency.

2. Be skeptical of extravagant promises. Some organizations claim they can “fix” a bad credit report or credit score. Others say they can settle a consumer’s debts for relatively little money. If an agency sounds too good to be true, it probably is. Reliable credit counselors help people manage their money better and, if appropriate, can set up a realistic repayment plan that is acceptable to creditors.

3. Make sure counseling sessions are substantial. The length of a counseling session will vary from agency to agency, but consumers need to make sure the counselor takes enough time to understand your personal situation

4. How does the agency protect consumers’ money? Consumers need confidence that any funds they hand over to an agency for debt repayments are secure. Consumers need to ask for evidence that an agency is bonded or has insurance that protects their money from fraud or the agency’s own financial difficulties.

Debt Management Plans

If your financial problems stem from too much debt or your inability to repay your debts, a credit-counseling agency may recommend that you enroll in a debt management plan (DMP). A DMP alone is not credit counseling, and DMPs are not for everyone.

You should sign up for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. Even if a DMP is appropriate for you, a reputable credit counseling organization still can help you create a budget and teach you money management skills.

In a DMP, you deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors. Your creditors may agree to lower your interest rates or waive certain fees, but check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you.

A successful DMP requires you to make regular, timely payments, and could take 48 months or more to complete. Ask the credit counselor to estimate how long it will take you to complete the plan. You may have to agree not to apply for — or use — any additional credit while you are participating in the plan. As above, here are also things to look for when looking for a Debt Management Plan.

1. ALL payments sent to the agency should go to creditors and be disbursed in a timely manner. Some agencies may take the entire first month’s payment and call it a “fee” or “donation.” Consumers should ask whether this is the agency’s policy. It is also a good idea to ask whether the agency holds payments or disburses them shortly after receipt. The success of a DMP relies upon full and timely payment to creditors to reduce a client’s debt.

2. Does the agency provide a full range of services, or is it just trying to push a profitable Debt Management Plan? Consumers should seek out an agency that provides a full range of services and tailors plans to each consumer’s personal circumstances.

3. The full amount of Debt Management Plan repayments should go to creditors. Some agencies may take a portion of a consumer’s debt repayment and call it a fee or “donation;” others may even take the entire first month’s payment. Consumers should find out how much of each monthly payment is going to creditors and how much is going to the credit-counseling agency. The full amount of those payments should be paid to creditors to reduce the client’s debt.

4. Make sure the agency will work with all of your creditors. Before entering a DMP, consumers should make sure the agency would work with all of their creditors. Some agencies may refuse to work with creditors unless the creditor agrees to a certain level of financial support for the agency. No agency can require creditors to recognize a DMP program, but the agency should be willing to reach out to every creditor.

If debt has consumed you, and your life is getting more difficult by the day, then Debt management and credit counseling are probably two very important choices to consider. If you have severe debt, you may be eligible to enroll in a Debt Management Plan. It takes approximately 36-60 months to repay debts through a DMP. This is sometimes the best alternative to debt freedom.

I’m a walking poster child for how to not manage money and handle credit.  I’ve been irresponsible most of my adult life with money but was lucky enough to always have someone bail me out of every financial mess I got into until 2 1/2 years ago when bankruptcy was not only “knocking on my door” but had come inside to stare me in the face.

I finally grew up, took responsibility for my actions, and started making changes.  Today, even though I still have debt, I no longer use credit cards, live on a budget, and bankruptcy is no longer a looming threat (it’s not even living in my zip code).

I’ve wondered what made such a complete mess-up when it came to money.   I could be a whiny baby and blame my parents but they tried to teach me how to be frugal and fiscally responsible and they weren’t people who just talked the talk.  They took out a loan for 1 vehicle in their entire lives.  Every other one they paid for in cash.  They have never paid a single penny in interest on a credit card and never once as a kid did I have to wonder where my next meal was coming from.  If there were times when money was tight in our house I never knew it.  I always had what I needed and more.

Yet once I turned 18, got a job, and was on my own I started using credit cards like they were “free money” and always had an excuse of why I was always overspending.  And I mean it when I say had excuses and “good reasons.”  I was the queen of explaining away why I had spent money I didn’t have.

My husband worked hard and did his best to provide for us (and still does).   And to be an outsider looking at our family today you wouldn’t probably think we ever had money problems.  My husband and I managed to raise our kids with all of them having everything they needed and more (yes, they were spoiled with material things which was completely my fault and not my husband’s).  We built a new house along the way (over 3,000 square feet which was much more than we needed but I was always about bigger and better so my husband did his best to give it to me.)  I went back to school, got my bachelor’s degree once my kids got into high school and then found a job that I enjoyed.

Then, 4 years ago, even though  I still didn’t have my spending under control we were still financially stable enough that I could quit my job to be at home and take care of my Mom who had gotten seriously ill (I’m the only living child and was traveling extensively for my job so I felt the need to be closer to home – and it’s something I have not regretted for one second).

Then, within the span of 2 years,  one of our children defaulted on student loans we had co-signed on to the tune of $20,000 thousand dollar, my husband’s work vehicle had to be replaced, a home business we had started and invested quite a bit of money into didn’t work out, our college daughter’s vehicle quit running and since she didn’t have any money we bought her another one, another one of our children experienced financial difficulties so we loaned/gave him several thousand dollars, and I still hadn’t stopped spending money like it was growing on a tree in our backyard.

On top of that we had a big mortgage payment for that big house I had to have.

Suddenly, instead of being able to pay all our bills each month (well, at least the minimum payments) we now had a whole lot of month left at the end of our money.

So we consolidated and took out a home equity loan.  It took a $75,000 loan to pay off our son’s student loans, pay for the 2 vehicles we had to buy, pay off the debts of our failed home business and pay off our credit cards.

You would think that at this point I would have gotten scared and would have stopped spending but I didn’t.  It took another $3,000 before my husband came to me and said we either had to make changes or declare bankruptcy and if we didn’t make changes right away we would no longer have a choice because bankruptcy would be our only option.

He gave me a book to read – one a co-worker had given him when he confided to her how worried he was about finances.  The book got me to open my eyes and realize what I had been doing.   (I’m not going to recommend you read it.  I’m going to tell you to read it.  It’s The Total Money Makeover by Dave Ramsey).

I finally agreed to sit down with my husband and face the amount of debt we had -close to $300,000 (including our mortgage) and to start making changes.

Today we still owe $160,000 on our mortgage and $26,300 on our home equity loan.  We have $0 credit card debt and $0 car loan debt.  In 2 1/2 years we’ve paid off $100,000 in debt.  By the end of 2009 we plan to have our home equity loan completely paid off and our mortgage under $150,000 despite my husband just receiving word yesterday at work that his compensation will be changing which will mean less income.

I’ve done some really stupid things – lots of them – and I have nobody to blame but myself.  But, I’ve also changed and have started doing a lot of things right.  And while I used to be a walking poster child for how to not manage money today it’s just the opposite.  Family and friends now ask for financial advice and tips because they know how much things have changed at our house.

Why have I told you all this?  Well, whether or not you wanted to hear my story, I wanted you to know that I’m not just some faceless person banging away on my computer telling you how to get out of debt without any real knowledge of how to do it.  No, I don’t have a degree in “finance” unless going to the “school of having to learn about managing money the hard way” counts.

I’m not a “financial expert” who has never experienced financial difficulties but yet pretends to know exactly how to do it (there are plenty of people out there like that).    I’ve been to the brink of financial disaster and am recovering from it.  There’s the saying of “what doesn’t kill you makes you stronger” and that definitely is how I feel about my debt.  I’ve faced it (one of the hardest things I’ve ever done) and have changed it.