As the Latin Proverb states, "A wise man learns by the mistakes of others, a fool by his own." There are many mistakes happening around us, and not all of them are being made by individuals; some are even being made by countries.
How The European Crisis Developed
The development was simple: spending out paced revenue. The imbalance occurred on both sides of the equation as revenues decreased and spending increased. In Greece, where the crisis started, people were bribing government officials so they could get out of paying taxes, which decreased revenues. At the same time the government increased their spending, including more entitlements to the population.
Picking Up The Money Slack
When spending out paces income there's a shortfall. Only two things can cover that shortfall: selling assets or going into debt. Greece has increased it's debt level to a point that they can no longer afford to service their level of debt. Their lenders realized this and started demanding more protection in the form of higher interest rates, which made the crisis escalate. Now Greece is considering selling sovereign assets, such as land, in order to make up the difference; the problem is, there's only so much land to go around.
Does All This Debt Sound Familiar?
Not only does our government have a reduction in revenues due to decreased taxes from a high unemployment rate, but they're also increasing their spending in the form of entitlements. Both sides of the equation are moving in the wrong direction.
Okay, allow me to hit you over the head (but gently): are you in the same situation? Let's learn from governments around the world. They are in deep trouble, and our government is not immune.
How to Fix Your Own Debt
Resolve this year to be active with your money. Sometimes we're at the mercy of the economy when it comes to increasing the revenue side of our equation. However, if we don't do something about the spending side, we may find ourselves in a situation where we have nothing left to sell and no one willing to lend to us to cover our shortfall.
If you take small steps at winnowing down your spending, it's not too difficult. Start with obvious things, like the daily trip to the coffee shop. Then cut down on dining out. When you start preparing food at home you may find it's easier to prepare several meals at once, thereby reducing the dining out even further.
These small steps will add up to large dollars and those will be the dollars you keep.
What's the first small step you're going to take this year so you won't end up in a situation like Greece?