Middle class families in financial bind

by Center for Personal Finance editors

WASHINGTON (10/16/06)--There's trouble brewing in middle class America as more families get caught in an unprecedented financial crunch (Center for American Progress Sept. 28).

A report released last month by the Center for American Progress, a nonpartisan research and educational institute, and Service Employees International Union (SEIU) revealed that despite a growing economy, incomes are flat, big-ticket item prices of housing and health care keep rising, personal debt levels keep growing, and families aren't able to save for a rainy day--or for the possibility of unemployment.

Some of the key problems include:

Expenditures. Over the past five years, the cost of families' top five expenditures--health care, housing, food, household operations, and cars--have increased more than twice as fast as the cost of the bottom five items.

Jobs and wages. Five years into an economic recovery, average job growth is only one-fifth that of previous business cycles. Wages--after factoring in inflation--are flat.

Debt. In the first quarter of 2006, families took on a record amount of debt equivalent to 126.4% of disposable income.

Emergency savings. With the average period of unemployment lasting 17.6 weeks, less than half (48.3%) of all families were capable of weathering this financial strain in 2004--the last year data was available. That number is down from 53.8% in 2001. For middle-income families, the trend is worse: 28.8% of families could weather a typical unemployment period in 2004, compared with 39.2% in 2001.

An even bigger threat to a family's financial security, according to the report, is a medical emergency. At the same time employers are shifting more of the health care cost to employees, the cost of a typical medical emergency keeps increasing: $3,313 in 2004, compared with $2,832 in 2001 (in 2004 dollars).

If your family is struggling financially, take small steps now to get back on track. Track spending, get a handle on income and expenses, establish a spending plan, and set realistic goals to reduce debt. Consider these debt reduction strategies:

Pay off high-interest credit card debt. Pay all bills on time to avoid late fees�and a damaged credit record. Set a monthly limit on charging. Steer clear of blank courtesy checks and cash advances. Don't borrow from Peter to pay Paul. Work out a repayment plan with creditors. Check your credit reports annually at annualcreditreport.com Get help, from the professionals at your credit union or a nonprofit credit counselor (nfcc.org).

Finally, make savings--however small--habit. Set up direct deposit of your paycheck and then pay yourself first by having a set amount, say $25 or $50, automatically transferred to savings each payday before you have a chance to spend it.