Norm Champ Norm Champ (From video by Charles Garnar/ALM)

U.S. household debt is at an all-time high. Savings rates are dwindling and nearing a low. What’s so awful about this picture? Low personal savings rates often foreshadow recessions, according to a working paper by the International Monetary Fund, posted last August.

Savings rates declined as income, employment and net worth recovered from the financial crisis and Great Recession, the study notes.

The household savings rate decreased to 6% in November 2018 from 6.20% in October. In contrast, from 1959 to 2018, the rate averaged 8.82%, according to Trading Economics.

In October 2018, credit card debt totaled $1.037 trillion, up 10.7% from September, the Federal Reserve reported. Overall consumer debt rose at an annual 7-3/4% rate.

Now comes former Securities and Exchange Commission policymaker Norm Champ with a strong recommendation for financial advisors and consumers. After the global meltdown, the ex-SEC director of investment management helped stabilize the U.S. financial system and set policy changes intended to protect investors.

His advice to FAs now: “Help your clients get in shape so they’re reducing debt and not incurring new debt,” Champ says in an interview with ThinkAdvisor. ”Don’t let them fall into the spending and credit card trap. People are buying all this junk — the smartphone and all its accompaniments are burning a hole in people’s pockets.”

Champ, who wrote “Going Public: My Adventures Inside the SEC and How to Prevent the Next Devastating Crisis” (2017), is finishing up the manuscript for his next book, which is on personal finance and called “Mastering Money,” due out from McGraw-Hill later this year.

He’s on a mission to convince Americans to spend less, get a job, save money and then invest tax-deferred. It’s basic financial literacy and the crux of his new book.

“Yes, we’re a consumer economy; so the government has an incentive to get you to spend. But I’m not looking for [it] to crack down on [spending and savings],” Champ says. “I want people to strengthen themselves and resist [excessive] buying in order to improve their lives.”

He continues, “Studies show that 40% of Americans say they don’t have $400 to repair their car. But I bet they have a smartphone, wide-screen TV, and Netflix and Hulu subscriptions,” says Champ, a securities attorney and partner at Kirkland & Ellis in New York City.

Right after the catastrophic financial meltdown, personal savings rates rose. But that consumer behavior was fairly short-lived. And as Americans began saving less, partly because of low interest rates, they began purchasing more — on credit.

Here’s another buying-on-credit issue for FAs to bring up with clients, Champ says: Hidden taxes — sales tax, for example, which is, he points out, a “voluntary” tax.

Further, “a huge source” of hidden taxes is the lottery, he says. “Studies show that lower-income Americans are willing to spend about 10% of their income on lottery tickets. And the government encourages it! Lotteries are set up by the states to get taxes out of you,” the brunt of which is felt by lower-income consumers.

Essential to a healthy personal balance sheet is, for most people, earning money at a job, Champ stresses. Need new skills? The best way to acquire them is on the job, he says.

Moreover, “the beauty of having a job is that you’re eligible for lots of tax-free investing. Here, the tax code actually gives you something — a chance to deploy money into higher-return assets like stocks and bond funds, tax-free till you’re 70-1/2,” Champ emphasizes.

In sum, the lawyer wants to prevent a devastating crisis in consumer finance by having folks follow three steps: 1) Reduce debt, especially credit card debt, 2) Get new skills to land a better job and 3) Save money to invest tax-free.

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