Personal Finance Can Help You Understand the Federal Budget Crisis

The federal budget is one of the major financial problems facing the country today. A way to understand this huge problem is to have an understanding of how to budget a household income.

The reason that understanding a household budget can help you understand the fiscal crisis is that they are shaped by two basic questions:

1. How bad is the institution’s or individual’s debt?
2. What can be done about it?

Managing a household and a government budget are also approached in similar fashions as well. After all, they are both budgets!

With a household budget, you need to see if there is an actual problem that needs to be solved. This is particularly important for lenders giving out money to families that are looking to borrow some. They do this by comparing the debt to income ratio. Debt can constitute car loans, student loans or a home mortgage.

A household’s debt should not exceed over 30% to 40% of its collective annual income. If a household’s debt does, that means they are not good candidates for any kind of loan. Some debt can be good because people need to get jobs, education or even a house. However, you don’t want debt to overwhelm all your expenses. How will you have money left over to pay for utilities or rent?

Economists also use this kind of ratio to measure the health of a country’s economy. However, in this ratio, they measure debt against output instead of annual income. Output is determined by a country’s gross domestic product, which means the collective value of all the goods and services they produce in a year.

Many people believe that a healthy GDP has debt that constitutes 60% to 90% of its output value. However, opinions do vary quite a bit.

Republicans think the debt is a huge problem while Democrats aren’t as concerned about it. The debt to GDP ratio is predicted to reach 77 percent by 2023. It is a high amount but not astronomical.

The Republicans plan on instituting huge spending cuts that will cut the debt to GDP ratio to 55 percent. The Democrats plan on utilizing spending cuts and new revenue to bring it down to 70 percent.