Personal Finance: What we can learn from Greece

Greece’s financial crisis has receded from the headlines – for now. But it will be back, because the latest bailout did nothing other than postpone a day of reckoning.

Meanwhile, I thought it’d be worthwhile to examine what their debt debacle can teach American consumers.

Although there is very little practicality in comparing the finances of a country to those of an average individual, a rough comparison may help some readers put their own debt loads into perspective.

Greece owes its creditors 323 billion euros. The country’s gross domestic product puts it at a debt-to-income ratio of 177 percent. That means the country owes 1.77 euros for every euro their economy produces, hence the need to cut spending or increase revenue in Greece.

While 177 percent sounds like a lot, the average U.S. household actually has a debt-to-income ratio of 370 percent. This is based on the average U.S. household owing about $204,992 in mortgages, credit cards and student loans, while only having a median household income of $55,192.

Luckily for Greece, a default or debt restructuring would actually give them a chance to wipe away many of their debts. But the average American may have a harder time doing so through personal bankruptcy, as certain debts like student loans are often not forgivable.

A country in economic peril can have their debt restructured or forgiven, or it can simply default. Default is always the worst option (for a nation and individuals), as defaulting essentially closes you out from further borrowing in the near term. Eventually, though, it does allow for a recovery and re-entry into capital markets for nations and individuals alike.

Perhaps the most challenging obstacle for Greece today is that it does not have the option to simply print more money. The country gave up that option when it joined the euro currency bloc more than 15 years ago. The European Central Bank is in no hurry to give breaks to a problem-prone place like Greece.

But even if the Greeks had their own currency, printing money is not necessarily the best option when your economy can’t handle the new influx of currency. New funding can encourage inflation and a host of other bad outcomes.

So, given that neither you nor I can print our own money, what can we learn from Greece’s debt reckoning? The No. 1 takeaway, without a doubt, is that getting out of debt requires a committed lifestyle change.

Sure, Greece may look less-leveraged on paper than the U.S. consumer, but the reason credit markets have abandoned that Mediterranean country (and not individual Americans) is because Greece has shown almost no willingness to adjust their spending to help manage their debt load.

In the absence of massive social and economic reforms, Greece will never be able to pay back their debt load, even at only 177 percent of their GDP. As individuals, we must be absolutely committed to adjusting our lifestyles (or increasing our incomes) to continue to service and pay down our personal debt loads.

This story was originally published September 23, 2015 at 10:00 AM with the headline "Personal Finance: What we can learn from Greece."