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What you need to know about the debt crisis

The United States hit its legal limit on the amount of debt it can hold. No one knows if there is a debt contagion in the eurozone that could bring countries to their knees, or not. The delirium is everywhere in the media but it's mostly a big waste of your time.

Do you quit your job if the U.S. defaults? No. If the euro goes the way of the dodo bird and the European Union is dissolved, will your life change dramatically? Probably not. Chances are you will be doing the same thing the day after any news breaks in either region. And it could be good news, or it could be bad.

Friends tell me they sometimes believe that what is happening is too complex for them to understand so they don't even bother trying. They are sick of hearing about it day in and day out and just want to be told what to do. Good news: What is important to understand is actually really easy, and there is an equally simple answer to address it.

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Here is what you need to know about the sovereign debt crises around the world, and this applies to the U.S. and the eurozone: Countries spent more than they earned and now it's caught up with them. That's it.

Don't worry about getting dragged down with the lingo. Ceilings, default, restructuring, austerity - from your personal financial perspective all you need to know is that the laws of math have not been suspended.

Spending more than you earn equals a deficit, and annual deficits create a larger running debt. And eventually the interest payments to service that debt get so big that they cripple your ability to do what you would like to do. Sounds an awful lot like consumer debt troubles, doesn't it?

I don't want to diminish the potential negative impacts to the global economy, which in turn may affect Canadians. This could potentially lead to job losses, and maybe one of the jobs lost is yours. You could read up on the economics behind the sovereign debt crises until you could teach it at an MBA class, or you could just worry yourself awake every night thinking of doomsday scenarios. How do either paths serve to change the outcome?

Your best course of action is to get your financial house in order, just as these governments do. In their case it means cutting spending, and balancing the budget. In your case it's not much different.

My three-point plan I've espoused before is dead simple. 1) Spend less than you earn, 2) Disaster-proof your life, and 3) Pay down high-interest debt aggressively. Disaster-proofing your life could include the right types of insurance or having a rainy day fund to turn to just in case you do lose your job because of all of this mess.

Do these three things and you'll be more financially secure than most Canadians. And most countries.

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Preet Banerjee, B.Sc, FMA, DMS, FCSI is a W Network Money expert and blogs at You can also follow him on twitter at @PreetBanerjee.

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About the Author
Personal Finance columnist

Preet Banerjee is a consultant to the financial services industry. You can follow him on twitter at  @PreetBanerjee. You can find his conflict of interest disclosure on his website. More

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