Americans really love to finance their purchases with debt, even if they know they're digging themselves into a deeper hole. This more or less sums up the findings of the latest Planning & Progress Study 2017 from Northwestern Mutual, released last week.

Northwestern Mutual's annual study examines consumer behaviors and attitudes toward money, financial planning, and decision-making. This year, it included 2,749 online surveys of adults across the U.S., and as you may have rightly imagined, the results were downright terrifying as they relate to America's growing debt burden.

A bear trap with a ball bearing the word "debt" attached by a chain.

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America has a serious debt problem

Here are some of the statistics which could arguably be described as the scariest debt findings ever:

  • Nearly half of all Americans (45%) are spending up to half of their monthly income just servicing their debt (making interest and principal payments).
  • Over a third of respondents (36%) expect to be in debt for at least the next six to 20 years, while another 14% anticipate being in debt for the remainder of their lives.
  • Almost half of all Americans (47%) have at least $25,000 in debt, with 15% of Americans lugging around in excess of $100,000 in debt.
  • Building on the previous point, the average debt, excluding mortgage debt, is $37,300!
  • Some 40% of Americans responded that debt has a "substantial" or "moderate" impact on their financial security and is a "moderate" or "high" source of anxiety.
  • Consumers have no clear consensus on how best to tackle their debt problems.
  • Discretionary expenditures, such as leisure travel and entertainment, accounts for more in average monthly spending (40%) than paying off debt (33%).
  • Nearly a quarter (24%) of respondents cited excessive or frivolous spending as a primarily financial pitfall.

These are really eye-opening statistics. When you realize that the average American is carrying $37,300 in debt (excluding mortgage debt) and the median annual household income in America is only about $56,500, it's easy to understand why half of all consumers expect to be in debt somewhere between six years and for the rest of their lives.

What's the issue? I'd opine it's a combination of two factors:

  1. A lack of a detailed household budget and a clearly defined debt-payoff plan.
  2. Insufficient knowledge about how credit works.
A budget laid out on a table next to a calculator.

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Budgeting the "SMART" way

One clear problem Americans have had for decades is their inability to effectively save money for their future or to pay off debt. According to the St. Louis Federal Reserve, the personal saving rate as of February 2017 was a mere 5.6%, which is less than half of what it was 50 years ago, and well below the recommended 10% to 15% that most financial advisors suggest.

The culprit for these poor savings habits can probably be traced to a lack of a working household budget. A 2013 Gallup poll found that just 32% of U.S. households kept a detailed monthly budget, which essentially means that 68% of households were winging it and hoping for the best. Without having an intricate understanding of your cash flow, which can only be had through a detailed budget, optimizing your spending and saving habits becomes almost impossible.

The positive news is that budgeting software can be found online, and in many cases it's free. It may even be able to help you formulate a budget if you provide a monthly saving target. There are no excuses not to have a budget nowadays.

A detailed guide to goal-setting the "SMART" way.

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Perhaps the toughest part is simply sticking to your budget. To that end, here are a few suggestions:

  • Get everyone under your roof involved, because your chances of success go up when those around you share your goals.
  • Consider using cash for purchases, since cash creates an immediate and tangible loss in value (i.e., you have less money in your wallet). This should help reduce impulse buys.
  • Have a specific amount of money automatically deposited into a savings or investment account each month to hold yourself accountable to your budget.
  • And most of all, be "SMART" with your budgetary goals. The SMART acronym stands for Specific, Measurable, Achievable, Realistic, and Time-based goal-setting. By defining your goals clearly, you'll have a way to measure your progress and make spending or saving adjustments on a regular basis.

Part of this budgeting process should include a specific and measurable plan to get out of debt. There are two good solutions that tend to stand above all others to reduce or eliminate your debt. It's up to you to decide which one best suits your needs.

One idea involves tackling one credit card at a time. This won't help reduce the interest you're paying on your existing debt, but you'll probably feel a sense of accomplishment in moving one credit account after another to a $0 balance.

Your other option is to consolidate your debt to your lowest interest rate card to reduce what you'll owe in interest. The downside to this plan is it could negatively impact your credit score by increasing your utilization rate on your low-interest-rate credit card.

You should weigh the benefits and risks to decide which pathway makes the most sense.

A confused young adult with a credit card in her hand.

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Understanding credit 101

It's also pretty evident from these debt statistics that a good number of consumers probably don't understand how important their credit score and credit report can be in their fight to lower their debt (or in keeping it from ballooning in the first place).

A good or excellent credit score and credit report can lead to a number of advantages. For example, you may be able to ask your lender(s) to lower your interest rate. Statistics show that credit card providers oblige more often than not to this request, but few consumers actually ask. It's often more expensive for credit card companies to seek out new cardholders than it is to bend to your request. If you have a lower interest rate, you'll be able to chip away at your principal even faster.

Consumers with good or excellent credit scores are also offered lower interest rates from the get-go, and they may even have multiple companies fighting for their business. This can be helpful if you're looking to buy a home or make a large purchase.

A pen pointing to the definition of what a credit report says about a consumer.

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There are five basics that Fair Isaac Corp., the company behind the well-known FICO score, feels you should know to improve your credit score and put the ball back into your court.

  1. Pay your bills on time: More than a third of your credit score is determined by your ability to pay your bills on time. Setting up automatic payments from a checking or savings account for some bills can help reduce or eliminate your chances of a late payment.
  2. Keep your credit utilization rate down: Most credit-reporting bureaus like to see your aggregate credit usage below 30%, if not lower. A low credit utilization rate signals to lenders that you're a responsible consumer.
  3. Keep good-standing accounts open: Don't make the mistake of closing accounts that have provided you with positive credit history. Those good-standing accounts help build a road map that encourages lenders to trust you.
  4. Avoid too many new accounts: Credit-card companies expect you to open new accounts from time to time, but avoid frivolous new accounts where it doesn't make financial sense (e.g., to save 10% on a $39 purchase).
  5. Prove you can handle both loan types: Lastly, show lenders that you can handle installment loans, such as a mortgage or car loan, and revolving loans, such as a store department credit card, where your minimum payment depends on your current balance.

You have all the tools you need to get out of debt -- now go make it happen.