Are your finances similar to those of the average American? If so, you may be in serious financial trouble. Unfortunately, far too many Americans just aren't very good with financial issues -- which means you're pretty deep in debt and saved far too little.
But if you don't want to find yourself living paycheck to paycheck, paying thousands in interest, and left with too little cash in the bank when the time comes to retire, you need to be way better than average.
Here's what the average American's finances look like
So, why isn't being average good enough when it comes to your finances? Let's take a look at some data about typical Americans:
- The average household with credit card debt has a balance of $15,654, according to a 2017 NerdWallet analysis.
- Among adults with a credit card, 46% report they're carrying credit card debt, and 55% indicate they carried a balance at least once over the course of the prior year, according to the Federal Reserve's Report on the Economic Well-Being of U.S. Households in 2016.
- A 2016 study from GoBankingRates found 69% of Americans had less than $1,000 in the bank, and 34% of Americans had nothing at all saved.
- Almost half of all Americans couldn't cover a $400 expense in an emergency, according to the Federal Reserve's report.
- The median retirement account balance for all working-age households is just $3,000, according to the National Institute on Retirement Security, while the median balance for pre-retirees is just $12,000. While those with retirement accounts have a higher median balance -- Fidelity estimates the average 401(k) balance at $104,300 in 2017 -- 45% of working-age households have no retirement assets in any retirement plan. And $104,300 is still far too low, as it would provide an income of less than $350 monthly.
- More than half of all used cars and 85% of new cars came with auto loans in 2017, according to Experian. Longer-term loans are becoming normal, and average monthly payments for car loans hit an all-time high of $515 monthly.
A quick look at these figures demonstrates that if your financial life looks like most people's, you're spending too much, saving too little, and might be in serious jeopardy during retirement.
Here's how you can beat the averages
The good news is, you don't have to be average -- you can do better. There are simple ways to beat the average and excel when it comes to your finances.
Despite the fact that only 35% of families live by a detailed budget, you can start by creating one for your family. If you do, you can prioritize savings and can make a plan to pay off debts.
If you started at age 30 and put just $50 a week into an IRA or 401(k) earning 8% annually, you'd have about $450,000 by the time you hit retirement at 65. That's about the cost of a single dinner out for a family of four -- and you'd end up with a 401(k) four times larger than the average. Putting aside another $85 a month for just 12 months would also put you among the 30% of Americans with at least $1,000 cash in the bank.
Getting out of debt is also essential to beating the average. If you have $15,654 in credit card debt, you're paying 15% interest, and you make minimum monthly payments of $300, it would take you 86 months to repay what you owe, and you'd pay $9,855 in interest.
To avoid wasting thousands, put as much money as possible toward repaying debt and consider trying the debt snowball method, which involves paying off your lowest debt first -- and which studies show helps you stay motivated to repay debt faster. Adding $200 a month toward your debt would cut your repayment time to 40 months and total interest paid to $4,330. You'd be debt-free in less than half the time and save more than $5,000.
Swearing off car loans is another great way to put yourself on much firmer financial footing than the average American. If you buy affordable used cars and drive them for as long as possible, you can save your "car payments" in the bank. This will allow you to pay cash for your cars while investing the extra you'd have paid on a new vehicle loan. With this plan, you can set yourself up to have double or triple the average 401(k) balance by the time you hit retirement.
Make your plan today to do better than average
Even though driving a new car, living without a budget, and charging things on your credit cards seems normal since it's what the average American does, you owe it to yourself to try for above-average results.
Make a commitment today to automate your investments and make a budget that allows you to invest and repay debt as quickly as possible. You'll be happy you acted now, rather than struggling to live on Social Security alone, and you'll have plenty of cash in the bank to enjoy your golden years.