Do you have more or less debt than the average American? You may be surprised to find that among households carrying debt in 2018, average personal debt exceeded $38,000 -- not including mortgage loan balances. This is according to data collected by Northwestern Mutual, which also revealed Americans were twice as likely to owe between $5,000 and $25,000 than they were to have that much in savings.
It's not just a few families in debt, either. Just 23% of Americans carried no debt in 2018. With so many people owing so much, it comes as no surprise the majority of Americans listed debt reduction as their top financial priority in 2018. Unfortunately, not everyone is optimistic about their efforts to pay off debt, with 13% reporting they'll likely owe money for the rest of their lives.
Whether you owe more or less than your fellow Americans, owing anything on credit cards -- or carrying other high-interest consumer debt -- can be devastating to your finances. Since debt can affect so much of your life, it's important to understand why Americans owe so much. And it's also a good idea to figure out what to do if you're one of the millions who are in hock to creditors so you can break free once and for all.
Why are Americans in so much debt?
Many factors beyond our individual control contribute to American indebtedness. Healthcare and housing costs have risen quickly, tuition has left many college grads struggling with student loan payments, and some essential costs like child care are very expensive. If your income truly doesn't stretch far enough to pay for the bare essentials, it's going to be very difficult or even impossible to get out of debt.
But this isn't the case for everyone, and Americans are in debt for a lot of reasons -- including the fact that we aren't allocating enough income to getting out of debt. A recent survey by Nationwide found Americans devote almost the same amount of monthly income to debt repayment as to discretionary spending on things like hobbies, clothing, and leisure travel. While you need to have some money available to do fun things, spending a lot on trips or clothing not necessary for school or work may not be the best use of your funds if you have credit card debt.
Americans are also buying more expensive vehicles than ever, with the average new car buyer in early 2018 borrowing more than the average per capita income. If you're devoting hundreds of dollars every month to payments for a new car, it'll be hard to live within your means without borrowing for other purchases.
What can you do about your debt?
When you're in debt, committing to a payoff plan can be the best way to get your financial life back in order. To tackle the problem head-on:
- Decide which debts it makes sense to repay: Mortgages and student loan debts usually charge very low interest, and interest may be tax deductible, so paying off these loans early isn't necessary or advisable. But credit cards and other high-interest consumer debt should be paid off ASAP.
- Make a budget prioritizing debt repayment: You'll want to pay more than the minimums so you can get out of debt faster. Be prepared to cut back on nonessentials until your debt is paid down so you can make the largest possible monthly payments to creditors.
- Consider debt refinancing: If you have high-interest debt, consider taking a new loan at a lower rate to pay it off. You could get a balance transfer credit card with a 0% promotional rate and transfer existing credit card debt to it (some balance transfer cards charge a fee). Or you could get a personal loan at a lower rate and use it to pay off credit card debt.
- Decide on a payoff order: If you are dealing with debt on multiple credit cards, the debt snowball method involves paying off the debt with the lowest balance first, then the one with the next-lowest balance, and so on until all debt is paid. This approach is supposed to help you stay motivated. An alternative is the debt avalanche method, which involves paying off the credit card debt with the highest interest rate first so you can reduce total interest cost.
- Pay off your debt with extra payments: Regular monthly payments should always be above the minimum for the debt you're focusing on paying off first. And if you get extra cash -- such as from a bonus or selling items -- use it to make an extra payment.
After you've got your debt paid off, commit to living on a budget and make sure your income is above your outflow so you don't get back into debt again. And save up an emergency fund if you don't have one already, as this will help ensure you don't go into debt due to unexpected expenses.
Don't accept debt as a fact of life
While it's normal to have some consumer debt these days, you don't have to accept this way of life as your normal. Follow some of these suggestions today to start working on a debt payoff plan and to avoid going into debt in the future. It may take time, but you can become debt-free and commit to not borrowing again in the future. If you do, you'll be among the minority of Americans who get to keep all their cash instead of sending any of it to creditors -- and that's a very good financial position to be in.