Financial Advice

Nearly Half of Indebted Americans Spend Half Their Income on Debt Repayment

Debt is not necessarily a bad thing – it allows us to acquire large and valuable assets like homes and cars. However, debt is also supposed to be manageable and temporary. According to a recent study, too many Americans are expecting their debt to become a permanent condition.

The 2017 Northwestern Mutual Planning and Progress Study found that 14% of Americans expect to be in debt for the rest of their lives, and another 36% expect to be in debt between six and twenty years.

Debt levels are so high that 45% of respondents with debt devote up to half of their monthly income to debt repayment. Almost half (47%) of Americans have at least $25,000 in debt and over 10% have debts in the six figures. Given that 29% of respondents list mortgages as a top source of debt, $25,000 sounds reasonable – until you consider that the average debt is $37,000 without consideration of mortgage payments.

Credit card debt can play a large role in the feeling of debt hopelessness, and 19% of survey respondents listed credit card bills as one of the largest sources of debt. Thanks to the ease and convenience of credit cards, excessive spending can be difficult to resist.

According to the survey, Americans said that after covering necessary bills, discretionary spending on items such as leisure travel, hobbies, and entertainment still consumes 40% of remaining monthly income. Almost 25% of Americans list “excessive/frivolous” spending as a financial pitfall.

How can you avoid permanent debt? The best way is to set up a realistic budget and control your spending to avoid frivolous expenses and keep debt more manageable. Greg McBride, Chief Financial Analyst with Bankrate.com, calls a budget “your score card to tell you whether or not you’re living within your means.” McBride adds that a budget forces you to “…keep track of your expenses, calibrate the amount you’re bringing in on your net income with what’s going out the door.”

As you set up your budget, be sure to put aside some amount to build an emergency fund, even if that amount is small. McBride refers to your emergency savings as “the buffer between you and high interest debt.”

If you already have excessive debt, the repayment strategy is similar, but your budget must be even tighter with respect to spending. You can’t afford to just break even. You must have a surplus to apply to your debts, even if that surplus is small.

What is the best way to apply that surplus? There are two basic strategies, says LaTisha Styles, Founder and Millennial Finance Expert of Financial Success Media, LLC. “In the first way, what you do is pay off the debts with the smallest balance… In the second way, you pay off the debt with the highest interest rate – and that could be the debt that has the highest balance.”

The second way is the most economically sound method of paying down bills, because you will save the most on interest charges. However, momentum and a sense of accomplishment are also important. If it gives you the proper motivation to see a bill completely paid off, even if it’s the smallest bill, that may be the best path for you.

It doesn’t matter which path you take toward debt reduction and elimination, as long as you choose one and stick with it. Don’t give up and just assume debt will be a permanent part of your life. Just because many Americans (and possibly our government) seem to be headed toward permanent debt doesn’t mean that you have to follow suit.

Photo ©iStockphoto.com/siphotography

This article by Moneytips first appeared on Moneytips.com and was distributed by the Personal Finance Syndication Network.

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