Indebted Nation: Strategies To Escape The Sinkhole


According to new Federal Reserve data, Americans used about $18 billion in credit between May and June, with consumer credit increasing at a seasonally adjusted rate of 4% through the second quarter.

Debt has been at the forefront of American life this year. After a tense standoff between Democrats and Republicans on the federal budget, congress voted to lift the debt ceiling in June. Yet the government isn’t the only one who can’t quit overspending.  

American citizens are sinking further into debt this year.

People aren’t just taking more credit; they’re taking longer to pay it off. A new Bankrate survey found 60% of Americans have carried the debt for longer than twelve months, compared to 50% two years ago. The number of consumers carrying credit card debt from month to month has also increased, now reaching 47%.

Debt is a nationwide problem. A recent survey found nearly three-quarters of Americans currently have some form of debt. 

As the burden gets heavier, personal finance experts weigh in on how to how to break bad debt habits and manage existing arrears.  

Bad Timing

The cost of borrowing has skyrocketed since the pandemic with the Federal Reserve embarking on the most rapid round of monetary tightening in decades. This has made servicing personal debt more costly. 

“More consumer debt is almost never good,” says Caleb Vering, associate wealth advisor of Farnam Financial. “(But) with the interest rates up to 5.4%, consumers are often paying 20% or more on their consumer debt which is a worrisome state.”

High levels of inflation are also a driving factor. 

“There is a growing struggle among consumers to manage and reduce their credit card debt, leading to escalating balances,” Kevin M Arquette, CFP and Founder of WealthPoint Financial Planning. “The underlying concern lies in the fact that inflation is driving people to rely on credit cards to uphold their standard of living. However, utilizing debt to sustain one’s standard of living is fundamentally an unsustainable practice.”

In Case of Emergency

In many situations, chronic borrowing is a quick fix for financial under-preparedness.

The numbers show Americans need to better balance sheet the books. 

As per a recent Bankrate survey, almost half of all U.S. adults (48 %) say they have enough emergency savings to cover three months’ worth of expenses, while a majority (57%) are uncomfortable with their current level of emergency savings. More than a third (36%) of Americans have more credit card debt than emergency savings – the highest level not seen since 2011.

In recent decades, media pundits and personal finance gurus like Dave Ramsey have educated the public on how to crawl out of debt sinkholes and rebuild their lives. Some debate Ramsey’s relevance to younger generations today, arguing his recommendations need updating to stay feasible with current living costs. 

Yet some advisors find timeless value in his approach. 

“There are several good components to the Ramsey Baby Steps formula, and step two is to pay debts off via the snowball method,” says Jen Swindler, CFP, AFC, Senior Wealth Manager at Vincere Wealth Management.

“I almost always recommend the avalanche method – highest interest rate first, rather than the smallest balance first, because the cost savings can be astronomical. However, there are cases where the snowball approach works better for certain clients.”

Behind The Wheel

Cars are one product that can drive up debt levels for consumers. According to data from the New York Fed, auto loan debt is the third largest debt type for American households, behind mortgages and student loans.

Although car prices this year have retreated somewhat from last year’s dizzying highs, they are still much more expensive than before the pandemic. Most consumers need to borrow to buy a vehicle. Strategies like the 20/4/10 Rule can streamline car debt. The idea is a 20% down payment, take only four years to pay off the car loan, and keep car costs to less than 10% of monthly income. 

The framework offers guardrails for purchasing vehicles, and can be helpful to ensure you ‘drive within your means.’ 

“Cars have become ludicrously expensive‚Ķ However, you don’t need a brand-new Bronco to get to work,” says Verring. “The 20/4/10 rule is a great starting point but isn’t always possible for some.”

Going Deeper

Debt strategies to pay down one’s debt often take the form of a numbers game. Start small, start big; at the end of the day, you have to pay it off to make it go away. 

Yet, sometimes the roots of the problem go much deeper or go beyond the individual.

“Debt is as much a sociological problem as it is financial,” says Vering. “People finance lifestyles they can’t afford with debt. Until we temper the cultural fixation with flaunting the bank’s money this problem is not going away.”

It’s also important to remember that not all forms of debt are negative. While all forms of debt act as liabilities in the short term, those allow the borrower to eventually acquire assets can be constructive in the long run.

“One should think about debt as an instrument to ultimately create more wealth for themselves. For example, building equity in a home using a mortgage,” says Herring. 

Debt is a complex and multifaceted phenomenon that goes beyond the pure realm of finance and into behavioral psychology, sociology and others. This makes debt an interesting phenomenon to study and may act as a research topic for those who are interested in pursuing finance as a career. Yet for the average Joe, it is about the dollars and cents of everyday living and monthly budgets. By keeping informed and being ready with some appropriate strategies, individuals can go far to keep the debt-collector wolves from the door. 

This article was produced and syndicated by Wealth of Geeks.


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