Americans are Struggling With Debt—What You Can Do
May 5, 2017 | Your Finances
Alyssa Jeffers, a 26-year-old digital marketing coordinator in New York City, knows what it feels like to struggle with debt. She currently owes more than $22,000 and has difficulty paying her bills since taking a low-paying job at a small startup. Just the minimum payments can cost 70 percent of her take-home pay.
“I got into debt because I moved to an area with a high cost of living to attend college, but I ended up leaving school for a job,” she said. “I depleted my savings, maxed out two credit cards, borrowed from my parents and financed almost all of my major purchases.”
According to recently released data from Northwestern Mutual’s 2017 Planning & Progress Study, Jeffers is far from alone. Three-quarters of Americans struggle with debt. Of those who have debt, about 45 percent spend up to half of their monthly income on their debt. Americans have an average debt of $37,000. Many feel overwhelmed, with one-third saying they’ll be in debt between 6 and 20 years and 14 percent believing that they’ll be in debt for the rest of their lives.
“What we are seeing in those numbers is that Americans don’t really understand how much their budget can withstand and are taking on more debt than they can afford,” said Rebekah Barsch, vice president of Planning and Sales at Northwestern Mutual.
If you find yourself in debt, it’s critical to take steps like the following to get out from under it as soon as possible.
1. Get control of your spending. While some people get into debt for reasons that are beyond their control, such as losing their jobs, many of us are simply spending beyond our means.
In the Northwestern Mutual study, after paying for necessities, respondents said that they put 40 percent of their monthly income toward discretionary spending like entertainment, travel and hobbies. Around one-quarter also said that one of the biggest financial pitfalls was excessive spending.
“People get in a cycle of buy and pay back and really need more meaningful long term goals,” said Barsch.
Overspending leaves you vulnerable in case your financial situation shifts. Jeffers got into debt because she overspent, but it was falling in love with and taking a low-paying job that has caused her to get so behind.
She’s cut back on all spending and touts her budget as being her salvation. Barsch agrees a budget is critical for getting control of your debt—but Barsch encourages individuals to take it one step further. “We find that when people have a clear financial plan with a clear line of sight to the future, they are more likely to be more deliberate about how they spend their money,” she said.
2. Prioritize debt. When it comes to repaying debt, the study found that Americans had no clear consensus on the best strategy. Thirty-five percent said they paid as much as they could on each of their debts each month; 19 percent focused on the debts with the highest interest rate; 18 percent paid what they could when they could; and 17 percent were able to make only minimum payments on each of their debts.
Barsch suggests you prioritize repaying debt with the highest interest rates first and then focus on non-tax-deductible debt like personal loans or auto loans.
“It’s important to also understand that not all debt is bad debt,” said Barsch. “Good debt—like mortgages—is intentional and should be part of a financial plan. Contrast that with high-interest credit card debt that doesn’t build your net worth.”
3. Use strategies that help your repayment. While the situation might seem dire, repaying debt is possible.
For her part, Jeffers credits bargain shopping as helping her manage her debt, and she’s currently looking into freelancing to bring in extra income. She would like to cut her debt in half in 2017. “I may not get to have the social life I’m used to,” she said, “but at this point in my life, I would rather pay off my debt.”
When it comes to staying on track, Barsch suggests people make it as easy as possible for themselves. “The auto-pay approach helps you stay on track,” she said. “You can set up automatic debt payments after your paycheck is deposited so that you’re not tempted to spend that money.”
She also cautions against aggressively paying down good debt—like low-interest debt or debt like mortgages and student loans that offer tax deductions—at the expense of other financial goals. “When paying off debt, it’s important to still balance repayment with saving for your future,” Barsch said.
Tackling Debt Reduces Financial Anxiety
It’s so important to get a handle on your debt because of how it affects your life. According to the Northwestern Mutual study, four in ten Americans said that their debt was causing them high or moderate anxiety. “Debt is one of the highest sources of financial anxiety,” said Barsch. “Once you get a handle on it, you may find you’ll sleep better at night and be more confident about your financial future.”
Jeffers, for her part, is choosing to see the positive in her experience now that she has a plan to pay off her debt. “While I wish I hadn’t accrued the debt I’m currently in,” she said, “I have learned so much about budgeting, loans, independence and prioritizing.”