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The Average American is Drowning in Debt – Here’s Your Life Preserver

This is a guest post from Joseph Hogue.

As a financial advisor, I’ve seen the frustration Andrew talks about when he hears people just don’t have money to invest.

It doesn’t help that wages have barely budged over the last decade. The cost of healthcare and education are rising faster than paychecks and many families struggle to pay the bills, let alone have money left over to invest.

Andrew shared some great ideas on finding a little extra to start investing, from starting a side business to developing new skills and creating a budget.

There’s another problem though that is keeping people from the financial lives they deserve, an emergency that most families feel powerless to overcome.

americans in debt

The average American is drowning in debt. Like drowning, we struggle and flail about but just can’t seem to keep our head above that tsunami of bills washing over every month.

Saving your financial life means not just learning how to tread water in all that debt but how to get back to dry land. Only after getting out of the sea of debt will you have enough to invest and reach your financial goals.

How Bad is the Debt Crisis in America?

According to the Federal Reserve, total household debt in the U.S. surged to $12.84 trillion in 2017, jumping by more than half a trillion in just one year. In fact, the average American household owes more than $52,500 not including a mortgage.

It costs the average household a dollar of every $5 earned just to make these monthly debt payments. 

Of course, drowning in all that debt means people aren’t able to save for retirement. The U.S. is facing a full-blown retirement savings crisis as 10,000 baby boomers reach retirement age each day without enough saved to cover basic needs.

4 Steps to Take Control of Your Debt

The ship is sinking. The good news is that there are plenty of life preservers to go around. These four steps will not only keep your head above water and keep you from drowning in debt but could save your financial life.

We’re not talking about some vague strategy for paying off debt or a New Year’s resolution. If you’re really going to beat your debt, you need to commit to it. Sit down and write out exactly how you plan on ditching your debt for good.

Wake Up to How Much Debt is Costing You

Many people need a harsh wake up to how much debt is really costing them. Those $50 minimum monthly payments on the credit card don’t look so bad but it’s something else when a debt calculator shows you exactly how much you’re losing to interest over ten years.

• How much interest are you paying on your debt each month and how much of your payment actually goes to the loan payoff?

• What’s the price of that purchase when its paid off on a credit card over a few years? You might have liked that laptop at $400 but how much do you like it at $800 when you include interest charges?

• How much of your after-tax income goes to pay off debt?

It also helps to visualize your long-term financial goals. This doesn’t mean some vague idea of retirement or your goal of having $1 million by 65 years old. Really visualize what you want to do on a daily basis, what trips you want to take and what life will be like.

Now think about how all that debt is affecting those long-term goals. Is there any way you’ll be able to do any of that without paying off your debt so you can start investing seriously?

Create a Budget You Can Keep

One of my first money fails was setting my savings goal too high and creating a budget that was impossible to keep. I was skimping and saving every penny and would burn out a couple times a year, each time would lead to a spending spree that set me back to zero.

It’s not enough to have a budget that includes paying off debt and investment. You need to create a realistic budget you can keep.

• Try starting with just $50 in extra debt payments a month and gradually save more if you can.

• Take your savings and extra debt payments out of your budget first, instead of waiting to see if there’s money left after paying expenses. This will force you to cut expenses rather than savings.

• Consider a spending challenge. Pick an expense or two each month and cut as much of it as you can. Setting a one-month deadline will make it easier to keep on your goal and you’ll be surprised how little you miss some expenses.

Don’t forget to have a little fun with your money as well. We hear about sacrificing and saving for tomorrow but what’s the point of retiring rich if you had to be miserable your whole life to get there? Cut back on your expenses gradually to a budget you can keep and that still allows for spending on yourself.

Prioritize Your Debt

There are two methods to paying off your debt that can help to motivate you and save thousands on interest. These are two different strategies to deciding which debts you pay off first.

The most popular is called the debt snowball method.

• List out your debts by interest rate with the highest rates at the top.
• Make regular payments on all debt but make extra payments on the one or two debts with the highest rates.
• Keep making those extra payments to pay off your high-rate loans faster.

This method saves the most money because you’re prioritizing the most expensive debt and paying it off faster.

The second strategy is called the debt avalanche method. It’s similar to the snowball method but involves listing your debts by amount owed, from smallest to largest.

Instead of paying off the highest-rate loans first, you make extra payments on the smallest debts you owe. A lot of finance nerds like myself might sneer at this method but it actually has a very powerful advantage.

While you might pay more in interest by prioritizing your smaller loans, instead of attacking those high-rate loans first, you get to watch loans drop off your list faster with the avalanche method. That can be hugely motivating and help keep you on your budget.

Share Your Plan with Friends

Making a plan to pay off your debt is a great start…but how many times have you been here before? How many times have you been ‘serious’ about paying off your debt so you can start investing and get your finances back on track?

Any debt payoff strategy with a chance at success needs a support system.

You can create that support system by sharing your plans with your friends and family. I understand, money is a taboo subject for a lot of people and it can be embarrassing admitting you’re so far in debt.

Spending habits and an addiction to debt are created over the course of years. If you really want to get free of that debt, you’re going to need help breaking the spending habits that got you there in the first place. You can’t expect to pay off your debt if you’re going out with friends every night or if you’re trying to keep up with their expensive tastes.

Sharing your debt plan with friends, you might just be surprised that they need saving as well.

Paying off your debt so you have money to invest doesn’t have to be complicated but the real work is in the execution. Committing to saving yourself from the burden means visually understanding what that debt is costing you and the life it’s keeping you from living. We might not be able to save everyone from the tidal wave of debt, but a little planning could save your life and even the financial lives of those around you.

Joseph Hogue worked as an equity analyst and an economist before realizing being rich is no substitute for being happy. He now runs five websites in the personal finance and crowdfunding niche, makes more money than he ever did at a 9-to-5 job and loves building his work from home business.