Yes, we Americans are obsessed with data analytics. But maybe we missed something, because despite the dramatic stats about debt in America, not much seems to change. Common Good editors compiled data that show the big picture, and writer Ashley Abramson interviewed three experts about their analysis of the picture.
Ben Wacek, founder of Guide Financial Planning
How pervasive is the personal debt problem, really?
Americans have more than $14 trillion in consumer debt, which breaks down to about $92,000 in average debt per adult. That’s a huge amount, but some people have zero debt, and some people have significantly more. The majority is mortgages, student loans, and auto loans. But many have credit-card debt, too. Debt has really become normalized in our society — many people don’t think twice about putting something on their credit card or financing a Peloton.
Part of the personal debt problem is that prices have raised more quickly than people are earning. There are also systemic factors. Personal finance isn’t taught in schools, for example. So if you haven’t had the privilege to be raised in a family that handles money well, it will be harder for you to forge your own path. No matter the factors, it usually boils down to budgeting. People generally aren’t aware of how much money is going in and coming out.
How “bad” is debt? You hear about good debts and bad debts.
I don’t like to use the terms “good debt” and “bad debt.” There’s a spectrum where there’s bad debt and worse debt, and on the other end, you have full ownership of something.
The worst debt is credit-card debt, because it has the highest interest rate, and it’s often used to purchase goods that lose value. There are exceptions, like medical situations, but often people use credit cards when they just want the money to do something. Where debt may make more sense is buying a house or taking out a student loan because those things have more value.
Rather than just debt or no debt, I’d encourage people to think about the purpose of the debt and the interest rates. If you get behind on credit-card debt, it can get really hard to catch up. You may only be making interest payments, making it more difficult to build an emergency fund that should serve as a buffer between you and debt.
Are the “never debt” advisors realistic, given the pervasiveness of the personal debt?
There would be a benefit to changing our collective mindset around debt, and I agree that we should be using less debt overall. But very few people could buy a home or go to college without taking on debt.
Owning a home is a forced way of saving for many, because you have to pay your house payment every month, and hopefully your house appreciates in value over time. It’s a way of wealth building. But there are caveats. For example, people should think twice about buying more house than they need or taking out a loan with a high interest rate.
And while going to college is a way of investing in your future, it’s important to ask yourself questions when you take on debt. Are there less expensive ways you could get an education? Is the job you can get with this degree realistically setting you up to pay off this debt?
Is there a middle-ground strategy between having $100k in student-loan debt and not going to college until you’re 40?
Weigh your desires against your goals. Some people really value the traditional college experience. But if your goal is just getting a degree, there are some more cost-effective options.
Scholarships are also a significant way to cut costs: I tell students to think of applying for scholarships as a full-time job. I also encourage people to look at all the college options. Often people just pick a name they recognize, instead of looking at the true price tag and, just as importantly, researching financial aid each school offers.
What’s your go-to approach for mitigating debt while also maintaining a life and paying your bills?
It’s not the most fun answer, but so much of it is understanding and tracking your cash flow. If you can understand what’s going in and what’s going out every month, you won’t spend more than you make. And the only way to get out of debt is to spend less than what you make to the point you can make debt payments and pay your bills. There’s no magic way out of it.
I encourage people to look at the bigger picture and understand what they hope to accomplish. When you have goals ahead, like you want to pay off a debt within a certain time period, you have a bigger “yes.” That can motivate you to resist going out to eat or booking a vacation you can’t pay for. Smaller decisions get put into perspective when you have a higher goal.
How can people with debt also achieve their financial goals, like saving, if they don’t make enough money for both?
The most important thing to focus on is paying off higher-interest debt like credit cards. While you’re paying that down, save as much as you can, even if it’s a small amount.
There’s a balance, and people should think creatively to maximize savings where they can. If your employer matches your retirement plan, then contribute what you can to maximize that investment. If you’re building an emergency fund, start small by changing your habits. Pursuing more income is another option to make sure you can pay off debt and save.
The most important thing is to not put off saving just because you feel overwhelmed or behind. That mindset can keep people from trying, which really sets them back. Save $20 a month instead of buying coffee. It’s not a lot, but it grows over time.