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With household American debt now at roughly $14 trillion dollars, it’s no surprise many Americans are struggling to manage their debt and establish positive financial habits. Mortgage debt is by far the largest source of American debt, sitting at $9.83 of the $14.12 trillion. Following mortgages is student loan debt, which hit $1.5 trillion in 2019, surpassing auto and credit card debt.
But a new survey by New York Life found that over half of Americans polled have paid off half to all of their debt, with baby boomers leading the way on paying down debt and exhibiting positive financial habits. Despite positive signs of debt management in the survey, there’s still reason for concern, as respondents’ perceptions might not match reality.
Roughly 40% of respondents said they have financial habits that are above average or excellent. However, when looking at the group, 7% were contributing to a college savings plan, 4% were saving for childcare, 6% were saving to care for a parent and 25% were setting money aside in a retirement fund. While respondents thought they exhibited strong financial behavior, they’re undersaving for a wide range of financial goals.
“It’s easy to think of having ‘good’ financial habits as simply ensuring that you aren’t spending more money than you’re taking in,” said Brian Madgett, head of consumer education at New York Life. “While this is important, focusing on just this one aspect is a missed opportunity to implement a protection-first financial approach to ensure financial security for ourselves and our families, both now and in the years to come.”
The survey highlighted at least two areas that could be holding respondents back from saving more. First, existing debt management requirements are a burden to many people. For instance, over 77% of boomers have more than $5,000 of outstanding debt. Among all respondents with debt, almost half (46%) said they would contribute to long-term savings or an emergency fund if their debt was paid off. Furthermore, respondents were 14% more likely to save for the future or an emergency and 11% more likely to invest in the market than when their debt was at its highest.
If you’re struggling with debt, what proactive steps can you take to get it under control?
1. Follow a Personalized Budget and Financial Plan
If you want to get ahead of your debt, pay it down and save for the future, you need a budget and a plan. Almost half (46%) of respondents who had paid off more than $75,000 of debt followed a personal financial budget. This was 11% higher than all respondents, only 35% of whom said they followed a personal financial budget.
Having a budget and plan in place provides a blueprint and roadmap for success. You still have to execute the budget, but it’s much easier to fall off track without one. In a lot of ways, a budget and a plan act as accountability measures.
2. Speak with an Advisor
Financial advisors can help you plan around debt management. They prioritize what debt you should pay first and help you budget and manage cash flow. Don’t let debt take over your entire financial life. Balance debt payments with saving for the future, emergency funds, retirement and insurance needs. In the survey, those with the most debt (over $75,000) were also most likely to seek out a financial advisor for help.
3. Prioritize Debt
Not all debt is created equal. For instance, debt on your house should be paid off first. You have to make your mortgage payments or risk foreclosure and ultimately your home. You can refinance and push off other debts like credit card or personal loans, although the debt might compound due to accruing interest. If possible, try to prioritize paying down high-interest debt first. For instance, pay down credit card debt before putting additional money toward a student loan or mortgage debt, as credit card interest rates are often among the highest.
4. Consider Refinancing
You can refinance certain debt obligations to help reduce interest rates and your total debt payments. Today, interest rates for personal loans, student loans and mortgages are all very low compared to historical rates. However, credit card rates have continued to climb. Regardless of the debt you have, if you’re having trouble meeting your payments, it might be time to consider refinancing your debt to get a lower rate and monthly payment. You might deal with costs when refinancing certain debt obligations like a mortgage. Other debts like student loans or personal loans don’t carry additional costs for refinancing. Instead, one lender might be willing to give you cash to pay off your existing debt at a lower rate.
5. Don’t Fall Behind
The simplest answer to debt management is to stay in front of it. Manage your annual spending, don’t over-borrow for college and don’t buy a house outside of your means. More is not always more when it comes to spending and happiness. Regardless of your income level, a cut in spending can do wonders for your financial freedom and your stress levels.
Falling behind with debt can become a huge roadblock to financial freedom and retirement preparedness. Live within your means, have a plan in place and seek guidance from a qualified professional to develop a blueprint for financial success. Don’t let your spending and debt drive your life. Take control and live the financially free life you want.