Getting your debt paid off is a major step in beginning to build your wealth.
How Much Debt Do Folks Have?
While the total outstanding debt on a national basis is a record $15.84 trillion, including mortgages, here is a list of the average amounts of outstanding debt by age group, excluding mortgage balances:
- Gen Z (18-23) $9,593
- Millennials (24-39) $78,396
- Gen X (40-55) $135,841
- Baby Boomers (56-74) $96,984
- Silent Generation (75 and over) $40,925
Leading Types of Debt
What types of debt do folks owe? Here is a list, with the average outstanding balance for the big three.
- Credit card debt $6,569
- Student loans $37,172
- Auto Loans $26,162
Then, there is a family loan, personal loan, 401K (retirement) loan, HELOC (home equity line of credit), mortgage and payday loan.
If you believe loans are good because we are using other people’s money, I would say that’s wrong, because there is no good debt. All debt is bad. Take a look at your bank’s headquarters building and know that you paid for it.
About 25% of the population has no debt outside of mortgage debt. About 53% say that eliminating debt is a priority.
Why So Much Debt?
We live in a time when we all want everything now. Why wait? If you can have that new car, you get it. The average car payment is $648 for a new car and $503 for a used car, according to Experian. These payments range anywhere from three to seven years. When folks look at the car, they do not ask if they can afford the car, but ask if they can afford the payment. That’s not the right thinking.
Having a student loan, which is an epidemic across the country, is not even considered a loan by many who have this outstanding debt. The average loan payment is $393, according to the Federal Reserve. Many have not considered alternative ways to pay for a degree. They also do not ask the question, “Am I going to get a return for my investment?”
Credit card debt is a national favorite, with the average monthly minimum payment of $110 for a balance of about $5,525, taking a whopping six years to clear the balance. Many folks have resorted to supplementing their income by using their credit card for purchasing gas and food. Then, of course, there is impulse buying. Please keep it up, because it’s good for my Amazon stock.
How much of this sounds like you?
Auto payment $600, student loan payment $390 and credit card payment $110. Add that up and it comes to $1,100. What could you do with an additional $1,100 per month?
How about investing as one possible alternative?
How Much are Payments Costing You?
If you clean up your act and get these debts paid off, you could then invest the $1,100. If we assume you invest monthly $1,100 for the next seven years at a modest 7% return it will grow to about $118,000 before taxes.
Now, think about that! You can pay the banks for that new car, pay your student loans for an eternity, keep that buying up on credit cards and make bankers rich. Or, you can eliminate your debt and put yourself on a journey to accumulate wealth.
Eliminate Debt
All of this sounds great, but it’s easier said than done. Yes, very true: Good things in life do not come easy. You must work at it.
Here is a very simple formula to achieve this goal.
Create a budget. Put every dollar you earn into a category and give it a home. Live on less than you make.
Take a hard look at your budget. Do you have everything? Does it include debt payments? Does your income exceed your total expenses? If so, great! if not, maybe you need to create additional income. Can you eliminate some expenses? Are they all necessary?
Now, list out your debt, the amount you owe and monthly payments. Put your items in order from the smallest to largest amounts based on the balance owed.
Create a Plan
Now, freeze all debt. Do not add one single penny. The bad habits must be stopped. This is a critical step.
With the list of debts in hand, begin to pay them off. Begin with the smallest debt first, working your way through each debt until all are paid off.
With your budget done, you know what your needs are to pay all your bills. Now ask yourself what you need to do to begin to double or perhaps triple pay the lowest debt. The key is to get this first debt paid off as quickly as you can. Cut the budget to bare bones. Maybe get a second job or sell some of those impulse things you bought. Make sure you are keeping up with the minimum payments for all the other debt.
Once you have the first one paid off, then roll the payment from the first debt to the second debt, getting that paid off as quickly as you can. Continue to roll payments until you have gotten through each debt. Before you know it, all your debt will have gone away.
I think you get the idea.
Now What?
Getting your debt paid off is a major step in beginning to build your wealth. Now, begin to invest those payments that you do not have to make that make the banks rich. Make yourself rich instead!
Apply some discipline to create some short-term pain for the long-term benefit. Want to become a millionaire? This is the key. Go for it.
Conclusion
Debt management is debt elimination. Stay aware from debt consolidation because it does not get your debt paid, it just moves it. And yes, getting your mortgage paid off is also a goal. The sooner you can be 100% debt-free, the quicker you can build wealth.
So, get started.
Next month, we will discuss in more detail how to create an exact plan and a couple of alternative ways to become debt-free. This was high level, but you should be able to begin putting things in place.
Good luck! You work hard for your money. Make sure it stays your money!
Thanks for reading; I hope you found this helpful. QCBN
By Steven Calabrese
Steven Calabrese, CPA, is the CFO of Polara Health. He also is the owner/operator of a website known as thebiweeklyadvisor.com, where topics such as budgeting, investing, paying off debt and goal setting are discussed.
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