The Financial Implications of Excessive Debt

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“When you get in debt, you become a slave.”—Andrew Jackson

“Never have a debt payment of more than 25 percent of your take-home pay.”—Dave Ramsey

“Debt is a trap, especially student debt, which is enormous, far larger than credit card debt. It’s a trap for the rest of your life because the laws are designed so that you can’t get out of it. If a business, say, gets in too much debt, it can declare bankruptcy, but individuals can almost never be relieved of student debt through bankruptcy.”—Noam Chomsky

Many Americans are buried in debt—with the burden worsening amid lingering inflation. Credit card debt now tops $1 trillion in the United States, according to the Federal Reserve. You may think you’re in the know of how much you owe, but are you really?

Factoids:

• Credit card balances recently rose to $1.12 trillion.
• According to Transunion, the average credit card balance rose from $5,733 in the first quarter of 2023 to $6,218 in the first quarter of 2024.
• The average credit card interest rate on accounts with balances is 22.63 percent, according to the Federal Reserve.
• As of the first quarter of 2024, Americans owed $1.75 trillion in education debt.
• Among all borrowers, the average student loan debt in 2023 was $38,787.
• The average monthly car loan payment in the United States is $735 for new vehicles and $523 for used ones, according to credit reporting agency Experian.
• The number of consumers utilizing BNPL (“buy now, pay later”) is staggering—and a big reason phantom debt is on the rise. According to Adobe Analytics, over the 2023 holiday season Americans collectively racked up $16.6 billion in BNPL purchases—bringing the total amount of BNPL spending to $75 billion.
• For the first time, the average renter household in this country is paying 30 percent of their income on rent, according to a new report out by Moody’s Analytics.

(Source: Federal Reserve Bank of Philadelphia / Release: Large Bank Credit Card and Mortgage Data Units, in billions of U.S. dollars, not seasonally A\adjusted )

Oftentimes, by the time you realize you’re in debt trouble, it may be too late. If you can’t pay a utility bill or are using one credit card to make a payment on another credit card, you are clearly in dire financial straits and need to get this sorted and figured out. The anxiety of wondering if your utilities may be shut off or your credit score will fall to a level resulting in qualifying for new credit almost impossible, this is debilitating and often a leading cause of serious stress and even divorce.

A triple storm is brewing when it comes to debt. Inflation is raising the prices of everything. First, in many cases homes to cars and food to gas prices have gone up 40 percent or more since the pandemic began. Second, interest rates have been much higher for over two years and don’t show much chance of coming down anytime soon. With the average credit card interest rate at 22.63 percent, and the average credit card balance $6,218, the monthly interest alone is $117.26, or $1,407.13 each year! That money could have gone for food and gas, or to help pay increasing utility bills.

Third, permanent full-time jobs are decreasing, while new jobs are more often temporary and or part-time. The number of Americans working two or more jobs has reached nearly 8.4 million people. This represents 5.2 percent of the workforce. Roughly 5 million Americans held one full-time and one part-time job, and 2 million held two part-time gigs.

While the trend of multiple jobs may be influenced by inflation, and the need to brace for possible layoffs, remote work has provided the flexibility for some employees to take on second jobs, especially during the holidays. We still have some concern that if recession finally takes hold, this third trend and issue, along with the other two, will set back many Americans already struggling just to maintain the necessities of living.

Excessive debt can reduce your cash flow, savings, and investments. When you begin paying back your debt, you have less money to spend on other things or save for the future. The use of steadily increasing debt added a temporary improvement to your standard of living beyond just your earnings. Paying back this debt means you will have to settle for a standard of living beneath your earnings, quite a shift in your lifestyle!

Debt reduction is a crucial aspect of achieving financial freedom and securing a stable financial future. Effective debt-reduction strategies involve several tactics such as budgeting, consolidating some or all your debts, negotiating with creditors to lower the monthly payment or even settle for a smaller amount to pay back, and prioritizing payments.

And, finally—but most important—you need to create a budget; you need to track what is coming in and what must be paid out and when. This admittedly seems boring and tedious, but ask anyone who has done it, and they will tell you how it helped them dig out of their own debt trap. A budget is a financial plan that outlines income and expenses over a given period. Make a list of all your income sources, including salaries, freelance work, and other revenue. Categorize and record all expenses, such as housing, utilities, groceries, and entertainment. Differentiate between essential expenses and discretionary spending and give high priority toward paying off debt.

For more on how to create your own budget, please read: https://www.theepochtimes.com/bright/the-power-of-tracking-your-finances-from-clueless-to-cash-savvy-4-6-post-5664611.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.