Ruth Mahoney, President, Capital Region, Keybank
Following the recession, Americans started showing real signs of progress when it came to eliminating debt and boosting savings. As the economy has grown stronger in recent years, it appears we’re falling back to old—and bad—habits.
As of August 2018, Americans’ total household debt climbed to an all-time high of $13.29 trillion, and according to the Federal Reserve, the average debt per household is more than $137,000. This includes student loans, credit cards, mortgage and personal loans. Granted, not all of the debt is bad debt, but the overall load can strain the monthly budget and create a dangerous gap between spending and income.
Here’s the silver lining. Debt is not insurmountable. First, you should consult a financial advisor. They can help you figure out how to get back on track. Second, adopt a consistent approach to making payments and spending less than you earn. Here are seven tips that can help you do it.
Evaluate your spending. Most Americans have credit cards. Credit cards are not bad. However, most Americans also have credit card debt, which is bad. Add to that student, car and home loans; insurance, utilities and taxes; dining out; gifts for friends and family; a coffee or two; charity; and all of the little extras in addition to monthly bills and you can see why it is easy to fall behind. So, the first step to getting out of debt is to prioritize your spending. Separate needs from wants and put a hold on unnecessary spending until you get your finances in order.
Create a budget. Apply the following principal to your spending: you can’t spend a dollar unless you cut a dollar elsewhere. The idea is simple. To get out of debt you need a plan and discipline, which begins with spending less than you make. So, add up all of your expenses and figure out your monthly income. You need to come out ahead.
Develop a debt elimination plan. One approach is to start small. Make minimum payments on all but your lowest balance bill. Tackle it aggressively. Once it is paid off, move to the next lowest debt obligation. The idea is make it manageable so you can make progress and stay motivated. Each time you pay off a debt, apply the money you were paying for that debt to a new debt. You will soon find yourself making sizable payments on your most sizable debt. Another approach is to tackle your highest interest rate debt first. Neither is right or wrong. The key is to have a plan and to stick with it.
Stop using credit cards. If you’re in debt, remove the variable that helps you accrue it even more—credit cards. Keep one primary card for emergencies only. Use cash—or your debit card—for everything else. If you have to use your credit card, make sure you pay off the balance in full each month to avoid interest and fees.
Consider relocating. If you’re really committed to eliminating debt and boosting savings, it’s worthwhile to look at what is likely your largest expense—your home. Moving out of a home you love is a difficult choice to make, but it does offer a lot of upside. First, you can use any equity you have for a down payment on a new house and to also pay down debt. Second, you can reduce your overall living expenses while maintaining your income, which is a great way to accelerate savings.
Build an emergency fund. This may seem difficult, but it is essential. If you want to stop relying on credit cards to bail you out when you have an emergency and ultimately be debt free, you need to have a cash fund you can draw from. You can do this by putting any extra income you have at the end of each month into a savings account.
Earn more money. Do you have any extra time on your hands? If you can find a few extra hours in your day or week you can pick up part-time work, an extra shift or work additional hours from home. Any additional income you earn should be applied directly to your debt or to maximizing your savings.
Also, avoid quick fixes. There’s a saying. “Quick fixes do not fix.”
Debt consolidation may feel quick and easy, but what it really does is provide immediate relief by spreading the pain out over a longer period of time at an often-higher price. Essentially, it’s a loan to pay off your loans.
Before you jump into a debt consolidation program, consult with your banker or a reputable credit counselor. They may be able to help you define an alternative way to eliminate your debt in a time frame that works for you.
The important thing to remember is that as overwhelming as your debt may seem, you can overcome it and rebuild your financial life. And while the path to recovery may be easier for some than others, if you begin to adopt the value that you cannot spend more than you earn you can make meaningful and measurable progress.
The other takeaway here is that what is good for eliminating debt is also good for maximizing your savings. Once your debt is paid down, begin depositing that money into savings and investments accounts. Set goals. Talk with a financial advisor. You’ll soon discover that when managed well, your money can earn you money…and that the path from debt to prosperity was not as hard to navigate as you initially imagined.
About the author: Ruth Mahoney is regional retail leader and president of KeyBank’s Capital Region. She may be reached at either 518-257-8619 or [email protected]
Stop living paycheck to paycheck
One of the most common things people will say about their finances is that they feel like they’re living paycheck to paycheck…that it seems like saving money is unattainable and as soon as a paycheck arrives, most of it is already spent on bills, mortgage and other expenses.
If this is you, take heart. You’re not alone. But also know this: it can change. Growing your financial wellness is not unattainable. There are some very simple things you can do to help build up savings and plan for the future.
Think small, save big. The secret to saving large amounts is to save small amounts of money on a regular basis over time. Give your savings goals specific dollar amounts and time frames, and break your overall savings goals down into manageable chunks.
Automate savings. A very easy way to start saving small is to directly deposit a specified amount of your paycheck into a savings account to pay yourself first, without having to think about it. Most people use direct deposit to put their paychecks right into their checking accounts. You can also set it up so some of that money goes directly into your savings account.
Put loose change to work. Chances are, you currently have more money than you realize. It’s in your pocket, under your car seat and couch cushions. In fact, recycling and waste management company Covanta Holding Corp. estimates Americans throw away $62 million in loose change each year. $62 million! Instead of dismissing loose change, attach a savings goal to it, like applying it to a vacation fund or donating it to a charity when you hit a certain dollar amount.
Leverage technology. Today’s new banking platforms that integrate accounts with financial wellness tools make changing and tracking financial behaviors easier than ever. To see what solutions are best for you, talk with your banker.
The truth is, as much as we dream about being on the receiving end of a financial windfall, it’s not likely to happen. The average person just isn’t that lucky. The good news, though, is that luck is not a factor when it comes to securing your financial future. What really matters is purpose, discipline and persistence.