Americans’ debt load has risen nearly 23 percent since 2013 — despite record stock gains and low unemployment — and that can’t bode well for their future.
Household debt totaled almost $13.7 trillion in the first quarter, with credit cards, auto loans and home equity loans accounting for 18 percent of that figure, according to the New York Federal Reserve’s Quarterly Report on Household Debt and Credit. One could argue mortgage debt (68 percent of all debt) and student loans (11 percent) are relatively innocuous because they are leveraged to rising real estate prices and higher salaries over time, but the drag created by everyday spending on cards and cars hurts futures in several ways.
For families who barely make enough income to pay basic needs, it completely crowds out their ability to save.
Even families who have the capacity to manage debt and savings at the same time often don’t do it, experts say, because significant debt is a psychological barrier to long-term savings.
Meanwhile, the problem appears to be getting worse. The percentage of seriously delinquent credit card balances has increased steadily since 2016.
If your own debt levels are threatening to ruin retirement, it’s time to act:
• Mind the first rule of holes. As the old saying goes, when you’re in one, stop digging. Yes, this means putting an end to card use, at least until the highest-interest cards are paid off or your debt-to-income ratio is under control. To calculate your ratio, divide take-home pay by your total non-mortgage debt. Eventually you want this percentage to be zero, but aim for 10 percent to 12 percent for now.
• Power up. When your highest-interest card is paid off — yay, you! — roll that payment into paying down the principal on the card with the next-highest rate. Paying this down dramatically shortens the time it takes for payoff.
• Beware of certain “helpers.” Last month, the Consumer Financial Protection Bureau filed a federal complaint against a handful of credit repair companies, including CreditRepair.com, alleging the firms required upfront payments for services, contrary to laws requiring that repair companies document success before requesting payment. Regardless of how this case evolves, be skeptical of any for-profit credit repair or debt management service. Many communities have free or low-cost services through non-profit agencies. Check out the National Foundation for Credit Counseling at www.nfcc.org, and don’t fall for come-ons promising to make your debt disappear. They won’t.
• Set a new budget. In a perfect world, we’re all saving 15 percent of gross pay for retirement and another 10 percent or so for shorter term goals. This isn’t realistic for people with substantial debt, but setting out some kind of overall plan is important. Divide your gross pay into four equal buckets — housing, taxes, savings and everything else. Include, for now, debt payments in your savings bucket. Over time, as you pay down debt, more and more of that bucket will go toward your future.
• Get the match. It’s difficult to generalize how to make the trade-off between paying down debt and saving for retirement, but most experts suggest contributing enough to an employer savings plans to at least get the full company match. If your employer doesn’t match any contributions, aim for a few percentage points of pay. Next time you get a raise, put half of it toward retirement and the other half toward the highest-interest card debt. Pretty soon, you’ll have two money “snowballs” gathering speed.