According to data from the Federal Reserve Bank of New York, for the fifth consecutive year, total household debt increased to $13.15 trillion in 2017.
Let that sink in. That is a lot of debt. Conversely, household net worth has also hit all-time highs; and income levels appear to be high enough that, for many Americans, debt doesn’t spell financial distress.
However, it is important to know what type of debt you have and how you can tackle it, especially if you find yourself struggling to manage it.
Bad debt vs. good debt
Student loans falls into a category of debt that is traditionally referred to as “good” debt, because they have the potential to boost earnings or net worth. Mortgage debt is another kind that falls into this category, since after making all those payments you are left with an asset that has value.
“Bad” debt is the kind you incur when you use your credit card to pay for something you cannot afford, like a vacation, a new cell phone, or designer item. Or, you use your credit card to make a lot of small purchases that you don’t pay off promptly. If you end up paying interest on interest, that’s a bad situation.
There’s no absolute rule as to how much debt is too much, but common sense will warn you when you’re coming close to the edge. If you find yourself using your credit card to make routine purchases or to cover expenses in between paychecks, or even missing payments, there may be a problem.
What you can do
Even if you’re not at these points, it’s worth reviewing some of the most common triggers of household debt problems, and tackling them proactively.
Here are four tips on tackling household debt:
1. Don’t overspend. The most obvious culprit is overspending, and the remedies are equally obvious, even if they can feel tough to implement. You can accomplish this by creating a budget and sticking to it. Always account for your living expenses first and then if you have money left, you can save it or spend it.
2. Renegotiate loan payments. If you already have a heavy debt load, talk to your creditors and try to renegotiate payments. Personal finance pundits talk of debt stacking, which calls for you to contribute as much as you can each month to reducing the amount owing on the highest-interest form of debt (typically a credit card). When that is paid off, you may then start directing those excess payments to the next most-costly debt, and so on.
3. Open a Health Savings Account (HSA). If medical bills are a major source of debt problems, set money aside each month in an HSA. Your contributions are tax–free, and gains on the funds you invest also won’t be taxed (like an IRA). Withdrawals also are tax-free, as long as they are used for medical expenses, or related items, from hearing aids to prescriptions.
4. Avoid new debt. If you can’t handle the current debt you have, you should avoid accumulating new debt at all cost.
If you’d like additional information on managing your finances, I encourage you to read these two recent blog posts:
Read More ›
Do you need to spend over $30,000 to have a beautiful wedding? I don’t think so.Read More ›
As interest rates rise, opening an FDIC-insured account at your local financial institution may be a great option for you.Read More ›
There is nothing more worrisome than trying to figure out how to pay off college debt.Read More ›