Debt is on the rise, as Americans spend big on nightlife and ‘personal passions’
We’re in denial about how our debt can wreck our future.
The average American now has $38,000 in debt (not including mortgages), up from $37,000 last year, according to Northwestern Mutual’s 2018 Planning & Progress Study, which surveyed more than 2,000 adults, released Tuesday. What’s more, fewer people said they carry “no debt” this year compared to 2017 (23% vs. 27%).
Plenty of that is because we’re increasingly pulling out the plastic to pay for things. Credit card use is now higher than ever, Transunion data reveal. And 25% of Americans say that credit cards are now their top source of debt, up from 19% last year, the Northwestern Mutual data revealed. Furthermore, credit card debt hit a record high at the end of 2017, climbing to $786 billion, up 6.7% from the year prior and up from the previous record of $737 billion in 2008, according to data from Experian.
“It’s frightening how comfortable we have become with being in debt,” says Emily Holbrook, director of planning at Northwestern Mutual, told Moneyish. “Americans are diving into debt and struggling to stay afloat.”
So what are we buying? Dining and nightlife expenses (this takes up 15% of people’s monthly budgets) top the list of what people are spending their discretionary income on, followed by personal passions/hobbies (13%), personal care and clothing (13%) and leisure travel (10%).
While Americans pay lip service to paying down their debt (more than half of them say this is a top financial priority), the reality is that they’re not trying that hard to make it happen. People spend roughly the same amount of monthly income on debt repayment (36%) as they do discretionary expenses (37%) like dining out and personal passions — which is a big mistake, experts say.
“There are so few reasons to have high-interest debt hanging around … simply due to how fast the interest adds to the principal balance that one should absolutely prioritize paying off the debt over discretionary spending,” says Mitchell C. Hockenbury, a certified financial planner at 1440 Financial Partners in Kansas City. Kimberly Foss, the president and founder of Empyrion Wealth Management and author of Wealthy by Design, notes that while prioritizing debt over discretionary spending should be your priority, “in real life, sometimes we need the emotional lift of a little ‘retail therapy.’” If that’s the case, “use this selectively, and ideally as a reward for reaching a debt-reduction or savings goal. So, it might help motivate you to knock out that credit card balance if you know that, when you do, you have ‘earned’ a trip to your favorite weekend spot or clothing retailer.”
But many Americans’ attitudes towards debt issues is one of indifference. Indeed, the majority (56%) say that debt has “low” or “no impact” on their ability to achieve financial security. “That is wrong,” says John Petrofsky, a chartered financial analyst and associate portfolio manager at FBB Capital Partners in Bethesda. “There’s an opportunity cost there,” he explains — in that the money you’re using for your debt is typically money you’re not saving for your future. “Having zero debt and a healthy emergency fund is the strong basis for your personal finances,” concludes Hockenbury.
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