In a recent study, half of Americans said their expenses are equal to or greater than their income. Revolving credit, particularly credit cards, is an increasingly significant part of the equation. According to the Federal Reserve Bank of New York’s Household Debt and Credit report data, Americans’ total credit card debt hit $905 billion in 2017 – an increase of 8% from the previous year.
The phrase “credit card debt” usually triggers red flags when we’re talking about long-term financial planning. And in fact, the average US household now carries $15,654 on their cards, and pays $904 annually in interest. But debt, in and of itself, isn’t good or bad. Instead of making a value judgement about how you use debt, when working with clients we like to understand:
- What is your debt story?
- What are your attitudes about debt?
- Why do you feel the way you do?
- How are your debt levels affecting the Return on Life your money provides?
Having a deeper understanding of the above helps us do a better job positioning your money to work more effectively for you.
What’s the big picture?
Our current high debt levels reflect a previous generation of low interest rates, an active housing market, a robust credit market, and relative peace and prosperity. This meant more consumers with more plastic and more loans. Again, debt is not bad in and of itself, especially in a healthy economy. But from 2007-2009, many highly-leveraged people and companies were vulnerable to foreclosure and bankruptcy during the Great Recession.
People who were born between the Great Depression and World War II grew up in the daily realities of war and lean markets. Unsurprisingly, this group tends to avoid using credit cards when they can. Instead, they rely on the cash in their hands and the checkbooks they balance with pen and paper.
That credit-aversion seems to have skipped the Boomer generation, who, generally speaking, happily used credit cards and home-equity loans.
The current generation of young workers—Millennials—seem to be warier about carrying debt than their parents were.
Young people are entering the workforce at a time when household income is struggling to keep pace with the cost of living. They believe taking on debt would only widen that gap. In particular, the costs of medical care, housing, and food continue to grow faster than income.
Many underemployed Millennials are living at home into their late-20s, so they aren’t using credit cards to finance luxury items or buy first homes. Even for millennials who do find good jobs after college, many start their adult lives in the red because of student loans. As of September 2017, the average US household had $46,597 in student loan debt.
Millennials are less enthusiastic about investing in the markets. Growing up during the Great Recession shook their faith in the economy. Growing up in the shadow of 9/11 and terrorism, they’ve only known a world unsettled by global unrest.
Millennials are also a more conscientious consumer group than their parents were. They want to spend their time, and their money, on things that help to make the world a better place. They consider personal fiscal responsibility to be part of a greater good.
What’s your story?
While looking at big picture debt trends is useful for predicting where the economy is headed, your Life-Centered Plan is about you. Now would be a great time to take a minute to consider:
- How do you feel about debt?
- Why do you think that you feel the way you do?
- Are you comfortable with your current level of debt?
- Is your current level of debt causing any problems with one of your loved ones?
- Do you pay off your credit card balances in full every month?
- How do your attitudes about debt align or differ with those of your parents? Why do you think that is?
We encourage you to reach out to us and we can take a closer look at your financial situation and help you get on a more comfortable path. Together, we can create a financial plan that will improve your Return on Life.
1. Half of Americans are spending their entire paycheck (or more) http://money.cnn.com/2017/06/27/pf/expenses/index.html
2. Nerdwallet’s 2017 American Household Credit Card Debt Study https://www.nerdwallet.com/blog/average-credit-card-debt-household/