Investing can help you fight your debts


Key points to remember

  • According to data from the New York Federal Reserve, consumers ended 2021 with record debt of $15.6 trillion
  • The average household now owes $155,622, including mortgage, credit card, car loan and student loan balances
  • Mortgage balances accounted for the biggest chunk, rising $890 billion over the year and $258 billion last quarter

US inflation hit 8.5% in March, marking a new high that spans at least four decades. Price increases in the energy, food and housing sectors were strong contributors to the increase, with gasoline alone rising 19.8%.

And yet, median household income has fallen 3% over the past two years, leaving many Americans struggling to reconcile their checkbooks.

In other words, as prices continue to rise, so does the average debt in America. We’ll take a look.

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Review of Average Debt in America

According to the latest data from the New York Federal Reserve, the average household now owes a whopping $155,622 in debt. This number includes balances on mortgages, second mortgages, credit cards, auto loans, student loans, and other miscellaneous debts. That’s a substantial increase from the average debt of $90,460 reported by CNBC just seven months ago.

In total, household debt in the United States now exceeds $15.6 trillion. More than $1 trillion of that debt has piled up throughout 2021. In fact, the past three months alone have added $333 billion to the national balance — the largest quarterly increase since 2007.

Breaking down US debt

The New York Federal Reserve notes that mortgages are still the largest component of most household debt. Mortgage balances increased by $890 billion through 2021 as consumers flocked to the housing market amid low interest rates. The last quarter saw mortgage balances soar by $258 billion, boosted by rumors of impending rate hikes.

Meanwhile, new auto loans increased consumer debt by $181 billion in the fourth quarter, reflecting a $15 billion increase. (Although the sudden spike is likely due to more expensive loans, not more loans, thanks to raging auto inflation.)

And when it comes to credit cards, the numbers get interesting. A WalletHub study found that Americans managed to pay off a record $83 billion in credit card debt in 2020 thanks to nationwide stimulus payments and reduced economic activity. But average credit card debt is rising again, with consumers adding a shocking $74.1 billion to their balances in the fourth quarter alone. In total, household credit card balances sit at just under $8,600.

A look at new debt in 2022

Of course, “recent” data does not necessarily mean “new”. We are currently four months into 2022 – and in the hottest inflationary environment for 40 years, consumers have been steadily going into debt. In February alone, consumer debt jumped nearly $42 billion.

But it’s hard to blame consumers for the sudden increase in spending. (And in fact, we don’t.) Thanks to Russia’s invasion of Ukraine in late February, global energy markets exploded astronomically in just a few weeks. Not to mention that the US Federal Reserve instituted the first of several planned rate hikes in an effort to calm a runaway economy.

Throwing the student debt crisis into the mix

We largely skated on the above student loan debt – and for a reason. Exceptionally, student loans were the only category of debt to decrease in the last quarter of 2021, dropping the national balance by $8 billion.

That’s not to say the student debt crisis is over; it is rather far from it. Americans still owe an astonishing $1.6 trillion on federal student loans, more than is owed on any other debt (except mortgages). These numbers have skyrocketed on an exponential curve over the past few decades, driven by:

  • Stagnant wages
  • An ever-higher cost of living
  • Astronomical increases in tuition and fees
  • An employer market that makes it difficult to find quality jobs after graduation

To ease the burden, President Joe Biden has once again extended the federal student loan deferral and interest freeze, this time until August 31. , there is no indication that this will happen anytime soon.

How to deal with growing debts

Despite all our wishes and desires, the impacts of the pandemic will reverberate for years to come. While we largely welcome some of these changes (hello, work from home), the rising average debt in the United States is not one of them. If you’ve taken on more debt than you think — or, frankly, no debt — here’s how to get your finances back on track.

Revisit your budget

As the economy continues to improve, it’s time to take a hard look at your budget. Look at your regular spending to see if you can cut fat anywhere, especially in high inflation categories. Can you move to cheaper housing? Reduce your household energy costs? Switch to public transport?

Plus, with student loan forbearance extended through August, you might want to take this breather. If you have extra cash, throw it in your balance before regular payments (and interest charges) resume.

Pay more than necessary

We get it – sometimes that’s all you can do to make your minimum monthly payment. But whenever possible, you should pay more than the minimum on your high-interest debts, like your credit card bill. Even a little extra makes a big difference to your long-term interest payments, especially if you regularly have a balance to pay.

You can also extend this principle to other types of debt. From your mortgage payment to your car bill, reducing your balance faster means paying less interest and freeing up your income sooner. (But watch out for prepayment penalties.)

Build your emergency fund

For many, the pandemic has put into perspective how crucial an emergency savings fund is for any family, regardless of socioeconomic status. A well-stocked rainy day fund ensures that when life arrives, you don’t have to resort to credit cards and high-interest loans.

Generally, experts recommend saving at least 3-6 months of expenses. But even $500 is a better start than nothing. When it comes to saving, like investing, starting small and scaling up leads to long-term benefits.

Investing for a better future

If, after budgeting for necessities and debts, you have a little left over, it’s time to seriously think about your future. There’s never a bad time to start investing for retirement, or even in a taxable brokerage account.

A few dollars a month is enough when you take into account time and the growth of compound interest over years or decades. (Bonus points if you choose an account backed by AI expertise and recommendations to make the most of your investment opportunities.)

Download for iOS today for more quality content and access to over a dozen AI-powered investment strategies. Start with just $100. No fees or commissions.


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