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Americans are dangerously close to reaching a household debt level that rivals the levels during the financial meltdown of 2008. According to this report, total household debt grew by an enormous $226 billion just in the last quarter of 2016, ending the year at just 0.8% below the 2008 peak.
Banks and other lenders have begun easing the credit restrictions imposed after the financial meltdown experienced in 2008. This means credit cards, auto loans, and big-ticket loans such as mortgages are now easier to obtain. Consequently, debt is on the rise in America and shows no sign of slowing down.
With credit readily available and the cost of living outpacing income, many consumers are now using credit cards to make ends meet. In addition, those who aren't budgeting find credit cards as a useful means to bridge the gap between monthly income and expenses.
Why are Americans in so much debt?
There are many reasons why consumers find themselves deep in debt. While some are avoidable, others are not. Let's review some common ways consumers in America fall into debt.
Living above one's means has become a way of life for many in America. Learning to manage money and create a budget are skills not usually taught in school or at home. Even some who have a budget don't necessarily follow it due to a lack of discipline. Instead of prioritizing expenses such as rent, car payments, and utilities, they spend their money on frivolous items such as expensive meals out. When they run short on cash at the end of month, they turn to credit cards to make ends meet.
Some of the signs of overspending include the maxing out of credit cards, paying only the minimum payments, and continuing to be short on cash at the end of every month. Without changing spending habits, these consumers are likely to end in a debt situation that could lead to insolvency.
Loss of a job
Sometimes, debt problems are a result of things occurring that are outside of a consumer's control. Loss of a job can be one of life's most stressful events. Not only is there a wide range of emotions to work through, such as anger, fear, and depression, but losing the ability to bring in an income can also have a devastating effect on finances. If a new job or source of income does not come quickly, many will turn to credit cards to pay bills and survive.
Many Americans have experienced prolonged unemployment over the last few years as the economy has experienced stagnation and a lack of job growth. Or, they have been underemployed, meaning forced to work at a lower paying job or one that is part time. For many, this has led to a dangerous accumulation of credit card debt.
For some, medical bills have been the catalyst for racking up a high amount of debt. Although situations like this are out of a consumer's control, they are a threat to financial security nonetheless. In many cases, the cost of an unexpected medical situation can be financially devastating.
Good medical care can be very expensive even if the patient has a very good insurance plan. Insurance companies have begun to deny payment for some procedures, surgeries, and prescriptions, forcing patients to self-pay for needed medical care.
To cover these expenses, many must use credit cards or other means of credit such as personal loans. If the illness or injury interferes with the ability to work and earn a living, things can reach a critical level quickly.
Lack of savings
With poor budgeting and money management skills, many Americans have little to no savings. According to CNN Money, nearly 6 in 10 Americans do not have enough money saved to cover an unexpected expense of $500. In addition, almost half said that they had experienced an unexpected expense in the last 12 months.
A healthy savings account will act as a buffer against the use of credit cards to handle an unexpected expense. When a car is in need of repair, or a child needs a visit to the emergency room, many consumers must use their credit cards to cover the cost. Over time, as these expenses add up, consumers can find themselves in a significant amount of debt.
Ways to save money and repay debt
When consumers find themselves in a lot of debt, it's important to start attacking the debt and formulate ways to save money. Many consumers are surprised at what they find when they start trying to save money. Small changes can add up to big savings. With a little work and discipline, many find they can get control over their spending and find ways to save money. Let's review 9 easy ways to save money and pay off debt.
1. Formulate a budget
The first thing consumers need to do to get control of their finances is formulate a realistic monthly budget. If you are unsure how to do that, there are many resources on the Internet to help you. Websites such as LearnVest have free budget building tools to help you get started.
First, you will need to get a clear picture of your net income. Net income is the amount of money you take home after paying all your taxes and any other deductions such as payments into a 401(k) or flexible spending account.
You will also need to gather all your monthly bills and bank and credit card statements to understand your monthly expenses. Fixed expenses include rent, mortgages, and car payments, for example. It's not likely that you will be able to cut back on any of these expenses, but you will need to understand what portion of your money is going towards these.
Next, you will need to note your variable expenses. These expenses are likely to change on a monthly basis (i.e. gas and food). Look into these areas to find savings.
Once you have a good working budget, you will have started the process of getting control over your money and spending.
2. Change your spending habits
Now that you know where your money is going, you can begin to look for ways to cut back. Packing your lunch, for example, can save you hundreds of dollars over time. Cutting out that morning coffee from the expensive coffee shop wouldn't hurt either.
Sometimes, just being aware of the actual cumulative cost of our habits can put things in their proper perspective. Is that morning latte really worth it?
3. Create an emergency fund
When you create your budget, make sure you budget a portion of your income to go to savings. Having a cushion will help you over the emergency hurdles life throws at you. When your refrigerator goes out or your car needs a repair, having the money to pay for it in cash will help you avoid accumulating debt on credit cards.
Most money experts say you should have at least $1,000 in your emergency fund; however, if you can continue to save past that, go for it.
What to do if you are in over your head
Sometimes, regardless of every effort to get your debt under control, you just cannot make any headway. If you are falling further behind every month, you need to act. If you have reached a point of insolvency and can no longer meet your obligations, perhaps working with a debt relief company is in order.
Companies such as National Debt Relief work with consumers to help them resolve their debt. They work to reach a settlement with the credit card companies that, in most instances, is far less than what you owe.
If you are in trouble financially, don't wait until there is no option other than bankruptcy. Get started today and get your debt under control.