$101,915

Average American Debt Level!

DYI:

If you find yourself in a Financial Hole

Stop Digging!

The current personal debt crisis in the United States is concerning. As of 2024, the average American carries approximately $101,915 in total personal debt, which includes liabilities such as credit cards, student loans, and auto loans​. Recent data indicates that about 36% of Americans have increased their debt in the past few months, with 34% reporting that they carry over $10,000 in consumer debt​. With rising costs and economic uncertainty, nearly half of adults have struggled to make timely bill payments, and a significant portion anticipates using credit cards for essential purchases, especially during the holiday season​.

Credit card debt, in particular, has become a significant concern. The average American now carries around $6,271 in credit card debt, a figure that has been steadily rising as consumers increasingly rely on credit to manage everyday expenses. The Federal Reserve reported that total credit card debt reached $1.03 trillion, the highest level on record​. This surge in credit card debt can be attributed to a combination of factors, including inflationary pressures and the rising cost of living, which push consumers to borrow more just to keep up with basic needs. Consequently, many find themselves trapped in a cycle of high-interest repayments, making it increasingly difficult to achieve financial stability​. 

The following are the common types of personal debts:

1. Mortgage Loans

• Yield Range: 2-7% annually
• Features:
  • Mortgages tend to have the lowest interest rates among personal loans, especially with a fixed-rate, 30-year term.
  • Interest may be tax-deductible.  DYI:  More than just a rule of thumb; a lifesaver making a house a blessing instead of a curse, 15 year mortgage, loan amount no more than 2x gross income**, and pay down as many points as the mortgage company will allow.  **Soon to be millionaires always shoot for 1.5x times income and yes you will have to save up for the down payment to achieve this criterion.

2. Credit Card Debt

• Yield Range: 15-25% annually
• Features:
  • Credit card debt has one of the highest interest rates, quickly accumulating if not paid off monthly.  DYI:  If you always find yourself running balances (hence being charged close to loan shark rates) switch to only using your debit card or go old school using cash!

3. Car Loans

• Yield Range: 4-10% annually
• Features:
  • These loans usually come with fixed rates over a term of 3-7 years.
  • Cars depreciate quickly, which makes financing them costly in the long run. DYI: Buy used cars in cash and save yourself huge dollars.

4. Student Loans

• Yield Range: 4-8% annually
• Features:
  • These loans often come with favorable repayment terms, including deferment and income-based repayment options.  DYI:  Depending on the amount - if relatively small make a rapid payoff - if large then structure your repayment over a 5 to 10 year time frame.  Many doctors take 15 years to retire the debt due to insane educational costs. 

5. 401(k) Loans

• Yield Range: Prime rate + 1% to 2% (e.g., if the prime rate is 7.5%, the loan's interest rate will be 8.5% to 9.5%).
• Features:
  • Repayments consist of principal and interest, typically made monthly or bi-weekly via payroll deductions.
  • Interest repaid goes back into your 401(k), effectively "paying yourself."
  • No credit checks or third-party lender involvement.
  • Reduces the growth potential of your retirement savings during the loan period.
  • Leaving your job could require repaying the balance as a lump sum, typically within 60 to 90 days. Failure to do so may result in taxes and penalties.
  • Best used as a last resort to avoid jeopardizing long-term retirement goals.  DYI:  Borrowing money out of your 401k is a dead last resort - never your go to source of money this is for retirement when your working years have ended!

6. Other Personal Loans

• Yield Range: 6-15% annually
• Features:
  • These loans tend to have higher interest rates than secured loans like mortgages but lower than credit card debt.

Smart rules of thumb to manage these various types of debts:

• Pay Off High-Interest Loans First

  • Example: It's a no-brainer to first manage your credit card debt that obviously has the highest interest rate! If you have a credit card debt with a 20% APR and a car loan with a 6% interest rate, prioritize paying off the credit card to save on interest costs.

• Consider Loan Advantages

  • Example: A 401(k) loan allows you to repay yourself with interest, which can be more advantageous than taking out a personal loan with higher interest rates. Similarly, some mortgages or student loans offer tax benefits worth retaining.

• Refinance to Lower Interest Rates

  • Example 1: Switch your credit card debt to another credit card debt that has lower interest rate or borrow from your 401(k) to pay off the highest interest rate credit card debt if necessary!
  • Example 2: If you're repaying a 10% personal loan, consider consolidating it into a 6% home equity loan to lower your interest expenses.