Most of us had encouraging, proud parents who made us feel special and amazing and overall above average. We thought we were really something for a while until we grew up and realized that actually we are just pretty normal. We are primarily middle class, working citizens with 2.5 kids, 2 cars, +/- a dog and we live in a mortgaged house in the suburbs. Unfortunately, as of the end of 2015, 69% of us had household debt averaging about $130,922 (including mortgages). Wow. When you consider that our median income was about $53,700, that number is truly staggering. Even those of us in above-average financial standing cannot afford to put 100% of our income aside for two and a half years, which is what would be required to pay off that kind of debt as quickly as possible. Living like the “average” person in America is clearly not ideal when it comes to financial success.
Breakdown of Household Debt
Let’s take a better look at these generalizations to find the category that most closely represents your situation, because most people don’t have all of the following types of debt at the same time.
|Total owed by average U.S. household carrying this type of debt||Total debt owed by U.S. consumers|
|Credit cards||$16,061||$747 billion|
|Auto loans||$28,535||$1.14 trillion|
|Student loans||$49,042||$1.28 trillion|
|Any type of debt||$132,529||$12.35 trillion|
Table data from www.nerdwallet.com
About 35% of the US population has credit card debt and the average balance is roughly $16,000. The big problem here is that this average household pays $1,292 annually in interest. That’s over one grand of your hard-earned cash straight down the drain. Calculate the number of hours you have to work to make that much money. Using the median income as an example, the full-time worker is paid $25.82/hour. It would take 50 hours, a little over six full days of work, at that income to pay JUST THE INTEREST each year! That thought should give you chest pain. Clearly, credit card debt with its sky-high interest rate has got to go. Hanging with the average American credit card debtor is not going to set you on the path to wealth.
About 36% of American households carry mortgage debt. Many people consider a mortgage to be “good debt,” as your home is an investment. I partly agree with that. In my opinion, all debt is bad debt. All of it needs to be paid off, but the priorities of paying versus saving change a little when it comes to your mortgage. I agree that your home is an investment and that it’s okay to carry a 15-year mortgage. However, I don’t want to ever become okay with paying minimum payments, even on my house, and I don’t want you to give into that kind of complacency either. Keep saving and investing while you have a mortgage, but get that sucker paid off early if you can.
If a mortgage can be called “good debt,” then I would have to categorize this one as “terrible, no good, very bad debt.” And yet, 29% of US households have car loans that average almost $30,000 (insert that emoji with the wide eyes). Dave Ramsey not so fondly calls this “car poor.” Vehicles depreciate in value almost instantly and they just keep dropping from there. Most car loans are much higher than the value of the car, meaning that this debt goes on indefinitely as people trade cars and their associated payments. They are pretty much set up to pay that monthly amount until they die. My advice: downsize and pay that mess off as fast as you can. Cars are necessary, but they’re also money suckers. I can guarantee that you will need to put (a lot) more money toward that car throughout its lifetime. It will need oil changes, new tires, and other repairs and maintenance, but unlike your home, it’s not increasing in value along the way. Unless you end up on “Pimp my Ride” (is that show even still on?), you will not be making money on your vehicle and it is not an investment. View your vehicle as nothing more than a resource for your family. When you begin to think of it as a necessary expense instead of a status symbol, you will want to purchase the highest value for the best price and suddenly the luxuries and appearance seem a lot less important. “Paid in full” is most important attribute of your vehicle.
This one is another sometimes necessary evil. Nineteen percent of US households have an average of about $49,000 in student loans. Certainly, higher education opens doors for higher income, but, man alive, that’s a big number. For a fresh-out-of-school professional making starting salary and thrilled with her new-found disposable income (however small it may be), the months between graduation and the due date for the first loan payment fly by without a second thought. Unfortunately, the loans have only accumulated interest during that time and our optimistic young lady has developed some poor spending habits and a higher standard of living than she can afford to maintain. It seems like the commonplace way to approach these loans is to kind of ignore them and just pay the minimum due forever and ever. I know professionals who have been paying off their loans for over a decade. Y’all, we gotta dump that ball ‘n’ chain! It’s time. There’s no good reason to pay on your school loans for the same amount of time as a mortgage.
How to Break Away from Average
As this data has shown, there is clearly a problem with the average American’s finances. To make matters worse, debt has been completely normalized in our society. There’s no sense of urgency to rid ourselves of it. Most of our peers and many of our parents have debt, too. They all plan to work at their average jobs to pay for their average lifestyles until they can retire at an average age. What if we decided to challenge the status quo? What if we determined to do things differently so that we aren’t restrained by average for the rest of our lives?
We’ve already set that goal as a young family and I challenge you to do the same. The beautiful thing is, even if you find yourself in the average person’s situation right now, you don’t have to stay there. We can make changes to move ahead financially. It’s not easy to go against the flow, but there’s no way to escape average if we’re still living the average lifestyle. To live differently, we have to manage money differently and that’s unpopular (Check out some of our stranger ideas here: 16 Strange Money Saving Habits). Driving a beater to avoid car payments while paying off student loans and living in a tiny starter house is not what most of your peers are doing. It’s uncomfortable and it certainly doesn’t look like the “American Dream.” As I grow older and watch people, I’m finding more and more that the “American Dream” isn’t nearly as dreamy as it seemed. That big, beautiful lifestyle takes two middle-class, full-time incomes to fund. People are exhausted and stressed at jobs they may or may not enjoy and there never seems to be enough money leftover to give them some breathing room. The days are long, the stress levels are high, and the results aren’t what was expected. I don’t know about you, but I’m ready to ditch average. I’d rather be the kind of amazing that my parents think I am. Care to join me?
Resources for this post:
You might also be interested in these posts. Click the pictures to keep reading!