Interviews with more than 2,700 adults over the age of 18 revealed that nearly three-quarters of them said they were struggling with debt, and it was a “high” or “moderate” source of anxiety for 40 percent of them. Almost half of those interviewed were carrying at least $25,000 in debt, and the average debt load was $37,000, excluding mortgages. More than 1 in 10 owed more than $100,000, and 45 percent of those carrying debt were spending half their monthly income on debt repayments.
And yet still we spend.
The individuals surveyed by Northwestern spent on average 40 percent of their income on non-essential items, such as travel, entertainment, eating out and hobbies, despite saying they felt anxious about their financial futures.
“We have fueled a consumerism with easy credit, advertising and social media, and people don’t understand the financial trade-offs involved in their spending,” said Rebekah Barsch, director of financial planning at Northwestern Mutual. “There’s all kinds of ways to get into debt and relatively fewer ways to get out of it.”
There are ways out, however. Here are five ideas and/or strategies that financial advisors use to help clients with large amounts of debt improve their financial outlook.
1. Don’t beat yourself up.
A heavy debt load can lead to a sense of helplessness for borrowers. Many are ashamed of their situation and would rather ignore the problem than face it.
“Debt can be debilitating,” said financial advisor Lazetta Braxton, founder and CEO of Financial Fountains. “There’s a lot of guilt and shame involved, and when someone is in that drift zone, it can be debilitating.”
Braxton, a certified financial planner, says that most people are relieved just to talk about the situation openly. “I don’t overemphasize the issue. I just treat it as part of the financial planning process,” she said. “Once people get a full picture of their situation and develop a plan to deal with it, they feel good about making a clean start.”
Don’t feel helpless and ashamed. It will only make matters worse. Talk to your financial advisor if you have one, or book an hour with a debt counselor to talk things through.
2. Take inventory and prioritize.
What kinds of debt do you have? Take an inventory of all the balances you owe, the interest rates they carry and the minimum payments required to avoid higher interest charges.
Once you have a clear picture of your situation, you can prioritize which debts to attack first. The rule of thumb is to pay your minimums on all obligations, then focus on paying down the high-rate debt (usually credit cards) as opposed to low-rate debt, like a student loan or mortgage. Unfortunately, emotion often comes into play.