Managing a few thousand dollars in debt is a situation that most American adults will eventually experience. But when does the hill become too big to climb, even for responsible people with stable incomes?
Many people probably would throw up their hands once their debt hit $20,000 — but that’s exactly the financial dragon that about one in four Americans have to slay.
A new GOBankingRates survey of more than 1,000 adults showed that about 25% have more than $20,000 in non-mortgage debt. Some hold six-figure IOUs — for things like credit cards, student loans, medical debt, auto loans and personal loans.
Although that heavy burden is unfortunately common, it can be manageable — but only with goals and a strategy to reach them.
The good news is that the higher the debt, the less likely people are to hold it. Here’s how the percentages broke down among the roughly 25% of people who owe lenders more than $20,000:
- $20,001-$50,000: 9.75%
- $50,001-$75,000: 3.28%
- $75,001-$100,000: 2.79%
- $100,001-$150,000: 3.98%
- $150,001-$200,000: 1.69%
- $200,001+: 1.59%
The study revealed that toxic debt is such a commonly shared experience that it’s rarely far from most people’s minds. For example, the largest percentage by far said paying down their or their family’s debt would be the first thing they would do if they received an unexpected bonus at work or even hit the lottery. Likewise, the largest percentage said getting out of debt was their No.1 financial priority.
The study also found that men are a little more likely than women to have stifling debt of $20,000 or more, as are 35-to 44-year-olds in the expensive time of early middle age. The oldest Americans, ages 65 and up, are least likely to hold high debt, with 55- to 64-year-olds not far behind. The youngest adults, 18-24, are also less likely to owe $20,000 or more, possibly because they don’t yet have sufficient credit to borrow large sums.
It’s a Bad Time To Borrow but a Tough Time Not To
Today’s rising interest rates make debt both harder to avoid and more destructive at the same time.
Here’s how the cycle plays out.
Rising prices spread paychecks thinner and force people to borrow money to maintain their living standards. But to fight that inflation, the Fed raises interest rates, which makes money more expensive to borrow. Cash-strapped households then have to stretch their paychecks even further to pay their new high-interest loans.
“When prices rise, people tend to spend more,” said Richard Barrington, a financial analyst for Credit Sesame. “They buy the same things but pay more for them. That’s understandable in the short term, but it can lead to living beyond your means.”
An Emergency Fund Is One of the Keys To Digging Out
Heavy debt is suffocating. While you can breathe easier with every dollar of it you erase, you must set some dollars aside for emergency savings simultaneously.
The study showed that about one in four people would tap their emergency funds to deal with unexpected expenses, but a nearly identical percentage would be forced to borrow their way out of trouble.
Even if you put long-term nest-egg building on hold to concentrate on digging out of debt, doing so at the expense of short-term savings makes you vulnerable to even more toxic borrowing.
“Pausing investing to focus on debt reduction depends on an individual’s situation,” said Trinity Owen, founder and CFO of The Pay at Home Parent. “But having an emergency fund is a priority.”
You probably based your pre-inflation budget on your income, but those dollars buy less stuff today. Start by revising your spending plan to account for that diminished purchasing power, even if it means a temporarily diminished lifestyle.
“It is a good idea to adjust your budget to be in line with what you earn,” Barrington said. “If prices went up and your salary did not, then you may need to cut some of what you buy to keep your spending within a new budget. It’s not easy, but getting further into debt is worse in the longer term.”
Get Organized — and Target Debts by Level of Priority
It’s much easier to develop a spending plan based on paying down debt after you organize those debts by order of importance.
“If you have multiple debts, look at the interest rate you pay on each one,” Barrington said. “Rank them from the highest to the lowest interest rate. The most efficient way to pay down debt is to first start with the most expensive ones.”
For most people, that means putting credit cards in the crosshairs first — unless you have toxic short-term debt like payday loans.
“Paying off your most expensive debts first brings down the amount you pay in interest,” Barrington said. “This means more of your future payments can go to reducing the balance that you owe.”
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