How Can An Average American Make Their Debts More Manageable?

Debt: one thing that most of us have but do not talk about it a lot. We think we are the only ones who have creditors to pay but that’s not true. People are just not open about it. According to new research from Ascent, the total consumer debt of Americans equals 16.5 trillion dollars. According to the New York Fed’s Household Debt and Credit Survey, this is the highest after the pandemic.

Pixabay/Pexels | Credit card repayments should be a priority because of increasing interest rates

Reason For The High Debt

According to the credit bureau Experian, the average American has $96,371 worth of debt. The median weekly income of an average was $1070 or $55640 for a whole year in 2022, which means that an average American household owes more money than they make during the year. According to another research, households paid 9.5% of their income to pay off their debts in 2022.

Is Credit Card Debt Dangerous?

Compound interest goes in your favor when you are investing if it’s on a credit card balance. Most banks add compound interest daily, which means the amount you owe is increasing with every passing day. If you want to qualify for a mortgage in the future then it’s best to keep your debt-to-income ratio (DTI) to 36%.

Karolina/Pexels | Americans should spend 36% of their income to pay off their debt.

How Can You Lower DTI?

You can lower your DTI by paying your debt or by increasing your income. Managing to do both would be an ideal scenario. However, if you can’t manage both there are ways you can make it more manageable to pay off your debt. You can apply for a debt consolidation loan, which will pay off your debts and relieve you from all your worries except for earning. If you own a house then you can consider paying off your loan by applying for a home equity loan. You can also start a side hustle, maybe freelancing to earn some extra cash to pay off your debt. If you have a lower DTI than average Americans then you shouldn’t be ashamed as long as you have a good job you can work hard to improve your DTI ratio.

RODNAE production/Pexels | You can apply for a personal loan to pay off your debt

Follow The 50/30/20 Rule

To pay off your debt and manage your budget follow the 50/30/20 rule. According to it, 50% of your monthly net income should be spent towards your needs like mortgage payment, food, transportation, etc. Spend the next 30% of your income on your wants. You can spend this money to dine out or party with your friends or buy your favorite watch. The remaining 20% should go towards your financial goals, which can be investments, saving, or paying off debt. If you have credit card debt then it should be characterized in the needs category so that you can pay it off as soon as possible. Not everyone will be able to pay off their credit card dues in full so McClary suggests reserving 10% of your income to pay off debt every month.