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Investing Can Help You Combat Your Debts

Key Takeaways

  • According to New York Federal Reserve data, consumers ended 2021 with a record $15.6 trillion in debt
  • The average household now owes $155,622, including balances on mortgages, credit cards, auto loans, and student loans
  • Mortgage balances made up the largest portion, rising $890 billion in the year and $258 billion in the last quarter

U.S. inflation hit 8.5% in March, marking a new record that spans at least four decades. Price hikes in the energy, food, and housing sectors contributed heavily to the increase, with gasoline alone rising 19.8%.

And yet, median household incomes have dropped 3% in the last two years, leaving many Americans struggling to reconcile their checkbooks.

In other words, as prices continue to rise, so, too, does the average debt in America. Let’s take a look.

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Examining the average debt in America

According to the latest data from the New York Federal Reserve, the average household now owes a whopping $155,622 in debt. This number includes balances on mortgages, second mortgages, credit cards, auto loans, student loans, and other miscellaneous debts. That’s a substantial increase over the $90,460 average debt reported by CNBC just seven months ago.

All told, household debt in the United States now tops $15.6 trillion. Over $1 trillion of this debt piled on throughout 2021. In fact, the last three months alone added $333 billion to the national balance – the largest quarterly increase since 2007.

Breaking down America’s debt

The New York Federal Reserve notes that mortgages still constitute the single-largest component of most households’ debts. Mortgage balances increased by $890 billion throughout 2021 as consumers flocked to the housing market amid low interest rates. The final quarter saw mortgage balances shoot up by $258 billion, spurred on by rumors of impending rate hikes.

Meanwhile, new auto loans increased consumer debts by $181 billion in the fourth quarter, reflecting a $15 billion increase. (Though the sudden rise is probably due to more expensive loans, not more loans, thanks to rampaging auto inflation.)

And when it comes to credit cards, the numbers get interesting. A WalletHub study found that Americans managed to pay off a record $83 billion in credit card debt during 2020 thanks to nationwide stimulus payments and reduced economic activity. But average credit card debts are rising again, with consumers adding a shocking $74.1 billion to their balances in Q4 alone. All told, household credit card balances sit just under $8,600.

Looking at new debt in 2022

Of course, “recent” data doesn’t necessarily mean “new.” We’re currently four months into 2022 – and in the hottest inflationary environment in 40 years, consumers haven’t stopped piling on the debt. February alone saw consumer debts leap by nearly $42 billion.

But it’s hard to blame consumers for the sudden surge in spending. (And in fact, we don’t.) Thanks to Russia’s invasion of Ukraine in late February, global energy markets popped astronomically in just weeks. Not to mention, the U.S. Federal Reserve instituted the first of several planned rate hikes in an attempt to cool down a runaway economy.

Throwing the student debt crisis into the mix

We largely skated over student loan debts above – and for a reason. Unusually, student loans were the only debt category to decrease in the final quarter of 2021, dropping $8 billion from the national balance.

That’s not to say the student debt crisis is over; rather, it’s far from it. Americans still owe an astonishing $1.6 trillion on federal student loans, more than what is owed on any other debt (except mortgages). These numbers have soared on an exponential curve in recent decades, driven by:

  • Stagnant wages
  • An ever-increasing cost of living
  • Astronomical tuition and fee increases
  • An employer’s market that complicates finding quality jobs after graduation

To ease the burden, President Joe Biden has once again extended the federal student loan deferment and interest freeze, this time through August 31. And while many hope that he will use executive action to write off at least a portion of the nation’s student loan debts, there’s no indication that will come to pass anytime soon.

How to address growing debts

For all our wishing and wanting, pandemic impacts will echo on for years to come. While we largely welcome some of these changes (hello, work-from-home), the increasing average debt in American isn’t among them. If you’ve taken on more debt than you’re comfortable with – or, frankly, any debt – here’s how to steer your finances back on track.

Revisit your budget

With the economy continuing to surge ahead, it’s time to take a hard look at your budget. Examine your regular expenses to see if you can trim the fat anywhere, particularly in high-inflation categories. Can you move to cheaper housing? Lower your household energy costs? Switch to public transportation?

Additionally, with student loan forbearance extended through August, you may want to take advantage of this breathing room. If you have extra cash, throw it at your balance before regular payments (and interest charges) resume.

Pay more than necessary

We get it – sometimes, it’s all you can do to make your minimum monthly payment. But where possible, you should pay more than the minimum on your high-interest debts, such as your credit card bill. Even a little extra makes a big difference in your long-term interest payments, especially if you regularly carry a balance.

You can extend this principle to other types of debt, too. From your mortgage payment to your auto bill, reducing your balance faster means paying less in interest and freeing up your income sooner. (But do watch out for prepayment penalties.)

Establish your emergency fund

For many, the pandemic put into perspective just how crucial an emergency savings fund is for any family, regardless of socioeconomic status. A well-stocked rainy day fund ensures that when life happens, you don’t have to resort to credit cards and high-interest loans.

Generally, experts recommend saving at least 3-6 months’ worth of expenses. But even $500 is a better start than nothing at all. In saving, as in investing, starting small and working your way up leads to long-term benefits.

Invest for a brighter future

If, after budgeting for necessities and debt, you have a little leftover, it’s time to seriously consider your future. There’s never a bad time to start investing for retirement, or even in a taxable brokerage account.

Just a few dollars a month stretches a long way when you factor in time and compound interest growth over years or decades. (Bonus points if you choose an account backed by AI expertise and recommendations to make the most of your investment opportunities.)

Download Q.ai for iOS today for more great Q.ai content and access to over a dozen AI-powered investment strategies. Start with just $100. No fees or commissions.