Most Americans are drowning in debt today. Those who aren’t are likely to own at least their home and paid off most or all of their mortgage debt over several years or decades. Instead of working hard for our money while spending more money each year than we earn like most Americans, we should ask our money to work hard for us by way of ownership or beneficial interests in various types of real estate.
As of the 1st quarter of 2020, housing prices in many regions of the nation are near or above all-time record highs. This is especially true in prime coastal metropolitan regions in places like San Diego, Los Angeles, San Francisco, Portland, Seattle, Miami, New York City, and Boston. In addition, rental prices for tenants are near or well above all-time record highs which benefits their landlords much more than the increasingly stressed tenants.
Historically, the #1 factor for the creation of an individual’s or family’s overall net worth is usually directly related to the equity (current market value – mortgage debt) in their primary owner-occupied home. Millions of lucky older homeowners purchased their homes in the ‘60s, ‘70s, or ‘80s for somewhere between $20,000 and $100,000. Today, these same homes might be worth anywhere from $250,000 to $2 million dollars or more for coastal properties. If the homeowner paid off their 30-year mortgage payment, then their home is probably free and clear with no mortgage debt.
In many pricey regions, tenants are paying upwards of 50% to 60% of their gross monthly income towards their monthly rent. It’s been reported by a few publications that the average American today in recent years didn’t have access to $400 for an emergency situation such as an unexpected medical bill or for unusually high utility bills.
A 2017 study completed by the well-known financial services company named Northwestern Mutual noted the following details about the people who they surveyed:
- 50% of Baby Boomers (born between 1946 and 1964) have basically no retirement savings.
- An estimated 45% of U.S. consumers spend upwards of 50% of their monthly income on consumer repayments that are generally near the minimum payments.
National Debt Numbers for the USA
To better understand how staggeringly high that the national debt numbers are nationwide, let’s take a closer look below at some of the main consumer debt categories:
- Total Consumer Debt: By the second quarter of 2019, the Federal Reserve reported that national consumer debt numbers reached $13.86 trillion, which was an increase of $1.2 trillion over the previous record high of $12.68 trillion in the third quarter of 2018. This was the 20th consecutive quarter increase at the time.
- Home loans: As of the 3rd quarter of 2019, the Federal Reserve reported that outstanding or unpaid mortgage debt for one-to-four residences surpassed $11 trillion.
- Automobile loans: Total automobile loan debt was a whopping $1.3 trillion as of the second quarter of 2019. The average monthly payment for a new car loan hit $550 per month and nearly $400 for used cars.
- Student loans: The combined national student loan debt exceeded $1.5 trillion in 2019. On average as of the 4th quarter of 2019, the average borrower owed $28,565 in student loan debt. The average payment was just above $210 per month per borrower. In most cases, this unpaid debt is not dischargeable in a future bankruptcy filing.
- Credit cards: Unpaid credit card debt surpassed the $1 trillion dollar mark in the third quarter of 2019 ($1.08 trillion). Per CNBC, upwards of 55% of Americans who had credit cards carried at least some unpaid credit card debt. The average U.S. household balance amount was reported at just above $6,800 while costing more than $1,160 per year in annual interest.
The Unpaid Consumer Debt Interest Anchor
What was the #1 reason why Americans carried credit card balances or credit lines? Answer: Unforeseen medical bills that were not fully covered by their medical insurance if they even had any type of insurance protection in place.
In 2020, the interest rate spread paid out and charged by banks and other financial institutions reached an all-time record high. For example, a bank may pay a depositor customer just 1% as an annual savings rate while charging them 18% to 28% for credit card debt. In these cases, the interest rate spread would reach anywhere from 17% (18% – 1%) to 27% (28% – 1%).
Let’s review below a relatively small unpaid credit card balance with a credit card interest rate that is near more typical 18% annual interest rates even for people with higher FICO credit scores to better understand this concept of a “debt anchor” that drowns borrowers over time:
Credit card balance: $2,000
Annual interest rate: 18%
Minimum payment made by the borrower: 2% of the balance or $10, whichever is higher
Length of time to pay off the debt to zero: 370 months (30 years and 10 months)
In this example above, you would pay more than $4,931 in interest and charges. This same amount would be 146% more than the original balance on the card, per CreditCards.com.
Would you prefer 30 years’ worth of credit card or mortgage payments? With 30 years’ worth of credit card payments on unpaid balances, your best case scenario is to eventually pay off the debt to zero. Conversely, 30 years’ worth of mortgage payments at a much lower annual interest rate that is generally tax deductible will probably create the bulk of your family’s net worth after the home becomes free and clear.
Sources: U.S. Census, Federal Reserve, Debt.org, CreditCard.com, and Sallie Mae