Main image courtesy of Crestwood Associates. 

Debt happens to almost all Americans, and most of us deal with it at some point in our lives. Unfortunately, often due to circumstances out of their control, there are many people who must live with a debt burden for a large part of their lives due to their demographic circumstances. As of 2021, American household debt sat at $14.6 trillion, and was spread out amongst 340 million people. The Covid-19 pandemic played a part in increasing that debt number, but Americans were in debt even before the pandemic and all of its repercussions hit. 

How is it that so many of us are in debt and what can we do to get ourselves out of it? Glad you asked, because in this article we’re going to discuss:

• What debt is and who is most likely to be in debt
• Steps you can take to get out of debt

What is debt?

And why are so many Americans living with a large debt burden?

Debt is a financial transaction where one party borrows money from another, usually to make a large purchase that someone cannot afford otherwise. The person who borrows money is responsible for paying back the original amount they owed along with any interest. When we think of debt, it’s usually in the form of credit cards, which we use to make purchases, or as loans taken out that we agree to pay back. While this sounds like a simple transaction, oftentimes it gets more complicated.

Many of us are struggling with debt, some demographics more than others. While your background, gender, and education level aren’t the only indicators of how much debt you’re likely to have, they do provide proof that certain Americans are more likely to deal with a large debt burden than others.

What are the 2 types of debt?

There are two kinds of debt:

• Secured. Home mortgages and car loans fall into this category because if you are unable to pay back the loan, there is collateral (a house or a car) that can be seized by the lender.
• Unsecured. This type of debt includes credit cards, student loans, and personal loans and it is unsecured because there is no collateral that can be seized should you be unable to pay. 

Debt can be taken on willingly, for example when you’re approved for a loan, or unwilling, such as using a high interest credit card to pay for medical bills. Regardless of whether it’s secured or unsecured, debt still needs to be paid back—and many people are struggling to do so. 

Is there a safe debt load?

While some would argue there’s no debt load that’s completely safe, a safe debt load depends on your financial situation—how much you earn vs. how much you spend. Experts agree that your debt to income ratio (which is your total monthly debt for necessities divided by your monthly income) should not be over 43%. When it starts to creep around this number, you may find yourself struggling to pay.

When you’re juggling a high debt to income load, it can affect your financial security, limit how much you can contribute to savings, and prevent you from achieving financial goals like buying a house or investing. Having debt can increase the stress in your life, and has a measurable impact on your relationships. 

What are the steps to get out of debt?

It’s not impossible, and you can work to get out of debt!

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If you’re dealing with any size debt burden, just know that you’re not alone. There are so many others who are dealing with the same problems that you are, and are looking to lower their debt so they can start saving their money and make their dreams a reality. But how? Here’s steps you can take to start driving down your debt.

1. Make a list of everything you owe

Start with a list of all your outstanding debts, including loans and credit cards. You’ll also want to make sure you note the minimum payment required as well as the interest rate. Add this up and you’ll have the minimum amount you pay each month. You do not want to keep paying the minimum, because that way you’ll never be debt free. 

2. Make a 50/30/20 budget and put extras towards your debt

Add up how much you have available to spend on discretionary items and savings after your necessities. If this is more than your minimum debt payment amount from step one, then try to work out how you can use this money to pay extra on your debt. While it may be tough at first to cancel streaming subscriptions, limit your dining out, or reduce what you’re putting into a savings account, the money you have left after paying your necessities can instead go towards paying down your debt.

Pro tip: Start throwing this extra money towards the loan or credit card with the highest interest first.

3. Consider taking on a side hustle

After you’ve cut unnecessary expenses and are putting that money towards your debt, you may also want to increase your income with a side hustle. Whether you sell unwanted clothes, deliver food, or use your skills as a freelancer, this is a great way to add extra money to pay down your debt without cutting into your budget even more.

4. Reduce interest rates on credit cards

If you have credit card debt, consider asking the company for a reduced interest rate. If you’ve been making on time payments, they may consider doing this temporarily or permanently. It can’t hurt to ask and the worst they can say is no. But if they say yes, that’s less you’ll have to pay over time!  

5. Keep paying debts on time

Whether it’s a loan or a credit card, it’s essential to keep paying on time, and add any extra that you can. If you have debts in collection try to get those current first, as that will stop the creditor calls and reduce the impact on your credit score, which is important if you want to work towards getting a home.

6. Know your why

It’s tough to budget and cut expenses. It’s also hard to give up your time to a second job or a side hustle. That’s why it’s important to keep thinking about your why—why you want to get out of debt. When you’re debt-free, you will have more peace of mind, you can concentrate on saving, and realize your financial goals.

Debt can be complicated, but you don’t have to stay in it! Follow these steps diligently and you’ll see a difference in your debt.