This Is Why It'€™s So Hard for So Many of Us to Pay Off Debt
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AT A GLANCE
  • Real incomes have been stagnant for decades, while the cost of basic expenses has soared.
  • That’s meant less “slack” in people’s budgets, which makes it harder to pay off debt or save.
  • Picking up side income, living like a student, planning ahead and chipping away at basic expenses can help.

Getting to debt-free is an important part of taking control of your money. Not only is debt a huge barrier to building wealth, but it can be a psychological burden, as well. Yet, at the same time, advice to “just pay off your debt” can feel cruel to people struggling to just pay the bills each month. And that’s a lot of people.

Several surveys have found that more than half of adult Americans are living paycheck to paycheck.

Here’s a big reason why. Real incomes have been stagnant for a generation—according to some measures, since around the time an American landed on the moon. Meanwhile, prices of basics like housing and health care have soared. According to The Pew Charitable Trusts, from 1996-2014, average annual housing costs jumped from $12,284 to $16,996, while health care costs increased from $1,119 to $2,560. But incomes barely budged: By 2014, median household income had fallen 13 percent from 2004 levels.

As a result, “slack,” or money left over at the end of the month, is disappearing. On average, Americans in 1996 spent 71 percent of their income on the basics; by 2014, it was 75 percent—and heading the wrong way.

No slack equals no room for extra debt payments. And not much in the way of savings, either: About 60 percent of Americans aren’t sure they could come up with $2,000 to cover an emergency, according to a recent study by the Financial Industry Regulatory Authority.

“This change in the expenditure-to-income ratio in the years following the financial crisis is a clear indication of why and how households feel financially strained,” Pew said.

Something has to give.

Often, that “something” is said to be a latte—an easy target and symbol of spending excess. Okay, sure, drop your Monday through Friday $4 coffee habit. But let’s be clear: That alone is not going to get you out of debt. It’ll save you $20 a week, or $80 a month. Real money, but lattes aren’t digging your financial grave. For many, the basic cost of living does that.

A few years ago, I asked my website readers to mail me their monthly budgets, and thousands did. They looked like you’d expect: lines for rent, car, child care, food, phone, TV and insurance, plus entries at the bottom for entertainment and travel. Many betrayed this simple fact: The basics often cost people $3,000 to $4,000 a month.

Here’s one example from a family in Texas:

Rent: $1,350
Healthcare: $588
Utilities: $400
Child care: $600
Food: $800
Car insurance and gas: $300
TOTAL: $4,038

Just to keep up with that level of spending, you’d have to earn about $48,000 annually in take-home pay—perhaps a salary of $60,000 to $65,000. And that’s without any tuition, credit card payments or savings (and forget entertainment).

Tack on a $35,000 college loan, and you’ve added a $400 monthly payment. To afford that, you need to bump up your $65,000 income into the $70,000-plus range. That’s far above the median family income of $53,700. (Editor’s Note: After this story was published, the Census Bureau revealed new data showing median household income jumped to $56,500 in 2015—an improvement, though still below the amount needed to cover expenses in this example.)

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So what can you do if you’ve got debt and you’re stuck in what seems like a perpetual paycheck-to-paycheck cycle?

It comes down to two factors: how much you earn and how much you spend. And, as you can see, the math is working against many Americans. But that doesn’t mean the situation is hopeless. There are ways to start a modest climb up the debt mountain.

Click on the next page for steps you can take to start making a dent in your debt.

September 9, 2016

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