Borrowing

This Is Why It's So Hard for So Many of Us to Pay Off Debt

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.)

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.

Earn extra income.

Easier said than done, of course, but one of the most exciting modern developments is the ability to pick up spare income in the sharing economy: Drive one night a week for Uber. Sell your crafts on Etsy. Airbnb your apartment. (Or try any of these other side gigs.) Use all that extra income to pay down debt.

Live like a student.

One of the best pieces of advice I heard leaving college was to embrace the three-roommates-and-Ikea-furniture culture throughout my early 20s and beyond. If you can live like a student a few more years, you can seriously decrease some basic budget line items. Given that housing is almost everyone’s largest expense, tolerating a complicated morning shower schedule a while longer can really make a difference.

Chip away at basic expenses.

You can save as much as 10 percent a year on heating and cooling by adjusting your thermostat by 7-10 degrees from its normal setting for eight hours a day, according to Department of Energy estimates. (Warmer in summer, cooler in winter.) Buying in bulk can save you money on groceries. Carpooling even one day a week can save you money on gas and wear on your car. Using your insurance company’s mail-order service to purchase prescription medication you take regularly can dramatically cut costs. Many retail pharmacies now offer 90-day prescriptions, too, with lower co-pays.

Plan better.

Just about everything you buy has a last-minute tax. If you’ve ever waited too long to purchase a plane ticket, you know what I’m talking about it.

But nearly everything works this way. If you plan ahead, you can take a subway instead of a cab. You can make (or even microwave) dinner instead of ordering in. You can score happy hour specials instead of paying full price—or invite friends to hang out at your place instead. A lot of unnecessary spending occurs because of poor planning.

Zero in on your spending weakness.

Everyone has a weakness, whether it’s shoes, video games or cable TV. No one’s saying you have to live like a monk, but take a minute to do the latte calculation above. How much is cable costing you over the course of the year? How much do you spend on movies? On food you end up throwing out, or cell phone data you don’t use?

Look at these expenses on an annual basis (even my $4 latte above adds up to almost $1,000 a year). Then make some commitments—a few less coffees or pairs of shoes, one more night at home each week. Climb the mountain $1 at a time.

Don’t neglect savings.

Finally, for many people living month-to-month, aggressively paying down debt when you have no emergency savings is a bad idea. Emergencies happen, and neglecting savings to put every last dollar toward your loans can result in having to borrow money at expensive rates when the unpredictable happens. To really make strides toward financial health (and see the biggest difference in your net worth), pay down debt and build up your savings simultaneously.

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