Borrowing

The best habit you can get into if you want to become debt-free, according to a financial planner

"Coming out of the pandemic, the amount of debt that consumers are carrying has been reduced."

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For all its hardships, the pandemic has been helpful for a lot of savers, particularly workers who were lucky enough to weather Covid without losing income. Overall, the personal savings rate continues to be historically high, according to the Bureau of Economic Analysis, and credit card debt has decreased more than 15% since the pandemic started, according to the Federal Reserve Bank of New York.

That's great news, experts say, even though they expect personal debt to eventually return to pre-pandemic levels.

"So far, so good, in terms of people establishing some new habits about saving more, spending less, and paying down debt," says Ted Rossman, senior analyst at CreditCards.com. "I do, unfortunately, think that eventually it's going to go back to the way it was."

You don't have to return to the status quo, though, says Chantel Bonneau, a certified financial planner with Northwestern Mutual in San Diego. Whether you got your debt under control during the pandemic or you're just starting to work on that goal now, the key, she adds, is to not incur any more debt.

"The best habit people can get into is knowing their cash flow and not getting themselves into a pile of debt to finance your lifestyle," Bonneau says. "Or you're going to pay for it for a really, really long time."

Tracking your spending carefully is crucial to understanding your cash flow, Bonneau says, and that knowledge makes it easier to "live within your means," she says. And getting your debt under control can make it easier to develop other good financial habits.

Spending less on debt makes it easier to save more

Americans spend a lot of their monthly budget on servicing their debt: On average, 30% of their monthly budgets go to paying down debt, according to Northwestern Mutual's annual survey on American financial habits. And when you're paying that much toward your debt every month, you're probably not saving much, Bonneau says.

"If you're already spending 30% on debt, you're probably not saving another 20%, so try and get that debt under control," Bonneau says.

Getting control of your debt means you can shift that money toward saving. "Begin that habit of paying yourself and saving as early as possible," Bonneau says. "If you start with 1%, or $50, or $100, it makes it easier to go to $130 the next month and then $150 and then $200."

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'On net, the consumer is in a better place' now

The main reason experts are so jazzed about the average American's financial health right now is that it really has gotten so much better during the pandemic. On the individual level, personal debt has dropped even more, according to Northwestern Mutual's survey. Not including mortgages, adults in the U.S. have $23,325 in debt, the lowest number Northwestern Mutual has recorded since it began asking that question in 2017.

That year, excluding mortgages, the typical adult in the U.S. owed $37,000. When adjusted for inflation, that's a decrease of 44%, according the the Bureau of Labor Statistics' inflation calculator.

"On net, the consumer is in a better place coming out of the pandemic," says Christian Mitchell, chief customer officer at Northwestern Mutual. "The amount of debt that consumers are carrying has been reduced."

There is one caveat to that good news, Mitchell says: "More people are saying their plan to tackle that debt has been elongated."

So, while personal debt is going down, for example, a sizable chunk of Americans have pushed back the date when they'll be fully debt-free, according to Northwestern Mutual's survey. More than a third, 34%, of respondents said the pandemic has elongated their timelines for getting completely out of debt.

That may seem reasonable in the short term, especially with interest rates as low as they currently are, Mitchell says, but it may become more of an issue in the not-too-distant future.

Interest rates won't stay this low forever

In the early, economically uncertain months of the pandemic, a lot of people felt they had to put off paying nonessential debts.

Student loan payments are a great example. Thanks to a moratorium put in place by the federal government, borrowers haven't had to make any payments on their student loans since March 2020. The loans didn't accrue interest and there are no penalty fees. The measure was meant to help people who lost income during the pandemic, but anyone with a federally backed student loan, regardless of employment status, benefited.

That moratorium ends in January 2022, at which point payments will be due again and interest will resume accruing.

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For many people, the moratorium has been a welcome reprieve to figure out their spending habits and how to prioritize paying their student debt. It's a smart idea to use the pandemic to reassess your financial health, Mitchell says, especially when interest rates are so low.

Elongating your timeline for paying debt is fine when it's so cheap to service that debt, but Mitchell warns that Americans with debt, especially those with fluctuating interest rates, need to be mindful that the cost to borrow money isn't going to stay this low forever.

"I'm not making a call that interest rates are going to increase anytime soon, but that is a possibility," Mitchell says. "The longer they are stretching out that repayment, the more they could be prone to interest rates going up."

Instead, consumers can "use this as an opportunity to think about their behaviors relative to debt and commit themselves to behaving differently going forward," Mitchell says.

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