The Ugly Truth Behind Debt In America
09 July, 2021
If you’re like most, the thought of money management makes your skin crawl. It’s hard not to think about it as a black hole of confusion that only a select group of people have the “inside knowledge” to come out on top. It’s a never-ending rat race, and you feel like you can never cross the finish line.
But, since no one wants to talk about finances, how do you even know if you’re anywhere close to the top? Or how you’re doing compared to your peers? With social media access at our fingertips, it looks like everyone is a millionaire living a luxurious lifestyle but you. As a result, it’s easy to believe you’re left behind, floundering. In a world of Haves, you are the Have-Nots, and it feels soul-crushing.
However, this is far from the truth. Did you ever suddenly stop and wonder if the system set you up for failure? That it might not be your fault that you struggle to figure out successful money management tactics?
The education system teaches subjects like algebra and history, which are applicable under certain circumstances. But why weren’t we taught about compound interest or how credit works, or anything about personal finance at all? We are kept in the dark for our entire lives. Until one day, we must fend for ourselves. Essentially, we are thrown into the deep end of the financial pool (without floaties) and left to figure out how to swim independently.
A lot of our money issues have become normalized, as is the case with debt. Because so many of your friends and family have revolving debt, like 80% of Americans, you think it’s a common occurrence and a way of life. But it doesn’t have to be.
This article will pull back the curtain on the many reasons why consumers are in debt and identify some solutions for breaking the debt cycle once and for all.
How Much Debt Do Americans Have?
Before we uncover why Americans have debt, it’s essential to address the elephant in the room: the amount of debt Americans have. According to Experian data, total U.S. consumer debt, the type of debt you owe, reached around $14.88T in 2020. That’s a record high for the country. And under that umbrella, varying types of debts have grown with it.
Shockingly enough, students have suffered the worst of it. Since 2019, student loan debt grew over 12% - the largest of any other debt category. So, around 45 million Americans are burdened by a collective $1.7 trillion debt, with each individual shouldering an average of $37,693. Unless you were lucky enough to get through college without a single bit of aid, you’re facing the world already at an economic disadvantage.
So, what do you do to help pay off that money? Well, you get a job. But you need a car for the commute, especially if you live in an under-connected part of the state. That results in another loan on your list: an auto loan. Unfortunately, this type of financing has also grown to an all-time high at $1.37 trillion, like student debt. While its growth wasn’t as drastic, it’s an area that lacks clear federal guidance. As a result, people who need financial help with their car have to tackle it independently, which can be hard when a lender has the upper hand.
Eventually, you get your car, though, and you’re working your way up the corporate ladder. That means it’s time to settle down in a more permanent residence. The clock is ticking, after all, and you’re chasing down the American dream. So you put a down payment on a home, which is part of a field that is also skyrocketing in price, to be hit with another debt hitting all-time highs: a mortgage. At $10.3 trillion as of 2020’s third quarter, this type grew at its fastest rate in over ten years – just in time for you to become a homeowner.
That’s not to mention that the average (Home Equity Line of Credit) HELOC debt was $41,954 per person in 2020.
The only types of debt which experienced a drop during the same period were credit card and retail credit card debt. In addition, while Gen X (ages 40 – 50) currently experiences the greatest amount of debt on average, millennials (ages 34 – 39) have seen the most significant increase in debt. Combine that with the above figures, imagine what financial burdens wait for future generations.
How We Got Here
Well, it’s obvious debt is a problem, but are we really to blame? Or, did the system set us up to flop? There are plenty of reasons why Americans are in debt; however, some common themes are worth acknowledging.
Debt Repayment Isn’t a Celebratory Event
Take a moment to visualize something you want right now. Is it a vacation to the south Caribbean, or maybe a new couch from Pottery Barn you are drooling over? Whatever it is, most likely, even the thought of it brings you joy. Then, once you purchase it, imagine all of the social media validation you’ll get, perpetuating your bliss.
Now imagine instead of buying your vacation or couch, you paid off $3,000 worth of debt. How do you feel? Are you excited and want to post on social media, or does it feel like nothing? Most likely, you don’t have any feeling of excitement because you can’t quantify your debt repayment. No one celebrates you when you reach a financial milestone. And, it’s something you may feel uncomfortable sharing since you don’t want to make others feel bad when you’re transparent about your financial situation. You want people to think life is perfect and money isn’t an issue.
When I graduated college, I left with $45,000 of debt. My first job paid me $36,000 per year. I never believed in my wildest dreams that paying off such a demoralizing number was possible. I thought I would spend my entire life repaying my student debt because I knew others on the same journey. And after all, I wanted to spend my money on stuff that gave me instant gratification, like a new Pottery Barn couch that I was obsessed with.
After years of making minimal payments, I became fed up. I knew I needed to do something about my student debt. So, I made the commitment to myself to put all of (well, most of) my extra income toward my student debt. The journey to repayment was dull and painful, but the day arrived when I ultimately made my final payment. The feeling was ecstasy. No more did I have to repay my debt; I was FREE!
I wanted to scream from the rooftops that I was debt-free, yet I felt as though I couldn’t. Even though I tackled a system designed to make me fail – considering 40% of borrowers are expected to go into student loan default by 2023.
So, who would really want to know about my success? It made me think that financial success isn’t something to celebrate. So, what’s the point of trying if no one cares? You celebrate more when you buy a new house or get into the college of your dreams. We don’t celebrate those who are mortgage-free or reached a $100,000 net worth.
Thus, debt-free individuals are not seen as financially successful. If Americans don’t view debt freedom as success, it’s no wonder they’re in the position they are now.
The Belief: Money Can Buy Happiness
Most consumers believe money can buy happiness. And, you probably feel the same way. At the very least, life is so much easier when you don’t have to worry about where your next meal is coming from. And one study with over 1,000 respondents supports that view. Of the participating group, only 8% thought money couldn’t improve their sense of fulfillment. That’s fair, though, right?
But money isn’t magic. There are plenty of people who have so much they don’t know what to do with it, and they’re still miserable. That’s because they base their whole life on it; friends, self-worth, you name it. If you don’t have it, or the right amount of it, then that leaves the opportunity for others to judge you. And unfortunately, we sometimes do it unconsciously.
Have you ever taken notice of your neighbors? Do you pay attention when you see them roll up in a new car or bring in a remodeling crew to fix up their house? If you worry about how you look compared to your neighbors, you’re not alone. According to Bankrate.com and the Detroit Bureau, almost half of Americans feel like they have to “keep up with the Joneses.” Essentially, social pressure and insecurity push them to overspend, making it look like they’re successful from the outside.
But would you care about keeping up with your neighbors' lavish purchases if you were in the Sahara? Probably not. Likely, you would only care about getting food, water, and some shelter from the heat. That’s because happiness based on owning things is contextual, cultural even, but not inherent to us as humans.
Making Minimum Monthly Payments
According to a recent study, most consumers only make the “minimum monthly payment” for almost every type of debt. Credit cards are the only exception, with 58% of people making payments that exceeded the minimum each month. Since APRs average 15.56% to 22.87%, making just the minimum payment on your revolving debt (credit cards) can take decades to repay or, worse, keep consumers in debt.
While you may have enough money to pay more, the minimum payment creates an anchor of sorts or a benchmark. You know that if you make the minimum payment, you will avoid late fees and other penalties. So, there is no real incentive to make more payments since you don’t notice the interest piling up on the account. Can you imagine what it would be like if you felt incentivized to contribute more to your revolving debt? What if your social media network rewarded you with validation every time you doubled your payment? Would that inspire you to pay off credit?
The psychology behind only making the minimum payment should give you peace, knowing that the system wasn’t designed to help you repay your debt. It was designed to keep it piling up.
Rely on Credit as a Safety Net
Sometimes, you can’t pay out-of-pocket expenses. Circumstances pop up that make it hard to avoid using credit. And, nothing can take you by surprise like a trip to the ER or a pile of hospital bills. Even if you typically try to avoid a trip to a doctor, it’s a different story with kids. You can’t wait around when it comes to their health. That’s why, according to an Aflac survey, 34% of families (and 27% of individuals) relied on credit cards as a direct result of overwhelming medical costs. Around 69% of the latter group have to make sacrifices just to keep up.
Building a dependency on credit is more than skipping out on gifts, though, as the Aflac research suggests. It’s also more than pulling back on spending the next month. It can lead to a long-term or even lifetime problem that’s hard to escape.
Credit stacks up, leaving many struggling to pay the excess. While some believe that carrying a balance can help build credit, it actually has the potential to hurt it. Accrued interest leads to higher interest rates, trapping you in a cycle of debt. Paying that extra or unnecessary interest is one of the easiest and surefire ways to waste money. It’s even up there with impulse buying or purchasing the same item over and over again. And most Americans fall under the same manipulation since the majority[AC1] of them use credit cards instead of cash.
Credit is hardly a safe fallback, but it can be challenging to move away from using it. With expensive rates, hidden fees, and astronomical billing for basic necessities, who can blame Americans for staying in a bad relationship? It means they can hold off the vultures for a little longer.
Living in Denial is Easier Than Confronting Debt Head-On
Think about the times you’ve put on some extra weight. How does it make you feel when you step on the scale? Do you feel excited and ready for a weight loss journey, or do you want to crawl under the covers and eat nachos? For most, it’s easier not to confront the scale demon head-on. And, to maintain your denial of any weight gain.
Finances tend to feel the same way. It’s easier not to know where you are than confront the truth. Many Americans hide their debt due to shame, which may worsen the situation because they don’t have a plan to address it. Addressing the problem makes people feel uncomfortable because they must make sacrifices.
My grandfather was a great example of shameful debt. He lived his entire life trying to keep up with the “Joneses” and maintain a lifestyle that wasn’t realistic for his income. He worked hard to follow in the same footsteps of those he admired. But as he tried to keep pace with his friends and colleagues, the debt grew. As a result, he and those close to him began to suffer.
He was too proud and too ashamed to ask for a hand to help him crawl out of the hole he dug. Instead, he would ask for short-term loans from his family for a quick debt resolution that he would never repay. Because he didn’t take a good hard look at the issue and address it at its core, he lived his life in the cycle of debt. In other words, he was afraid to step on the debt scale and see how much debt he had packed on throughout the years.
The concept of shameful debt is easy to understand. Unfortunately, in a world obsessed with image, confronting your debt demons just doesn’t seem worth it. But it would help if you considered what you are genuinely sacrificing to live in a world of show-and-tell.
So, How Do We Fix This Debt Predicament?
Consumer debt creates insecurity, reduces wealth, harms families, and may slow the economy. Carrying too much of this debt can lead to a rapid downward spiral.
Obviously, debt is a problem. It is something that many of us struggle with every day. But you’re not to blame for the root of the cause. The entire financial system doesn’t support financial growth and literacy. Keeping you in the dark helps the financial industry thrive. The banking system is broken and no longer focuses on serving its customers’ financial health. Traditional banks make a profit from your debts. On top of that, they don’t offer you the freedom or advice to help organize and manage your money in any way that helps improve your situation.
The banking experience, as we all know it, has remained unchanged for decades. It’s about time a bank worked hard for you, helping you become financially fit and achieve your dreams.
Just imagine a world that made it desirable to achieve your financial milestones. That debt repayment was an everyday celebration, or your peers and loved ones rejoiced when you reached your monthly savings goals. Living in a world with money management celebrations may be a long way off, but it’s something worth considering.
Ashley KilroyRead more from Ashley Kilroy