Why Americans Have a BIG Debt Problem!

it's brian preston the money guy understanding that america has a debt issue and this is one of those things where guys the sooner you realize you have to figure out are you a builder of wealth are you just a consumer of resources and you use debt to build that bridge to get you where you want kind of before you're actually ready and that by the way when you build that bridge it's dangerous now sometimes right in our financial lives we have to go into debt maybe we're buying our first automobile or making a home purchase and other times it's voluntary we might be buying something at a retailer we might be running up credit card debt either way most of us at some point in our life are going to be faced the decision of what's the best way to get rid of it how do i want to pay it off what's the best mechanism so i think that even though we predominantly talk to financial mutants who don't generally even though america has a debt problem they might not have a debt problem there's probably going to be a season in their life or the life of someone that they interact with where this will be valuable helpful information for you oh no doubt i mean even financial mutants when you're starting out and trying to build your toolbox of knowledge of what to do with your money you could also fall prey so we're trying to help everybody understand have know where money is used how to grow it and how not to fall in the traps and that's one of those big ones to avoid now i think this is a bit of an alarming stat because fte daniel pulled this up for us and this is what he found the average american this is from data compiled by northwestern mutual the average american now has 26 621 dollars in personal debt and that excludes the mortgage the average person's walking out walking around out there with 26 almost 27 000 that they owe to someone else for something they've purchased yeah and i think you've said it but i think it's worth repeating excluding mortgages because when you see bigger numbers where you're getting into five digits you're like well anything that's that's not just credit cards that's not just car loans is it you know no this is let's talk about let's get into why this is a problem and part of what i don't like about it is is that you learn very early or at least hopefully if you're watching the money guy content we talk about how easy it is to create financial independence and success with the three components of wealth building which is basically discipline that deferred gratification that creates margin meaning you have to live on less than you make and then you think about from there you actually create money because that's what that margin is it's money so that you can invest the margin the extra and then you hopefully you have enough time to let those assets grow your army of dollar bills the problem is debt works against all three of those because if you're using debt especially for a lifestyle that means you didn't create margin that means you actually exceeded what you made you used debt to kind of bridge the gap so you never got to invest the money and you definitely if you didn't get to invest the money you don't have the time to let it grow you might actually be turning compound interest upside down that's exactly right it can be the eighth one of the world that can be wind at your back when it comes to wealth building and building towards financial independence or it can be the headwind that you're gonna fight against your entire financial life if you don't get it under control early on so i saw this on twitter brian is you know obviously a friend of the show um we communicate back and forth with each other and it is i say something to this effect on the show but i was like when i said i was like why didn't i create this i mean brian did a really good job because it there is a choice being made do you want to be a builder of assets or do you want to make the banks rich that's the perfect illustration here so choose accordingly and be wise with this now here's the truth of the matter you know in our day job we get to work with successful people all over the country we're fee only financial advisors we work with a lot of millionaire families out there and one thing i think is so interesting is that most millionaires most folks who've been able to build and accumulate wealth don't have debt issues they fall onto the other camp they're not the type that ends up getting themselves behind the eight ball of having compound interest work against them yeah it is it's i think it breaks people have a misconception about that they they come to a financial advisor and expect you to be an expert on bankruptcy to understand how to get out of credit card debt and other things and guys it's just not the fact it's not the way the world works if you're a financial mutant you will come to a point to realize people who are you know going to make good decisions with the money don't struggle with basic discipline matters now look that's not a condemnation on anybody who is strong because we've all been young we've all been without money and resources i'm just telling you don't fall prey and go especially the consumerism with all the ad campaigns all the discussions all the voices with friends and relatives or they act like it's completely okay to be in debt that is not the case if you plan on taking your finances to the next level so okay before we can talk about you know the best ways to get out of debt how to actually satisfy debt let's talk about some of the most common types of death that we see some of the things that americans most often fall in the trap of and the first one that sort of immediately comes to my mind is credit cards right now according to a data compiled by experian and clever the average american with credit card debt at this present moment owns over our owes over five thousand dollars fifty three hundred dollars in credit card debt i wanna make sure i clarify this because this stuff sits out there on youtube we're out there wherever you download your podcast this is people who are with credit card debt meaning they're not paying it off monthly but this means that people actually have fifty three hundred dollars worth of debt and then here's a stat that kind of blew my mind because it's very quickly approaching 50 47 of households carry credit card debt see now one of the money guy tennis we talk about all the time is we have no issue with folks using credit cards we actually encourage that we think it can be a benefit to your financial life but carrying the balance is a no-no it's just something you cannot do i am amazed by the fact that almost half of the population is getting that wrong almost half the population does not pay it off every single month and i think that is terrifying first of all and also kind of saddening now here's what's interesting we've come to the pandemic because people couldn't travel spending was kind of cut down and then there's also been all this stimulus money that's been pushed out into the economy a lot of these numbers are actually healthier than they historically have so they've improved from prison because a lot of money's been put in the system i think this is a good point if you have struggled with credit card debt but you've gotten the stimulus money you've also been able to kind of reset your own personal consumption because you haven't been able to do stuff let this be the ground zero to kind of set yourself up for success going forward because this could be a positive moment here and then the second type of debt that we often see are is consumer credit like you go to the local big box retailer local electronics store and you buy something you have a credit card specifically with that retailer yeah and the way these things typically happen i mean i don't care if you go to kohl's um your favorite electronic store nordstrom i mean it doesn't even have to it can be your coffee shop these days i mean you just go mobile app is going to be pushing this everybody's trying to sell their corporate card and they'll usually they'll give you some type of incentive if it's at a furniture store they're gonna offer your 10 off you know they'll give you bonus points if it's through your coffee app all these things have this incentive and you might be caught in a moment of weakness and think that the discount is worth you opening another credit card guys i'm going or store credit i will tell you be very careful with this i have my own experience shares on this is that that 10 percent sometimes is not worth it if you're not communicating with the other people in your household because there's discounts it sounds like you're saying that from perfect space yeah we've we've had credit card you know a store credit that was opened earlier in our marriage that resulted in some late fees and interest and other things and then also i can tell you from a knucklehead mistake i made i went because i was so excited with my first house purchase that we bought furniture and when they you know and it's a few thousand dollars worth of furniture so when they offer me 10 i'm like that's real money i'm like that's a few hundred dollars i could save right there not realizing since i had not closed on the house yet that ding to the credit it did have an impact on my credit score so be very careful on how many different credit accounts including store cards that you're opening up out there no don't mishear us we're not suggesting oh don't ever have a store card if there are stores that you frequently shop at and that you use then the benefits make sense for your situation that's okay you should still pay them off every month we're not saying don't use them at all what we're saying is you want to be careful of opening one up at every store you go to to try to accumulate the discounts when in reality those discounts may cost you more over the long term than you realize i want you to be very deliberate with how you use your credit i mean there's a reason look we have in the background a credit score that is running on you at all times there's also look there's crooks that try to use your credit there's so we we recommend i actually like the thought of freezing your credit through the three credit bureaus because that also makes you much more deliberate with any time you want to open a new credit line you have to go unfreeze your credit from those credit bureaus man that makes you talking about measuring twice cutting once i like that extra layer by the way it's instantaneous so it's not a big deal but it does allow you to be a little more deliberate and take the emotionality out of the entire process a third type of non-mortgage debt that we often see folks get themselves in trouble with are auto loans yeah we all love the big shiny new automobile it's something that everyone can see there are safety features there's new technology but what i thought was really alarming is when daniel was pulling these stats we found that the average auto loan term for new vehicles right now is 72 months i think that's just absolutely insane because i know a lot of folks don't even drive cars for that long so it's incre insane the people are borrowing for a longer period of time than they actually even own the automobile i think the stats are even worse than this because when i was i was like oh this 72 months people aren't they realize you divide that by 72 by 12. i mean we're talking about six years here and i just you know when you want to have the optimistic goal of your driving your car is at least a decade you're going ahead and locking yourself in when you do this type of debt we know that's not even the behavior of the typical consumer but i think it's even worse only 26 of new car loans are for five years or less and so that just does that flies in the face of all kinds of advice that we give you because even five years i think is realistically probably too long to try too long to try to finance an audible and here's why let's give you a clue on this on why auto loans are disasters um cars depreciate i mean the the moment you buy a vehicle it depreciates really quickly to the point that you really you know if you are optimizing your cash flow situations you typically don't want to buy a car until it's used for three or four years so somebody else is paying that 40 to 50 of the depreciation out there so you do not these are not appreciating assets unless we're talking about like a 1967 camaro or something everybody always throws out those antique cars as the exception to the rule but are you really financing that for something everybody's doing that so i'm just telling you be very careful with with credit card i mean with cars because and that's why we put the guidance of 23 8 it's something that you really ought to be aware of so you don't get yourself in that type of situation and one way that we know folks aren't subscribing to 23.8 where you put 20 down and you don't finance for any longer than three years and you don't let your car payment exceed more than eight percent of your monthly gross income we know that people are falling short on that because the average amount finance for new car purchases in this country right now is 35 228 you can look at the average income for the average american in this country you can see we are way off from 23 8 affordability and you know we've done so many shows on net worth by age or 401k savings by age how many 20 and 30 somethings don't even have 35 000 in their investment accounts but yet they have a loan for thirty five thousand dollars it's working against them that's why we we do add on top of 23.8 if your car payment is less than your i mean is more than your investments you're doing it all wrong you always want your investment cash flow what's going out for your your future self to be better and greater than what you're spending on your depreciating asset and then sort of the last uh non-mortgage debt that we feel like is super super commonplace these days are ones that i think a lot of folks thought they can't avoid right i have to do this this is something it's not even really debt it's a it's an investment in my future well-being and of course we're talking about student loans yeah and student loans they still get classified you know what's called loosely good debt you know mortgages student loans these things are considered good debt in the fact that you're investing in something that's either appreciating or it's going to make you a better version of yourself but i think there ought to be an asterisk next to that because you know watching some of the documentaries and other things on student loan debts we do have a crisis in a lot of ways is because we've expanded how many majors there are out there we've increased the cost of education tremendously and then the way that that has all been bridged is they just let young people and parents just sign off and take on more debt and and that seems like a simple solution especially when you say good debt because you think what could go wrong with this what can go wrong is when you take on more debt than economically feasible for you to pay off and that happens when you have jobs that their first year starting salary is not even even 10 years in the future your salary was not going to come close to covering the six figures of student loan debt that you built up over the years so we've actually created some guidelines on this here's what we'd recommend don't take on more student loan debt than what your first year salary will be right out of college yeah that's that's such a great piece of advice because we know that the class of 2019 graduated with an average of 29 900 of student loan debt and that's the average that means that half of the folks that graduated had more than that had a larger amount than that we all know when we first come out out of our career or out of college and start our careers we don't always start at the top of the pay scale so if you already start and you're 30 40 50 000 in debt it's going to take you years upon years upon years just to get back to break even so if there are ways that you can contain that you can keep that number down you certainly want to do that so you can get to actually building wealth a lot sooner well we know that highly of the habits of highly effective people begin with the end in mind i would encourage you if you're a grandparent parent or your student yourself think about what you actually want to do for a living go look at the the majors that actually generate the highest incomes and also pay back student loan debt the easiest i mean i would look at that and then also go look at how powerful it is to consider doing community college your first two years um in some states that's actually even highly subsidized because the only only name that goes on the diploma is the one that you ended at right it doesn't say oh well i got a degree from university of georgia but first two years when community college it doesn't do that you just want to make sure that the last the place you graduate from has the name on there it might not be worth paying the exorbitant price tag for those early core curriculum classes well that's why i would have a 360 approach meaning you're looking at the big picture all the way around when you're comparing whether it's community college state schools trade schools or then the private schools just make sure like i said begin with the end in mind so that you don't go to some expensive private school but you end up with a salary that just is not going to be economically feasible for what you're trying to do just be very aware of that because i think that that is something that people fall in a big trap on because good debt can be bad for your financial life if you don't do it properly you

Channel: The Money Guy Show

Views: 25,968

Keywords: money guy show, debt, budget, cash, real estate, insurance, how to make money, save, credit card, compound interest, buying house, buy stock, success, personal finance, Why Americans Have a BIG Debt Problem!

Id: LVCKu8xUHZY

Length: 16min 52sec (1012 seconds)

Published: Wed Jun 16 2021