Borrowing money is the way most of us pay for things that cost a lot of money. Whether it’s buying a car or a home or paying for an education, debt is the way most people pay for high cost items. The easy credit that available and the pressure to use makes it hard to get out of debt.
Debt may not be a bad thing. I believe it’s a necessary evil that will undermine your retirement if it’s not managed effectively. The current economic conditions can sabotage the long term financial security that is so vital to stress free living and a successful retirement. A lot of us grew up believing some myths about debt that turns out not to be facts. Read about them here.
An article by Experian in April 2022 stated that average credit scores increased between two and seven points from 2020 to 2021. That’s good news, but at the same time, average indebtedness for mortgages, and auto loans have seen significant increases and the fastest growth. And we all know how fast the cost of food and fuel has gone up.
Experian’s State of Credit report (I’m not an affiliate for Experian) for 2021 found that mortgage debt increased across all generations, rising by $13,587 over 2020’s level to a total of $299,242 in 2021. That’s an increase of almost $19,000 over 2019. Millennials and generation X have the highest average mortgages. Not surprising really, young people have more time to pay off debt than us old folks and most of them don’t mind taking on more debt.
Debt Eats Away Retirement Savings
Three categories of debt most often reported are credit cards, car payments and mortgages. When inflation goes up and we pay more for our essential things, there are fewer dollars left after those credit card, car loan and mortgage payments are made. I can relate to that situation.
Retirement has changed over the years and there are new rules we have to consider. Saving for retirement is as essential as it’s ever been and social security will be part of our retirement income. But, Social Security, if it’s still around, is supposed to supplement retirement income, not be the only income, and in today’s world, people are expected to fund more of their retirement with 401(k)s and IRAs.
Paying off debt means there will be fewer discretionary dollars available to save for a future retirement. Success means learning how to get out of and stay out of debt. It’s not an easy task with so many things going against us.
Surging inflation and the increased cost of energy, especially the cost of energy, gasoline and diesel fuel, is driving the cost of everything else up. The Federal Reserve has embarked on a series of rate increases in 2022 that’s supposed to drive down inflation and we’ll likely have more rate hikes coming before things start getting better.
Unfortunately, if history is any kind of guide, this may be an economic situation that won’t be resolved for several years. Prices are going up and may never get back to levels before covid-19. In the meantime more of us are going to retire on a nest egg that continues to get smaller.
How To Manage Debt
Being debt free can be one of the best ways to go into retirement, but most of us won’t make it without some effort and maybe sacrifice to get there. From personal experience, here are six things to do to retire debt free (or almost debt free);
One: The first thing is to know what you owe and you owe it to. You need to take an inventory of all your debts. Don’t forget your subscriptions and those things you have on auto pay. No matter how small, it’s still a debt. Put it all on a spreadsheet so you can see what you owe and where your money goes. It’s probably a good idea to include estimates of your living expenses.
Two: Commit yourself to getting out of debt. If you’re not willing to commit yourself, it probably won’t happen.
Three: Make a plan and prioritize your debts. Some will be more important than others. Start the plan with a specific goal. If you don’t have a good reason to do something, it probably won’t happen.
Four: Cut back on credit purchases. You can’t get out of debt if you keep adding debt. If you have to use credit, find a card or lender with the best interest rates.
Five: Transfer credit balances to a card with the lowest interest rate. Consolidating with a lower interest rate is not a bad idea, but if you do this, you have to get rid of your other cards. The problem with consolidating is that it’s easy to continue to use those old cards and just rack up more debt. See number two above.
Six: Make a budget that includes paying off your debt. After you find out where your money is going, then you can make changes that will help make you successful.
Getting out of debt is not rocket science, but can be extremely difficult and sometimes you might need to get some help. There’s more detailed information on this post. It outlines my own journey to retiring almost debt free.