A troubling trend is taking hold in U.S. households; nearly 8 out of 10 workers report they are living paycheck to paycheck, and the number of Americans living on the financial edge is only growing. The paycheck to paycheck lifestyle drives many people to incur debt or otherwise struggle and sacrifice when expected expenses arise, and far too many people are relying on credit cards to make ends meet. This has resulted in crisis-level debt situations for far too many families, with 1 in every 50 households (approximately 2 million families) carrying more than $20,000 in credit card debt. In fact, revolving credit has experienced an annual growth rate of about 4.9 percent, and with a greater number of consumers (even those with subprime credit scores) being approved for credit cards, it’s likely those numbers will continue to rise.
But credit card debt isn’t the only storm cloud hanging above the heads of the American majority; mortgages, student debt, auto loans, and personal loans account for a huge portion of the debt burden in the United States as well. For many American families living paycheck to paycheck, what feels like a manageable amount of debt one day can start to feel like drowning in the space of one small crisis.
For all these reasons, it’s important to refocus your financial strategy as we enter into the new year; when it comes to getting out of debt, saving for retirement, or making smart investments, time is money.
- Analyze your spending habits. If you haven’t already taken control of your finances by getting a realistic sense of where your money is going, it’s time to start balancing the budget. Many people not only don’t know what they actually spend their money on, but also don’t have any real knowledge of just how much they owe. You should be managing your finances with a big picture sense of all your expenses and an honest assessment of how much money you have coming in each month. Once you’ve sorted out the budget, you can start making adjustments to your spending habits. Analyze what financial planning strategies work for you and which don’t pay off, and adjust accordingly.
- Invest in yourself. If you’re regularly finding that you’ve got a bit too much month at the end of your money, it may be time to consider some sort of side hustle or a second job to gain some financial traction. While most people are in debt, nearly 80 percent of Americans report that they incurred that debt to invest in themselves or opportunities. If you’ve got a creative talent or a compelling product or service, check out Shopify templates to earn some extra cash on the side or even launch a full-time entrepreneurial endeavor.
- Take advantage of balance transfers. One of the fastest ways to get out of debt is to transfer the high-interest debt to a low or 0 percent interest balance transfer card so that the money you put toward your debt makes a greater impact. Assess all your credit card debt and consolidate as many high-interest cards as possible; since most people have debt spread across several credit cards, you’ll want to understand exactly which transfers will make the greatest difference in your overall financial health. Remember that your best bet is to pay off the balance of your transferred debt within the promotional period so you save money on interest, so pay particular attention to those details when selecting a balance transfer card.
- Avalanche debt. You may have heard of debt advisor and media personality Dave Ramsey’s recommendation of “snowballing debt,” in which you pay off the lowest balance first, then apply those payments to the next lowest balance once the first is paid off, and so on. This strategy can be super motivating since you get to see debt disappear quickly when you focus on the smallest bills, but an even more focused version of this strategy is the “avalanche” method, where you attack the highest interest rates first to reduce the amount of unnecessary interest spending. The most targeted financial strategy would be to strike a balance between the two; for example, taking the extra money you save each month by paying off the lowest balance debt and applying it to the card with the highest interest rate instead of the next smallest balance.
- Start tracking your credit. Now that you’ve got a handle on what’s happening with your finances, it’s important to stay in the know. Start tracking your credit through any number of free websites and apps; not only will a healthy credit score help you get the best rates and offers, but tracking it will ensure identity fraud or other security threats don’t compromise all your hard work.
If you feel as though you’re shackled to your debt and the risky paycheck to paycheck lifestyle that necessitates it, know that you can remove the irons. By refocusing your financial strategy as we approach the new year, you can start taking steps toward establishing greater financial freedom in the future.
What strategies have helped you focus on and improve your financial health?