Non-housing related debt is over $4 trillion
Last week’s post provided a simple overview of how compounding can work for you. Unfortunately, the phenomenon can also work against you if you have a lot of interest-bearing debt.
Federal Reserve Bank of New York data says total household debt reached $15.58 trillion at the end of 2021. Mortgages comprise the majority, leaving non-housing debt at $4.33 trillion. The non-housing component includes auto loans, credit cards, student loans, as well as other interest-bearing debt.
Paying down debt is challenging. There are other competing needs (food, utilities, clothes, etc.) plus all those wish list items (toys, entertainment, more clothes) constantly tugging on our emotional strings. Oftentimes, making the minimum payment is the default choice. Unfortunately, this potentially makes the problem worse due to negative amortization. This means the minimum payment does not fully cover the interest; thus, the unpaid interest gets added to the loan principle.
There is no shame in accumulating debt. It is a part of our lives. Having a sound strategy to effectively reduce debt is paramount to building wealth over time. It is easy to make the minimum payment, but that will not solve the problem. Extra payments towards principle and eliminating non-essential credit use are the surest ways to reduce burdensome debt.
Our partners at eMoney created a short infographic on the topic. Talking to a financial advisor that can help chart a course of action is another resource.
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