The best habit you can get into if you want to become debt-free

Despite all the hardships, the pandemic has benefited many savers, especially workers who were fortunate enough to beat Covid without losing income. Overall, the personal savings rate remains historically high, according to the Bureau of Economic Analysis, and credit card debt has fallen more than 15% since the pandemic began, according to the Federal Reserve Bank of New York.

Experts say this is great news, although they expect personal debts to eventually return to pre-pandemic levels.

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“So far, it’s been pretty good in terms of some people establishing new habits of saving more, spending less, and paying down debt,” says Ted Rossman, senior analyst at CreditCards.com. “I think, unfortunately, it will eventually go back to the way it was.”

You don’t have to go back to the status quo, though, says Chantel Bonneau, a certified financial planner with Northwestern Mutual in San Diego. And, she adds, whether you’ve got your debt under control during the pandemic or you’re just starting to work on that goal now, the key, It is not taking on more debt.

“The best habit people can have is to know their own cash flow and not put themselves in a pile of debt to fund your lifestyle,” Bono says. “Or you’ll pay for it for a really long time.”

Bono says that carefully tracking your spending is critical to understanding your cash flow, and this knowledge makes it easier to “live within your means,” she says. It can control your debts Facilitate the development of other good financial habits.

Spending less on debt makes it easier to save more

Americans spend much of their monthly budget on servicing their debt: On average, 30% of their monthly budgets are devoted to debt repayment, according to Northwestern Mutual’s annual survey of American financial habits. When you pay off that amount of debt each month, Bono says, you probably aren’t saving much.

“If you’re already spending 30% on debt, you probably aren’t saving another 20%, so try to get that debt under control,” Bono says.

Having control of your debt means you can turn that money toward savings. “Start the habit of paying yourself and saving as soon as possible,” Bono says. “If you start with 1%, or $50, or $100, it will be easy for you to move up to $130 the next month and then $150 and then $200.”

“On the net, the consumer is in a better place” now

The main reason experts are so upset about the financial health of average Americans right now is that it has already improved so much during the pandemic. On an individual level, personal debt has fallen the most, according to a Northwestern Mutual survey. Excluding mortgages, US adults have $23,325 in debt, which is the lowest number Northwestern Mutual has recorded since it began asking this question in 2017.

That year, excluding mortgages, the average adult in the United States owed $37,000. When adjusted for inflation, this represents a 44% decrease, according to the Bureau of Labor Statistics’ inflation calculation.

“On the web, the consumer is in a better position to come out of the pandemic,” says Christian Mitchell, chief customer officer at Northwestern Mutual. “The amount of debt that consumers carry has been reduced.”

There’s one caveat to this good news, Mitchell says: “More people are saying that their plan to tackle this debt is overdue.”

So, while personal debt goes down, for example, A large portion of Americans have postponed the date when they will be fully debt-exempt, according to a Northwestern Mutual survey. More than a third of respondents, 34%, said the pandemic has lengthened their schedules to completely get out of debt.

This may sound reasonable in the short term, especially with interest rates as low as they are currently, says Mitchell, but it could become a problem in the not-too-distant future.

Interest rates won’t stay that low forever

In the early months of the economically uncertain pandemic, many people felt they had to defer payments on nonessential debts.

Student loan payments are a great example. Thanks to the federal government’s moratorium, borrowers have not had to make any payments on their student loans since March 2020. No interest on loans and no penalty fees. The measure was intended to help people who lost their income during the pandemic, but anyone with a federally backed student loan, regardless of employment status, benefited.

This moratorium expires in January 2022, at which point payments will be due again and interest accrual will resume.

For many people, the deferment has been a welcome reprieve in learning about their spending habits and how to prioritize paying off student debt. he is smart The idea of ​​using the pandemic to reassess your financial health, says Mitchell, especially when interest rates are so low.

Extending your debt repayment schedule is fine when servicing that debt is so cheap, but Mitchell cautions that debt-burdened Americans, especially those with volatile interest rates, need to Keep in mind that the cost of borrowing money won’t stay that low forever.

“I’m not talking about interest rates going up anytime soon, but that’s a possibility,” Mitchell says. And the longer that repayment lasts, the more likely they are to be exposed to higher interest rates.”

Instead, consumers can “use this as an opportunity to reflect on their debt-related behaviors and compel themselves to act differently going forward,” Mitchell says.

Article “Best Habit You Can Have If You Want To Become Debt Free, According To A Financial Planner” Originally Posted in Grow (CNBC + Acorns).

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