How does debt impact financial habits?

It's very tempting to overspend during the holiday season, especially during a pandemic when we're longing to see our family and friends. But before you pull out that credit card be sure to evaluate your personal situation to not add any additional debt to your financial situation.

Recently released data from the New York Federal Reserve found that Americans are sitting on a record $14 trillion of debt, including mortgages, credit card bills and student loans. Mortgages remain the largest chunk of Americans' debt, accounting for $9.4 trillion, followed by student loans ($1.5 trillion) and credit card balances ($13 billion). Despite these record numbers, Americans may be doing better than they realize when it comes to debt – and many who have tackled debt have improved key financial habits, making room to implement a protection-first financial plan.

A new survey from New York Life suggests that although debt is growing, the challenge of paying it off is not insurmountable. In fact, slightly more than a third of respondents (35 percent) say they’ve never had more than $5,000 in debt. Moreover:

• Nearly two-thirds (62 percent) of Millennials say they’ve never had more than $10k in debt.
• Gen Z – while younger, and perhaps not yet in a position to take out significant loans – also has limited amounts of debt, with 70 percent saying they have never had more than $5k in debt.
• A majority of respondents overall have either paid off all or more than half of their debt (35 percent and 27 percent, respectively). Among those who have the highest amounts of debt – $75k or more – over half (55 percent) have paid off all or more than half.
  
  

“Debt can be an enormous stressor for the household, with many Americans feeling like any amount of debt is a roadblock to achieving all other financial milestones,” says Brian Madgett, Head of Consumer Education at New York Life. “However, this data paints a more optimistic picture and suggests that those struggling with debt today can overcome it by following some key steps.”

Paying debt requires discipline – A habit that has extended to other money matters

• Managing debt effectively requires attention to detail and thoughtful planning. Given that a significant number of respondents have paid off all or some of their debt, the data suggests Americans are strengthening their financial muscles through a variety of good habits. For example:
  
• Thirty-seven percent of respondents say following a personal budget was most important to them when their debt was at its highest level. Almost half (46 percent) say they would contribute to a long-term savings/emergency fund if they had no debt at all.
• A little less than half of respondents with $5k-$25k in debt – who have less than half left to pay – say they follow a personal financial budget.
• Of those who have had the greatest debt burdens ($75k or more) and have completely paid it off:
  • 46 percent follow a personal financial budget
  • 32 percent are contributing to a retirement fund
  • Both of the above figures are higher than the habits reported by the general survey population
• Adults were 14 percent more likely to report putting money in a long-term savings or emergency fund today than when they were at the height of their debt. They were 15 percent more likely to save for a long-term purchase, and 11 percent more likely to invest in the stock market, suggesting that these are the three financial habits most affected by debt.

Seventy-seven percent of Boomers have more than $5,000 of debt, but they are also most likely to embrace several healthy long-term financial habits. Specifically:

There’s Always Room for Improvement

While the data overall paints a picture of positive momentum, adults may be overestimating their financial strengths.

Roughly 4 in 10 respondents (39 percent) rate their financial habits as above average or excellent – however, the data suggests a discrepancy between their perceptions and behavior.

Adds Madgett, “It’s easy to think of having ‘good’ financial habits as simply ensuring that you aren’t spending more money than you’re taking in. While this is important, focusing on just this one aspect is a missed opportunity to implement a protection-first financial approach to ensure financial security for ourselves and our families, both now and in the years to come.”

“A protection-first approach is an important foundation to ensure financial security for ourselves and our families, both now and in the years to come.” --Brian Madgett, Head of Consumer Education

Help wanted

Getting out of debt is challenging, but according to the survey data, many adults are “going it alone.” More than one third (35 percent) say they did not have help paying down their debt when it was at its highest level. When breaking down the data according to various debt levels, this lack of support becomes even more evident:

About one in four respondents (23 percent) say they either currently or previously worked with a financial professional. One in five respondents (21 percent) say that have not but would like to do so. The respondents who said they have not worked with a financial professional, but would like to in the future, indicated they think they would work with one when:

• They have more money saved (34%)
• They are making more money (32%)
• They find a financial professional they trust (27%)
• They have paid down more of their debt (19%)
• They have improved their financial habits (16%)

These findings suggest respondents may not fully realize the accessibility or usefulness of a professional as a resource to help get their money habits on track.

“It’s a savvy move to ask for help when it comes to money, whether you’re looking to get out of a rut or start accumulating wealth,” notes Madgett. “There are many resources right in your community that can offer the affordable advice and human guidance you need to achieve your financial goals.

“It’s a savvy move to ask for help when it comes to money, whether you’re looking to get out of a rut or start accumulating wealth.”--Brian Madgett, Head of Consumer Education
 

Methodology:

This poll was conducted between November 13-November 17, 2019 among a national sample of 2201 Adults. The interviews were conducted online and the data were weighted to approximate a target sample of Adults based on age, educational attainment, gender, race, and region. Results from the full survey have a margin of error of plus or minus 2 percentage points.

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