Your biggest source of debt matters when it comes to your repayment strategy.
Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…
The interesting study
Each year, Northwestern Mutual puts out a Planning & Progress Study that looks at a wide range of financial trends for consumers. This year, they polled 2,003 U.S. adults, including 601 interviews with Millennials (age 18-34).
The big result
As NBC News West 9 reveals, the number one debt for older Millennials is not student loans, as you might expect. It’s credit card debt.
Among older Millennials (age 25-34), credit card debt makes up 25% of their average debt burden. That ties mortgage debt at 25% as well. Student loans only account for 16% of their debt.
The fascinating details
According to NBC News West 9, older Millennials also carry more personal debt than the average consumer. They have an average personal debt balance of $42,000, versus $38,000 for other Americans.
“Long gone are the days when credit cards and student loans only represented a small percentage of the average household’s debt,” says Gary Herman, President of Consolidated Credit. “The fact that credit card debt tied mortgages as the leading source of debt for older Millennials is extremely concerning. It means that we’re moving away from good debt, and taking on too much bad debt.”
The good news is that most Americans, including millennials, list paying off debt as their biggest financial priority for 2018.
- 53% of Americans will focus on debt reduction
- 36% want to revisit their budget
- 29% are saving to achieve a major life goal
- 20% want to focus on retirement savings
- 16% will review their insurance coverage
- 16% want to rebalance their investments
- 14% say their focus is on improving tax planning
- 11% are reviewing beneficiaries
- 7% want to get a financial advisor
- 6% have other financial goals
If you notice, that’s well over 100%, meaning that many Americans are trying to accomplish more than one goal this year. That’s a good thing because financial balance is important if you want to achieve success. But Herman says trying to do everything at once is a good way to ensure you don’t accomplish anything.
“You want to find priorities that fit well together so that you can focus your attention and start moving in the right direction,” Herman advises. “For example, establishing and balancing a budget is often the first step to making an effective debt management plan. But if you’re trying to focus on insurance, debt, retirement, short-term savings and tax planning all at once you may need to pick one or two goals to focus on first.”
What you can do… and why the source of debt matters for your financial strategy
“When it comes to debt, there are good debts and bad debts,” Herman explains. “Good debts give you something of value. Mortgages are good debt, because becoming a homeowner gives you a good, stable asset that builds value long-term. And it’s worth noting, student loans are good debt, too. Although they can create an incredible burden when it comes to debt repayment, they also give you the means to increase your lifetime earning potential. The ability to earn a better income and advance your career is good for your finances long-term.”
By contrast, credit card debt is bad debt. You don’t get anything from making charges on a credit card that improves your financial standing. You may cover a daily expense if you’re short on cash or an unexpected emergency, which keeps you stable in the short-term. But long-term that high interest rate credit card debt is bad for your finances. Purchases on credit usually end up cost you more, especially if you’re carrying balances over month-to-month.
“If you carry credit card balances every month and they never seem to go down, you’re throwing money away,” Herman argues. “You need to find a way to pay off your balances, so you can achieve financial stability. That way, you can focus on achieving major life goals, such as buying your first home. Then your biggest source of debt will be your mortgage, and that’s a good thing. That’s the way it should be.”