Financial Samurai

Slicing Through Money's Mysteries

  • About
  • Free Wealth Management
  • Top Financial Products
  • Negotiate A Severance
  • Real Estate Crowdfunding

Debt Optimization Framework For Financial Independence

Posted by Financial Samurai 72 Comments

Debt Optimization Framework For Financial IndependenceDebt is an interesting animal. Most of us get into debt because we WANT something we cannot afford. We want a private school education so we borrow $50,000 to learn something we can learn for free on the internet. We want to live a fabulous lifestyle in our 20s so we put everything from fine dining to designer clothes on our credit cards. We want to stop paying rent, so we leverage up 4:1 to own a property that will crush our finances if we need to sell in a down market.

Make no mistake about it. Debt is a manifestation of greed. Which means I’m one greedy bastard! I wanted to live a nicer lifestyle and I wanted to get rich as young as I possibly could. In my 20s and early 30s, the biggest risk I feared was not taking enough risk.

Some of you might be thinking you aren’t greedy for having debt. But deep down, you know what I’m saying is true. Not only are you greedy, you’re impetuous to boot. But don’t be ashamed. If managed properly, greed can often be good when it comes to reaching financial independence sooner.

In this post, I share with you my debt history followed by a debt optimization framework to help you build wealth faster while minimizing the chances of a financial blowup.

Read More…

Never Ask To Borrow Money From A Friend Or Family Member

Posted by Financial Samurai 76 Comments

How To Get Out of A Bad Payday Loan

When it comes to money there are a couple rules I encourage people to follow.

The first rule is: Never tell anybody how much you truly make. You can share a portion of what you make, but not the entire number. Be particularly careful if your income is more than 50% higher than the median or average income for your age. A portion of people can’t help but become envious and despise you if you make more than them.

The second rule is: Never ask to borrow money from friends and family. As soon as you ask to borrow money from friends and family as an adult, you lose their respect and honor for you. And if you are a Financial Samurai, you value respect and honor above all else. Asking to borrow money from the people you care about can lead you down a deep dark hole.

Let me share with you a short story about how one man asked to borrow money from his close friend and girlfriend and what happened after. I’ll also share with you reasons why asking to borrow money is one of the worst financial moves you can make.



Read More…

If The Economy Tanked, Would You Be Ready?

Posted by Financial Samurai 26 Comments

If The Economy Tanked, Would You Be Ready?

The following is a sponsored post by Credible, a multi-lender marketplace that enables borrowers to receive competitive loan offers from its vetted lenders. Credible is headquartered in my hometown of San Francisco, California.

The U.S. is in the midst of its longest economic expansion in history. 

But when the Federal Reserve cuts interest rates, that’s usually a sign that the economy is slowing down — or worse. After raising rates nine times from 2015-18, this year the Fed has reversed course, cutting the short-term federal funds rate three times.

Another worrisome trend: New York Fed data shows the unemployment rate for recent college graduates (red line) has been inching upwards this year, suggesting employers are skittish about growth.

Unemployment rates for recent graduates, college graduates, and all workers

It’s impossible to predict when the next economic downturn will come. But the booms and busts of the business cycle are pretty much accepted as a necessary tradeoff of our free-market, capitalist system — which has weathered seven recessions since the 1970s. At the very least, it is clear that growth is slowing in both developed markets and emerging markets around the world.

World Growth Index
Source: ValueWalk

In a recent CNBC/SurveyMonkey poll, nearly two-thirds of Americans said they think it’s likely we’re headed for a recession next year. Close to half of those who see storm clouds on the horizon are preparing for it by cutting back on household spending and paying down debt.

“This refreshing prudence on the part of the U.S. households is, of course, exactly opposite of what macroeconomists at the Fed — as well as incumbent politicians who view lower rates as enhancing their re-election prospects — want to happen,” says former FDIC Chairwoman Sheila Bair.  

Rate cuts are designed to encourage people to borrow and spend. But this time, Bair says, “it looks like American households have learned their lesson, even if Washington has not.”

Whether or not a recession is coming next year or not, it’s always a good idea to constantly be managing any outstanding debt you’re carrying, whether its credit card balances, student loans, or a mortgage.

Make sure:

  • You’re not paying a higher interest rate than you can qualify for
  • Most of your monthly payment is going toward paying down principal, rather than interest charges
  • You’re prioritizing your loans with the highest interest rates
  • You have a good cash balance equal to at least six months of living expenses

Let’s look at some techniques you can use to whip your credit card, student loan, and mortgage debt into shape and get better prepared for the next recession.



Read More…

The Best Strategies To Get Out Of Debt And Become Happier In The Process

Posted by Financial Samurai 58 Comments

Out of debt with not a care in the worldI graduated from business school in 2006 with roughly $55,000 in student loans. Although $55,000 is a lot to pay off, I was already a “debt veteran” by then. What’s another $55,000 in student loans when I was already leveraged over $1 million dollars to buy my first properties in 2003 and early 2005?

I didn’t need to take out student loans, but I decided to conduct some financial arbitrage. The maximum amount one could borrow through a Stafford Loan at the time was $18,500 a school year at an interest rate of 2.75%-4%. I took out the maximum amount at the beginning of each school year to pay for tuition while I received 100% tuition and books reimbursement at the end of each year from my company to reinvest in the markets. 2003-2006 was a time of recovery in the financial markets and I figured I could beat a 2.75%-4% annual return.

Even though the financial services industry was going through retrenchment during the time I attended business school, the S&P 500 was doing quite well (2003 +28%, 2004 +11%, 2005 +5%, 2006 +16%). Even long term CDs were yielding roughly 4% risk-free. The extra $18,500 invested in the stock markets each year did end up growing faster than the cost of debt until a year after I graduated.

I was feeling proud of myself for the financial arbitrage until the 2008-2009 massacre hit. Originally, I was planning to continue holding on to my 2.75% consolidated loans to reinvest in the market. But when the markets got rocked, the loans started feeling like a burden instead of a gift so I wrote a check and paid everything off instead. I was overly focused on making an extra $3,000-$10,000 a year on my arbitrage rather than focus on the big picture of my overall net worth. It feels better to have less debt during times of crisis, however in retrospect, it would been better to lever up even more to buy more stocks!

Debt is the opposite of generating passive income for financial independence. Debtors are helping make someone else’s financial goals a reality while digging themselves further down a dark hole. The only type of debt I like is primary mortgage debt given there’s a good chance the underlying property will appreciate in value over a long enough period and you’ve got to live somewhere. There’s never a financial return for renting. Furthermore, the tax benefits of mortgage debt under $1.1 million dollars is also a nice bonus to have.

In this article I’d like to provide a debt framework that will help you get motivated to get out of debt. But first let’s understand the why.

WHY WE GET INTO DEBT

Read More…

The Average Credit Score To Qualify For A Mortgage Is Now Very High

Posted by Financial Samurai 35 Comments

As mortgage rates tumble to multi-year lows, there’s been a massive surge in refinances and new mortgage applications. The drop in mortgage rates is one of the key reasons why I don’t think there will be a housing downturn as vicious as the one we saw between 2008 – 2010.

Further, it takes about six months for the effects of a large mortgage rate change to show up in the housing data. Pent-up demand is building as buyers take a wait-and-see approach to the economy.

If you want to get a better indication of what the future might look like, simply check out the performance of a homebuilding ETF like XHB. Homebuilders and home-related stocks performed tremendously in 2019.

Average Mortgage Rates In 2020

In addition to lower interest rates, higher lending standards post-financial crisis is another reason why the next recession shouldn’t be as bad as the last.

Gone are the days of negative amortizing liar loans to people with terrible credit. It has become far more difficult to get a mortgage today. Let’s look at some data.



Read More…

Paying The Average Credit Card Interest Rate Will Keep You Poor Forever

Posted by Financial Samurai 29 Comments

Paying The Average Credit Card Interest Rate Will Keep You Poor Forever

The worst type of debt is consumer debt.

One reason why consumer debt is so bad is due to people buying things they really don’t need: a fifth pair of designer jeans, another luxury watch, every electronic gadget imaginable, and so forth.

But egregiously high credit card interest rates are the main reason why consumer debt is the worst type of debt for your finances. If you keep revolving credit card debt, you will likely stay poor forever.

Let’s take a look at the current average credit card interest rate.

Disclosure: Financial Samurai has partnered with CardRatings for our coverage of credit card products. Financial Samurai and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.



Read More…

Why Debt Welchers Are Admired: Hypocrisy At Its Finest

Posted by Financial Samurai 85 Comments

Greek Crisis, Santorini Church

Santorini, Greece

If you haven’t reviewed your asset allocation this year, I highly encourage you to do so today. Stock market volatility is back in 2020 due to fears of the coronavirus. We could be heading into a recession.

I’ve always grown up believing that taking on too much debt is a bad thing. What’s even worse is taking on debt and not paying back your lender. Whether the lender is an institution or a relative, paying back money lent you in good faith is an absolute must. They trusted you. Not paying them back is not only selfish, but highly dishonorable.

But when the worst punishment given to people who break their debt promises is a bad credit score or a garnishment of wages by the IRS, it’s not surprising that not paying off debt is becoming as common as spanakopita. Do garnished wages even count as punishment, since you’re simply paying back what’s owed? We’ve already discussed how a good credit score doesn’t really matter very much anymore!

The more I think about it, the more it seems like people who keep on paying their debts during bad times are fools. Deep down, I think all of us who keep on paying our mortgages, student loans, and credit cards when we’re hurting for money know we are being silly since there are so many bailout programs available for those who don’t.

When my Lake Tahoe property got crushed during the financial crisis, the smart economic thing to do would have been to stop paying my mortgage. California is a non-recourse state where lenders can’t come after your other assets to be made whole if you default on your primary residence. They can if you default on a rental or vacation property. Throwing good money after a bad investment is generally not a good thing to do. But I feared humiliation.

Instead of letting my property go, I sank another $100,000 in mortgage payments over the next three years until the storm finally passed. Luckily, out of the blue, I was able to get a loan modification to help with the expense. Otherwise I would have spent even more. Today, I still own the vacation property.

Key point: The reason why debt welchers are admired is because they have the GUTS to say F&*# Y*$ to their lenders and not give a crap about what other people think of them. I’m sure every one of us who owes money has thought about not paying back our debt, especially when money becomes tight. But most of us are too chicken shit to actually stop returning all forms of communication with our lenders. We’re too worried about our reputations, our careers, and our safety. Who wants to be in fear of opening the door one evening to a debt collector with a baseball bat?

Nobody rewards people who do what they are supposed to do. That’s like giving a trophy to someone who shows up for work on a Monday and Friday. What gets rewarded is doing what you’re not supposed to do, like not paying back your college loan or strategically defaulting on your mortgage.

I’ll prove to you why having poor financial habits are actually admired with several examples below.

DEFAULT ON STUDENT LOANS JUST BECAUSE

If it was so bad to default on your student loan, the New York Times wouldn’t publish an editorial on why those with student debt should default without a balanced rebuttal.

Lee Siegel, the writer encourages people to default because he wasn’t born wealthy. He writes,

“I have found, after some decades on this earth, that the road to character is often paved with family money and family connections, not to mention 14 percent effective tax rates on seven-figure incomes.”

Lee’s other reason for encouraging people to default on their student loans is because other people are defaulting or committing financial crimes.

“Tax fraud, insider trading, almost criminal nepotism — these won’t knock you off the straight and narrow. But if you’re poor and miss a child-support payment, or if you’re middle class and default on your student loans, then God help you.”

There’s over $1 trillion in student loan debt outstanding, a level much larger than the amount of credit card debt owed by consumption-loving Americans. Plenty of people owe student debt, which is why plenty of people are rooting for Lee’s message! We want student loan forgiveness, and we want it now!

The New York Times, one of the most venerable media institutions in the world, is implicitly supporting student loan defaults by running this editorial without responding with a well thought out counter argument. Is this not financial irresponsibility given the next financial crisis will likely be the result of student loan debt defaults? Guess not.

STRATEGIC MORTGAGE DEFAULTING

Carl Richards, a certified financial planner and writer for The New York Times strategically defaulted on his mortgage when he owed $200,000 more than what his home was worth in 2010. He could have kept paying the mortgage like his friends did, but he chose to let the rest of us pay his mortgage instead.

The public likes to blame banks for the housing crisis. Oh those evil banks who provided capital for thousands of people to live the American dream. What happened to blaming the people who decided not to pay their mortgages instead? If everybody paid their mortgages, there wouldn’t have been a financial crisis.

If defaulting on your mortgage was bad, why would Richards still be paid by the New York Times as a columnist, a job that very few people can get? If defaulting on your mortgage is seen as a poor financial move, why is Richards making money from a couple books he published about how to be smart about your money? Clearly the publisher sees an opportunity. Finally, if defaulting on your mortgage is so bad, why would he be invited to be a keynote speaker at a conference?

The rational answer is that defaulting on your mortgage is not considered bad. Defaulting on your mortgage can give you a unique story as a CFP who is supposed to know what he is doing with his money. People love a good story. The key is to hang a lantern on your problems and profit from your mistakes. Even if you end up making millions after strategically defaulting, you still don’t have to pay the debt back.

BAD MONEY MANAGEMENT CAN MAKE YOU A PRESIDENTIAL CANDIDATE

Sen. Marco Rubio, R-Fla is a star on the rise despite his poor money habits.

The New York Times reports,

“An analysis of his financial disclosures by Jude Boudreaux, a longtime financial planner and an adjunct professor at Loyola University New Orleans teaching personal finance, shows that Mr. Rubio earned $2.38 million from 1998 to 2008 but ended up with an estimated net worth of $53,000 (slightly more than Mr. Rubio disclosed himself). His savings rate during that period was about 2 percent.”

So where did all that money go? Well, he bought a $80,000 boat despite owing $150,000 in student loan debt and $30,000 in credit card debt. He then leased a $50,000 2015 Audi Q7, despite disclosing he had liquidated $68,000 in his pre-tax retirement account, which cost him an estimated $24,000 in taxes and penalties.

Then it was reported by the New York Times that Rubio used a Republican Party credit card for personal expenses –to cover a trip for a family reunion and to pay for stone pavers at his home in Miami. Bad money management is one thing, but using Party funds for personal use is a no-no, especially for elected officials.

It’s OK to be bad at managing money. If it weren’t, then Senator Rubio wouldn’t be Senator, and he wouldn’t be a candidate for POTUS. We know about the temptations of credit cards and buying things we can’t afford. Nobody is really going to fault you for poor financial decisions. We’ve ALL made them, most certainly including myself. The key is to just learn from our mistakes and move on.

Learning from our financial mistakes is exactly what Marco Rubio is doing. My only advice to him is to drive a less expensive car, because since he’s still in so much debt, the media will attack him relentlessly for all his toys.

EVERYTHING IS RATIONAL

Country Debt To GDP Ratio Chart

Every country is borrowing more money

If welching on debt was frowned upon, there would be greater punishment than simply getting a bad credit score or having your future wages garnished. The level of debt welching would drastically decline if we had a system where each finger would get chopped off after being more than 90 days late.

Instead, debt welchers are seen as heroes because they do what most of us dare not do, break our promises. Getting someone else to pay for our mistakes, and allowing us to reap the benefits when things go right is one of the smartest ways to build wealth if you can get away with it.

Everybody will screw up their finances at some point in their lives. And no matter how bad we screw up, there’s always forgiveness if we stay humble and try not to repeat our mistakes. We are OK with bailing each other out at least once, because we might need our own bailout some time in the future.

Should there be heavier repercussions if one doesn't pay their debt obligations?

View Results

Loading ... Loading ...

RECOMMENDATIONS FOR DEBTORS

Refinance your mortgage: Check out Credible, my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free. Interest are at all-time lows. Take advantage!

All-time low mortgage rates

Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.

After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.

Updated for 2020 and beyond.

Child Millionaires: Not Necessary Thanks To Canceling All Student Debt

Posted by Financial Samurai 144 Comments

One of the things many responsible parents are doing today is saving for college. Not saving for college and expecting a student loan bailout in the future is bad planning. The same goes for not saving for retirement and hoping the government will take care of you once you can no longer work.

Do you really want to take that chance? I don’t think so.

Given college tuition is rising by roughly 6% annually a year, by the year 2033, the cost for one year’s worth of public or private school tuition may approach $54,070 and $121,078, respectively.

Add on expenses for room, board, travel and miscellaneous stuff and the annual cost of college could easily be 50% – 100% higher.

Meanwhile, according to the National Center for Education Statistics, just 41% of first-time full-time college students earn a bachelor’s degree in four years, and only 59% earn a bachelor’s in six years.

Therefore, it is only logical that all of todays’ new and future parents should try to save about $1 million for each child’s college education. If a family has a “trophy kid,” then the family should save $4 million and so forth if college is the desired path. Going into debt to buy a depreciating asset like a car or a college degree is fiscally unsound.

No parent should expect their child to be brilliant and get scholarships. Nor should any parent expect their child to be sensible and attend a public institution to save on costs. High expectations lead to disappointment.

No matter how many articles I write about the depreciation of a college degree, not enough people will listen because the desire for status is too strong. We also all believe that we are more talented and smarter than we really are.

Parents can hope for sensibility, but should still plan to spend the big bucks.

However, to save for our children’s college education often means that we are unable to save as much for our own retirements. This, in turn, may cause financial anxiety and unhappiness within the household.

Perhaps the Cancel Student Debt movement is a solution. Probably not.



Read More…

Steps To Get Out Of MASSIVE Credit Card Debt Due To Lifestyle Inflation

Posted by Financial Samurai 49 Comments

I don’t discuss too much about credit cards on Financial Samurai because I’ve only got two (a cash back rewards card, and a cash back business card) and nothing much happens except for racking up rewards points. Definitely use a credit card for convenience, safety, rewards points, and insurance protection if you can control yourself. But if you’re not careful, thanks to the ease of use and absurdly high interest rates, problems may ensue.

The following is a guest post by Financial Samurai reader, Debs, a middle income earning new grandmother who was able to amass over $140,000 in credit card debt! I asked her to share her story on how she did it, and how she is getting herself out of debt. Kudos to Debs for having the courage to share her story.

Disclosure: Financial Samurai has partnered with CardRatings for our coverage of credit card products. Financial Samurai and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

It’s embarrassing to admit, but I tell this tale as a warning to all people like me who are on the bandwagon of lifestyle inflation, “I deserve” and family struggles that may cause you to take your eyes off the ball and wake up one day to say “How did I get here?”.

We weren’t addicted gamblers or smokers. We didn’t have a lot of fancy toys. We drank moderately and yes, we had four kids and a large home to boot (purchased in 1991). Maybe a few travels thrown in here and there, but not excessive. There was some shopping for work clothes and things for our home. Maybe a bit of stress relief shopping, but nothing extravagant. That is my first message.

Our debt crept up on us without even realizing it. At least I didn’t realize the size it had grown to. I wasn’t watching the finances. I was only working hard to contribute to the family income. That was enough, or so I thought.

Why We Got Into Big Debt

In retrospect, I can see how we made some mistakes that didn’t help us. We financed a swimming pool in 1995 because we wanted to have a backyard oasis while the kids were young enough to enjoy it. That (a) was not a smart idea and (b) increased our mortgage payments, which we thought we could afford. Apparently not, because our home equity line of credit (HELOC) started to grow after that.

We never budgeted, we didn’t track spending. We just figured that as long as we weren’t going overboard, things would look after themselves. If we didn’t have all the funds to pay our credit cards, the balance was paid with the HELOC. Then my husband lost his job. Income came down so we did a refinancing and rolled the LoC into the mortgage and off we went again, changing nothing about our spending habits, still not tracking, just living. Strike 1.

My husband went for training in a different career (real estate sales) but this was a lot of work compared to the return, especially at the beginning. A number of years went by, and we came back to the trough again. Strike 2. This was the “do or die” refinancing. We were never going to do this again. Yet, we did not change anything except to say we never wanted to be in that position. As if it would just magically occur because that’s what we wanted.

Again still no regular analysis or tracking of spending was performed, and certainly no targets set either. We were free falling. We didn’t take any second jobs or sideline work, the only thing we did do to bring in some extra income was rent out a room in our basement. After a few years, we had a freak storm and major flooding in our basement. This stopped the student renters for a period of time and once we had stopped we never got around to starting again. Generally, it felt like we were too stressed out from the day-to-day hustle to even realize what our problem was. Ignoring things, saying “I deserve”, people pleasing were all part of our psyche. I left all the family financing to my husband, and in retrospect that was a big mistake. It seems that he is “penny wise and pound foolish” but I am actually the frugal one in the family.

Repeating the same events is the definition of insanity, and I plead guilty.

Strike 3 gave me the shock of my life like I had the wind knocked out of me. It happened in March 2012 when I discovered that our family debt consisted of the following:

  • $26,000 of original mortgage debt including the refinancing for the swimming pool (not bad)
  • $71,700 of a second step mortgage (Strike 1) which probably started at around $100K in 2005
  • $100,000 in home equity Line of Credit
  • $100,000 in credit card debt that started from low interest rate balance transfers but eventually grew, especially when the interest rates increased to normal prevailing credit card rates
  • $47,500 of normal credit card charges
  • $27,700 remaining on a truck loan
  • $20,000 remaining on a car loan

The grand total was $393,500. I was 52 years old and my husband was 59. It was a personal debt disaster story.

The First Steps To Solving Our Debt Problem

It was the shock I needed to take action and take things into my own hands. I considered divorce. I didn’t consider bankruptcy. I don’t know if that could have been a prudent option for us or not. It wasn’t a word in my vocabulary, given I was earning six figures. But first, I had to stem the bleeding, so we initially took the following steps.

Arrange alternative financing at lower interest rates

We marched into our bank to figure out the options. I needed to get that debt off the credit cards A.S.A.P. to avoid the continued high interest rates. We took out a $235,600 mortgage with the equity in our home at 2.79% for 3 years, which would wipe out our HELOC and the large credit card and most of the other credit card. The bank could not advance us enough equity to wipe out all existing lines of credit, so we were left with a LoC for $11,900 at 7.9%, which was too high a rate for my liking.

Create a detailed budget and track spending

I created a budget and tracked every penny of spending in an excel file. Eventually I moved to doing this in Personal Capital as well, but did not abandon my excel file. I need my excel for cash flow forecasting and it gives me a second check on what is going on. Before our debt crisis day, I used the excuse that I did not have the time to do this. Now that we know how important it is, I do not mind doing it twice. ;-)

Renegotiate service plans

We renegotiated phone, TV and internet plans. It is amazing how willing the providers are to reduce your rates when you tell them you are considering moving to the competition because the costs are too high. We reduced our cable by $80 / month initially. We have since reduced costs further in these areas (see below).

Conduct a detailed analysis

Steps To Get Out Of MASSIVE Credit Card Debt Due To Lifestyle InflationWith some initial steps taken to reduce costs, I was still recovering from shock and trying to figure out if we could repair our marriage and rebuild trust. I needed to go back into history to figure out how the two credit card debts of $100K and $47K came about. How these amounts grew so large seemed unfathomable to me, since it certainly didn’t seem like we were living beyond our means. What I was able to piece together was that it these amounts grew just on a few hundred here or thousand there that could not be paid off based on monthly cash inflows.

Why wasn’t our cash inflow enough even with a six figure income? We were servicing a HELOC of $100K for most of those years, so were paying $6K – $8K of interest charges annually. Since this money was going to interest, there was no extra cash flow for home maintenance and other incidentals. Enter the cycle of robbing Peter to pay Paul. When I went back to re-tabulate, I arrived close to $100K in interest charges over about 18 years. Most of it was from the $100K HELOC , but towards the end, credit card interest started compounding as well. After that, I stopped following the money trail. I was sick of looking back and as bad as I felt, it wasn’t enough to throw away 22 years of marriage, so it seemed.

So I am here to say, this is how easily it can happen if you do not manage your money. Our combined income has ranged from $100K – $150K annually during this period of debt accumulation. At the start of our debt recovery in March 2012, our financial net worth excluding the value of our home was less than $100K. Our home is valued at about $500K.

How Did We Reduce Our Debt?

I can attribute this to tracking our spending against a budget and living reasonably frugally. In addition, we have deployed the following strategies to help reduce interest costs, reduce expenses , increase income or help with cash flow management.

  1. We increased our amortization periods on our older two mortgages, to allow for some breathing room on cash flow. We didn’t pay less overall on our debt, we just paid higher interest debt first. We have deployed all available debt prepayment options on our mortgages with available cash including:
    1. annual prepayments (which don’t have to be done all at once with our bank, but can be done in pieces anytime up to a maximum annual amount per mortgage year)
    2. payment increases by 15% once per year (which means original mortgages that were lowered are now being increased again as we wipe out other debt and have increased available cash flow)
    3. match a payment (doubling of our payment which means the second payment goes entirely to principal and we can stop any time.) This feature, available at our bank, also acts as a type of insurance for lost income since we can miss payments in future if needed in the event of a job loss, and not be considered in default of our mortgage.
  2. I have transferred vehicle debt or mortgage debt to a low rate credit card twice since beginning our debt repayment journey. Once to pay off our truck which was at 5.1% and once to make a large prepayment on our mortgage. I may continue to deploy this strategy, but only under the following conditions, because you need to take care of the low rate cash advance credit card pitfalls:
    1. when I’m sure I can pay off the balance in the time required before the interest rate hike. (Last one was an eleven month period at the low rate).
    2. I don’t pay a transfer fee and only consider 0.99% interest rate. The transfer eats up too much of the interest savings to make this worthwhile, even if only 1%. Since I pay off the balance over time, I see the interest costs decline over the term.
    3. I will not do this any time near a mortgage renewal date, which would require a credit check. Our credit utilization rate would be raised after doing the balance transfer and this could inhibit our ability to get the lowest possible interest rate for the mortgage renewal.
  3. We use cash back rewards credit cards that pay 4% on gas and groceries. Our credit cards are paid off monthly by the due date. There is no carrying of credit card balance except in item 2 above.
  4. We rent a room in our house for $460 / month.
  5. We switched to a more reliable and cheaper internet provider and have replaced our home phone with a internet based system – savings $50 / month.
  6. We have just recently cut cable and will save $83 / month.
  7. We negotiated a better cell phone plan, saving at least $27 / month.
  8. We limit our entertainment spending and travel, but have managed to take one trip using accumulated business travel points and some planned savings to attend a family wedding.
  9. We’re currently focusing on ways to reduce our grocery/miscellaneous budget, which may involve simple tactics like keeping my husband out of the store and other fun games. :-)

The longer we live like this, the more we see opportunities to reduce our spending even further. It’s definitely a journey, putting one foot in front of the other on our march towards debt freedom. This year we have paid on average 61% of our net income.

Today we have paid off almost $147K in 2 1/4 years. We still have 4 years to go to reach debt freedom.

debs-debt

Many people with lower incomes may scoff at our ability to pay off $65K annually but I want to stress that it is all relative considering the size of our debt. Sure, I earn a good salary, but it is 64% of the $200K, Financial Samurai deems the right amount to be ‘happy’. In addition, my husband earns only 60% of the average Canadian wage of $48,250. Thankfully, his income is supplemented a little with a $321/month survivor benefits from his first wife who passed away.

Now, after more than two years of debt payment and good retirement portfolio equity market returns, 50% of our net worth is from our home, which we will renovate and sell after we are debt free. Some may say, why not sell now and wipe out the debt instantaneously and start fresh? It has been considered and is still a point of discussion from time to time. We delay because we would need to do substantial kitchen and bathroom renovations in order to get the best return for our home which is in a good location. We do not want to increase our debt load in order to make that happen.

I’m not going to say it’s easy with a long term debt cloud hanging over your head, but I am going to say it’s possible. We are taking twice as long than what is normally recommended as the maximum to get out from under it – six years versus three.

I hope that when we are done, we do not have any regrets about not downsizing our home during this period. I also think that the habits and skills we are developing now will serve us well in retirement, continuing to live frugally, and appreciating what we have and how far we’ve come.

The Best Cash Back Credit Cards

If you’re mature enough to utilize credit cards for your benefit by paying off the balance in full each month, then credit cards are a wonderful financial tool to improve your life. Not only do you get an interest free loan for a month, you get buyer’s protection, and rewards points. I think everybody should have at least one cash back rewards credit card. Here are the three best that I’ve found:

Capital One(R) Quicksilver(R) Cash Rewards Credit Card

Simple and straightforward, the Capital One Quicksilver offers flat rate cash back rewards. Cardholders earn 1.5% cash back on all purchases without any spending caps.

Key Benefits

  • 1.5% cash back on every purchase
  • Rewards are unlimited, ie no spending caps
  • Zero foreign transaction fees
  • No annual fee
  • Get a $150 cash bonus reward if you spend $500 in the first 3 months

Read more and learn how to apply

CapitalOne Quicksilver Cash Rewards Credit Card

Chase Freedom Unlimited

If you’re looking for a flexible cash back rewards credit card that isn’t complex, this is it. The Chase Freedom Unlimited credit card offers great flat rate rewards.

Key Benefits

  • Earn a $150 bonus after spending $500 in the first 3 months after you open an account
  • Get unlimited 1.5% cash back on all purchases you make
  • Introductory 0% APR for first 15 months on purchases and balance transfers (3% balance transfer fee applies)
  • No annual fee
  • Redeem cash back with no minimums

Read more and learn how to apply

Chase Freedom Unlimited

Capital One(R) Savor(R) Cash Rewards Credit Card

This is a tiered cash back rewards credit card by Capital One that offers an impressive 4% on dining and entertainment without any spending caps.

Key Benefits

  • Unlimited 4% cash back on dining and entertainment
  • 2% cash back on groceries with no spending caps
  • Unlimited 1% cash back on gas and all other purchases
  • Get a $300 cash rewards bonus if you spend $3,000 in the first 3 months
  • $0 waived annual fee for the first year

Read more and learn how to apply

CapitalOne Savor Cash Rewards Credit Card

I hope everybody has at least one cash back credit card in their wallet. Just make sure never to carry a revolving balance. Use credit cards to your advantage for the rewards points, insurance protection, and one-month interest-free balance. Never let credit cards take advantage of you.

About the author: debtdebs is a fifty-something wife, mother and new grandmother, who admits to having her “head in the sand” about their financial situation until amassing $247,500 of consumer debt for a total debt of $393,500.  She shares her story with all those coping with poor money management decisions. 

Disclosure: Financial Samurai has partnered with CardRatings for our coverage of credit card products. Financial Samurai and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

How Much Is The Average Credit Card Debt Per Household?

Posted by Financial Samurai 51 Comments

Disclosure: Financial Samurai has partnered with CardRatings for our coverage of credit card products. Financial Samurai and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.

How many times have you withdrawn a wad of cash only to see it disappear a few days later with little idea where it all went? By putting as much expenditure on my credit cards as possible I get a handy dandy pie chart and expense line breakdown at the end of every month to see where my money is going. Furthermore, I get all those juicy rewards points that really begin to rack up over time.

Credit card debt is on the rise and the U.S. average household owes a crippling amount. Households in California owe the most with a whopping average of $10,175 in 2019 according to WalletHub with Texas and Florida coming in a close 2nd and 3rd.

According to CreditCards.com the average credit card debt per U.S. adult is $5,673. And the average debt per credit card that doesn’t usually carry a balance is $1,154 (must equal spend). They also report lower findings per state and list Alaska with the highest credit card debt at $7,726 followed by New Jersey at $6,881 and Connecticut at $6,876.

ValuePenguin lists the average credit card debt per household at $5,700 and at $9,333 for average balance-carrying households.

Average credit card debt per household

According to TransUnion, the average credit card balance per consumer was $5,554 in 1Q2019. Meanwhile, CNBC reports that only 10% of Americans have a monthly average credit card balance over $5,000.

Average monthly credit card balance

Depends How You Slice It

So you can see that it’s hard to figure out what’s the right number when it comes to the average credit card debt per household and per consumer. The figures vary a lot by source and by how the data is sliced and diced. One way to finding a better average credit card debt and spend number is to simply get more datapoints with a short four question survey below.

The impact on the amount of average revolving credit card debt per household is largely determined by income. You might have an astounding $15,000 in revolving credit card debt, but if you are making $1 million a year, who cares? The more pertinent measure is average revolving monthly credit card debt to average monthly gross income.

What’s confusing is that it’s unclear whether people who pay off their credit card bills every month are also included in the average credit card debt per household by each source. After all, when I charge something on my card, I have interest free debt for 28-31 days, depending on the month, until I pay the bill off in full.

The solution is to simply calculate the average credit card spend a month to the average monthly gross income, and calculate the average revolving credit card debt a month to the average monthly gross income to get a more thorough picture.

Read More…

  • 1
  • 2
  • 3
  • …
  • 7
  • Next Page »

Top Product Reviews

  • Personal Capital review (free financial tools)
  • Fundrise review (real estate marketplace)
  • CrowdStreet review (real estate marketplace)
  • RealtyMogul review (real estate marketplace)
  • Credible review (student loans, mortgages, personal loans)
  • LendingTree review (mortgages)
  • PolicyGenius review (life insurance)
  • Esurance review (auto insurance)
  • Bluehost review (web hosting)

 

Best Credit Cards By Category

  • Best Travel Rewards Credit Cards
  • Best Dining Rewards Credit Cards
  • Best Cash Back Credit Cards
  • Best Airline Credit Cards
  • Best Balance Transfer Credit Cards

 

Favorite Personal Credit Cards

  • Chase Sapphire Preferred
  • Chase Freedom Unlimited

 

Best Small Business Credit Cards

  • Chase Business Ink Preferred
  • Chase Business Ink Unlimited

 

Real Estate Resource Center

  • Real Estate Crowdfunding Learning Center
  • Why Real Estate Is One Of The Best Investments
  • BURL: Buy Utility, Rent Luxury Strategy
  • Why Invest In The Heartland Of America
  • A Guide To Buying And Managing Rental Property
  • Why Real Estate Will Always Be More Desirable Than Stocks

 

Investment Resource Center

  • Ranking The Best Passive Income Investments
  • The Proper Asset Allocation Of Stocks And Bonds By Age
  • Historical Returns Of Different Stock And Bond Portfolio Weightings
  • Why Investors Prefer Stocks Over Real Estate
  • How To Reduce Excessive Portfolio Fees
  • Email
  • Facebook
  • Pinterest
  • RSS
  • Twitter

Financial Samurai Featured In

Categories

  • Automobiles
  • Big Government
  • Budgeting & Savings
  • Career & Employment
  • Credit Cards
  • Credit Score
  • Debt
  • Education
  • Entrepreneurship
  • Family Finances
  • Gig Economy
  • Health & Fitness
  • Insurance
  • Investments
  • Mortgages
  • Most Popular
  • Motivation
  • Podcast
  • Product Reviews
  • Real Estate
  • Relationships
  • Retirement
  • Taxes
  • Travel
Copyright © 2009–2020 Financial Samurai · Read our disclosures

PRIVACY: We will never disclose or sell your email address or any of your data from this site. We do highly welcome posts and community interaction, and registering is simply part of the posting system.
DISCLAIMER: Financial Samurai exists to thought provoke and learn from the community. Your decisions are yours alone and we are in no way responsible for your actions. Stay on the righteous path and think long and hard before making any financial transaction! Disclosures