Save A Starter Emergency Fund
Before you attack your debt, make sure youve got $1,000 saved as a starter emergency fund. Why? As youre paying off debt, life will happenwere talking about the flat tire, leaking refrigerator and unexpected medical bill. If you dont have money saved up to pay cash for emergencies, youll be tempted to pull out a credit cardand go deeper in debt.
Average American Debt By Age
So, weve broken out some of the average American debt totals by age already, but heres an overview of debt totals and averages by age. Note: These averages include all American adults, both those with and without debt.
First, heres an overview of consumer debt by age .
Now well look at each age groups total debt broken into percentage by debt type . Notice younger Americans have a higher percentage of student loans, but older Americans have a higher percentage of mortgage debt.
For more information on debt levels across generations, check out our research study.
Health Disability And Medical Debt
Differences in health status and hospital stays or having adisability may also contribute to medical debt.
About 31% of households with a member in fair or poor healthhad medical debt compared to 14.4% of those with no members in fair or poorhealth .
The share of households with medical debt was almost doublefor those with any member experiencing a hospital stay than for thosewith no members with a hospital stay .
More than 1 in 4 households with at least one memberwith a disability had medical debt compared to 14.4% of households with nomembers with disabilities.
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The Politics Of National Debt
Disagreements about national debt have repeatedly preoccupied the U.S. Congress. Whenever the national debt approaches the limit periodically reset by Congress, lawmakers are faced with a choice of raising the ceiling once again or letting the U.S. government default on its obligations, risking dire economic consequences. The U.S. government briefly shut down before Congress raised the limit in 2013. A similar standoff two years earlier led Standard & Poors to downgrade its U.S. .
In 2021, Congress narrowly averted a scheduled Oct. 1 government shutdown by passing a short-term funding bill, then raised the U.S. debt ceiling by $2.5 trillion to $31.4 trillion in December 2021. That limit was expected to be reached in early 2023.
Americans profess to be concerned about the national debt in poll after poll, while also overwhelmingly supporting defense spending and outlays for Social Security and Medicare and opposing tax increases.
As a result, elected officials are also eager to be seen to be addressing the national debt, usually without linking it to the spending that the debt enables or to the tax increases that a balanced budget would require.
What To Do If Youre In Debt
If youre in debt, these numbers show youre not alone. Stillif youre part of these statistics, you dont have to stay there. You dont have to continue throwing $577 each month into an auto loan .50 You dont have to continue carrying student loan debt into what should be your restful retirement years.
Listen, your income is your greatest wealth-building tool. But when you have debt, you cant build wealth, because youre spending part of this months income to pay for something last month, last year or even last decade.
When you get out of debt and finally take back your incomeall of ityou can move forward with your finances. And paying off whatever amount of debt you have probably wont take nearly as long as you think it will.
Heres how you get debt out of your life once and for all:
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Negative Real Interest Rates
Since 2010, the U.S. Treasury has been obtaining negative real interest rates on government debt, meaning the inflation rate is greater than the interest rate paid on the debt. Such low rates, outpaced by the inflation rate, occur when the market believes that there are no alternatives with sufficiently low risk, or when popular institutional investments such as insurance companies, pensions, or bond, money market, and balanced mutual funds are required or choose to invest sufficiently large sums in Treasury securities to hedge against risk. Economist Lawrence Summers states that at such low interest rates, government borrowing actually saves taxpayer money and improves creditworthiness.
In the late 1940s through the early 1970s, the U.S. and UK both reduced their debt burden by about 30% to 40% of GDP per decade by taking advantage of negative real interest rates, but there is no guarantee that government debt rates will continue to stay this low. Between 1946 and 1974, the U.S. debt-to-GDP ratio fell from 121% to 32% even though there were surpluses in only eight of those years which were much smaller than the deficits.
Forms Of Government Borrowing
In addition to selling Treasury bills, notes, and bonds, the U.S. government borrows by issuing Treasury Inflation-Protected Securities and Floating Rate Notes . Its borrowing instruments also include savings bonds as well as government account securities that represent intergovernmental debt.
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Who Owns The National Debt Held By The Public
Of the $23.6 trillion of debt held by the public, we estimate about 34 percent is owned by foreign entities, 43 percent by private and public domestic entities, and 23 percent by the Federal Reserve Bank. The Federal Reserve has significantly expanded its Treasury holdings since the COVID-19 public health and economic crisis began in 2020.
Foreign holdings come from a mixture of foreign individuals, businesses, banks, and governments. Of the roughly $7.9 trillion of foreign-held debt, 17 percent is held by Japan and 14 percent is held by China. The next largest holders are the United Kingdom, Ireland, and Luxembourg, who each hold between $320 billion and $560 billion of U.S. debt. On a combined basis, the Eurozone holds about $1.3 trillion, and Organization of Petroleum Exporting Country member nations together hold about $250 billion.
Why Does The Us Have So Much Debt
Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact.
Kevin Dietsch/Getty Images
The national debt is the debt owed by the federal government. Its also called sovereign debt, country debt, or government debt. The U.S. national debt is made up of two types of debt: debt held by the public and intragovernmental debt.
Debt held by the public is what the government owes to Treasury investors. These investors include people in the U.S., international investors, and foreign governments.
Intragovernmental debt is what the federal government owes to other government departments. It funds pensions and other programs, such as Social Security in the U.S.
The federal government adds to the national debt whenever it spends more than it receives in tax revenue. Each year’s budget deficit is added to the debt, while each budget surplus is subtracted from it.
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Biden Bid To Restore Student Debt Relief Rejected By Court
— The Biden administrations student loan forgiveness plan remains stalled, after the 5th US Circuit Court of Appeals refused to lift an order blocking the sweeping program.
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Wednesdays ruling by a three-judge panel of the New Orleans-based court is the latest blow to a plan that has been shadowed by legal doubt since Biden announced it in August. The decision left in force a ruling from a federal judge in Texas declaring the program unlawful.
The debt relief program is facing potentially months of additional uncertainty as action now moves to the Supreme Court. The administration is already asking the conservative-majority court to lift a separate order blocking the program in a suit filed by six Republican-led states.
We are confident in our legal authority to carry out the student debt relief program and will be taking this fight to the Supreme Court as well, said White House spokesman Abdullah Hasan.
Republican officials and special interests are trying to rob middle-class families of the relief they need and deserve, but the president doesnt back down from a fight, especially one for middle-class families.
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The biggest issue for opponents has been establishing standing to sue — that is, showing they are being directly harmed by the policy.
–With assistance from Josh Wingrove and Greg Stohr.
What Is The Difference Between Debt And Deficits
Deficits are how much the country borrows each year, while debt is the total amount it has borrowed. In other words, the deficit measures the flow of borrowing while debt measures the total stock of borrowing. The federal government runs a deficit when outlays exceed revenue, and it must borrow money to make up the difference. When revenue exceeds outlays, the government runs a surplus. The debt is the sum of all past deficits and surpluses and reflects how much the government has borrowed over its history.
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Fannie Mae And Freddie Mac Obligations Excluded
Under normal accounting rules, fully owned companies would be consolidated into the books of their owners, but the large size of Fannie Mae and Freddie Mac has made the U.S. government reluctant to incorporate them into its own books. When the two mortgage companies required bail-outs, White House Budget Director Jim Nussle, on September 12, 2008, initially indicated their budget plans would not incorporate the government-sponsored enterprise debt into the budget because of the temporary nature of the conservator intervention. As the intervention has dragged out, pundits began to question this accounting treatment, noting that changes in August 2012 “makes them even more permanent wards of the state and turns the government’s preferred stock into a permanent, perpetual kind of security”.
What Is Good Debt
Good debt, DallAcqua explained, helps you to purchase an asset that is likely to increase in value or provide cash flow. Examples of good debt include:
- Mortgage: The average person cant afford to buy a home without some financing. Over time, real estate tends to appreciate in value. Its also a key driver of generational wealth, and there are several tax breaks for homeowners. Mortgage loans can also be used to buy an investment or rental property that will provide additional cash flow and appreciation.
- Business loan: In order for a company to scale, business owners often need to secure financing for equipment, inventory, payroll and other major expenses. A business loan, such as an SBA loan, can be critical for spurring growth and making a business successful.
- Student loan: These are generally considered a good form of debt because they help borrowers gain specialized knowledge that results in landing a better job. Federal student loans, in particular, have low fixed rates and there are tax write-offs for the interest.
- Auto loan : Even though an auto loan is generally considered a bad debt, there are instances when it can be beneficial. For example, if financing a moderately priced car allows you to commute to school or work when you otherwise wouldnt be able to easily get there, it may be considered good debt.
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What Makes The Debt Bigger
The current leading federal spending categories, which include Social Security, Medicare/Medicaid, and defense, are the same as they were in the 1990s. Thats when the U.S. national debt was much lower relative to GDP. The U.S. remains the worlds largest economy and one of the richest countries. How, then, did the debt situation deteriorate? Numerous factors are in play.
What Is The Composition Of Intragovernmental Debt
Most of the $6.5 trillion of intragovernmental debt is held in government trust funds. About $2.8 trillion is held in the Social Security Old Age and Survivors Insurance trust fund in the form of special issue securities that are expected to be redeemed within the next 15 years or so. A majority of the remaining amount comes from federal civilian and military retirement trust funds, which are projected to continue accumulating assets in order to notionally fund future retirement costs. Smaller amounts come from the Department of Defenses Medicare Eligible Retiree Fund, Medicare’s Hospital Insurance and Supplemental Medical Insurance trust funds, the Highway Trust Fund, the Deposit Insurance Fund, and the Social Security Disability Insurance trust fund, among other sources.
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Which President Created The Most Debt
In terms of percentages, President Franklin Delanor Roosevelt added the most debt with a 1,048% increase in national debt from his predecessor President Herbert Hoover. With $236 billion added to the national debt, President Roosevelt served as president during the time of the Great Depression which largely depleted the countrys revenue. To combat this, he set up the New Deal which included relief programs and government spending to address unemployment, severe droughts and agriculture disruptions, and bank failures. The largest part of the addition to the national debt was World War II – the war cost the country $209 billion from 1942 to 1945.
What Are The Primary Drivers Of Future Debt
The main drivers are still mandatory spending programs, namely Social Securitythe largest U.S. government programMedicare, and Medicaid. Their costs, which currently account for nearly half of all federal spending, are expected to surge as a percentage of GDP because of the aging U.S. population and resultant rising health expenses. Yet, corresponding tax revenues are projected to remain stagnant.
Meanwhile, interest payments on the debt, which now account for nearly 10 percent of the budget, are expected to rise, while discretionary spending, including programs such as defense and transportation, is expected to shrink as a proportion of the budget.
President Trump signed off on several pieces of legislation with implications for the debt. The most significant of these is the Tax Cuts and Jobs Act. Signed into law in December 2017, it is the most comprehensive tax reform legislation in three decades. Trump and some Republican lawmakers said the bills tax cuts would boost economic growth enough to increase government revenues and balance the budget, but many economists were skeptical of this claim.
The CBO says the law will boost annual GDP by close to 1 percent over the next ten years, but also increase annual budget shortfalls and add another roughly $1.8 trillion to the debt over the same period. In addition, many of the provisions are set to expire by 2025, but if they are renewed, the debt would increase further.
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Debt By Year Compared To Nominal Gdp And Events
In the table below, the national debt is compared to GDP and influential events since 1929. The debt and GDP are given as of the end of the fourth quarter in each year to coincide with the end of the fiscal year. That’s the best way to accurately determine how spending in each fiscal year contributes to the debt and compare it to economic growth.
From 1947-1976, debt and GDP are given at the end of the second quarter since, during that time, the fiscal year ended on June 30. For years 1929 through 1946, debt is reported at the end of the second quarter, while GDP is reported annually, since quarterly figures are not available.
How The Large Us Debt Affects The Economy
In the short run, the economy and voters benefit from deficit spending because it drives economic growth and stability. The federal government pays for defense equipment, health care, building construction, and contracts with private businesses. New employees are then hired and they spend their salaries on necessities and wants, like gas, groceries, new clothes, and more. This consumer spending boosts the economy. As part of the components of GDP, federal government spending contributes around 7%.
Over the long term, debt holders could demand larger interest payments, because the debt-to-GDP ratio increases, and this high ratio of debt to gross domestic product tells investors that the country might have problems repaying them. That’s a newerand worryingoccurrence for the U.S. Back in 1988, the national debt was only half of what the U.S. produced that year.
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How Does The National Debt Affect Me
Interest payments also have an important role as they grow in step with the national debt. As the government allocates more funds towards paying off interests, other investment areas could get crowded out. Areas such as education, research and development, and infrastructure may not progress at sufficient or adequate levels due to interest payments. Interest payments currently take many of the dollars that are raised through federal income, estate, and federal excise taxes. Net worth is also an important and interesting factor that can be affected by the national debt.The cost of borrowing money to purchase large assets such as homes will increase due to the Federal Reserves interest rates. Interest rates will push down the prices of homes as individuals will struggle to qualify for mortgage loans this will then lower prices on home values.
Debt Grows Into The Trillions During 1980s And 1990s
At the start of the 1980s, an increase in defense spending and substantial tax cuts continued to balloon the federal debt. The national debt at the end of the Ronald Reagan era was $2.7 trillion.
The era under President Bill Clinton was marked with tax increases, reductions in defense spending and an economic boom that reduced the growth of debt, but it still reached a staggering $5.6 trillion by 2000.
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