Debt and Its Hidden Costs

Debt insinuates itself into all aspects of holders’ daily lives

Many Americans appear to have cast aside the frugal habits they adopted in the wake of the recession, a new survey from the American Institute of CPAs finds.

The survey results showed that 73% of Americans were living with debt, arising from factors such as mortgage costs, student loans, everyday expenses and a lack of income.

Harris Poll conducted a telephone survey between Sept. 28 and Oct. 1 among 1,004 U.S. adults, 678 identified as having debt. The sample included 180 millennials, 164 Gen Xers and 364 baby boomers. 

The third-quarter report from the Federal Reserve Bank of New York showed that total household debt hit a new peak of $12.98 trillion, up $116 billion from the second quarter and $280 billion ahead of the previous high reached in the 2008 third quarter.

Debt’s downside extends beyond the interest Americans are being charged. Thirty-nine percent of survey respondents said they felt anxious just thinking of paying off their debt.

“For Americans watching their debt levels rise while they struggle to make monthly payments, the situation can feel hopeless and have a serious impact on their quality of life,” Greg Anton, chair of the AICPA’s national CPA financial literacy commission, said in a statement.

“The good news is, people don’t need to be held hostage by debt. Establishing a plan to live debt-free in the future will help reduce your anxiety today.”

Fifty-six percent of Americans with debt said it had negatively affected their life. For 21% of these, debt was causing relationship tension with a partner or spouse, and for 11% it was prompting them to mislead family or friends about their finances.

Debt is also insinuating itself into all aspects of holders’ daily lives, according to the survey. Thirty-one percent said they worried about their debt in general, 18% worried about it at work and 25% went to bed thinking about it.

The survey found that living with debt was both a financial and a mental burden for 28% of Americans who said they stressed about everyday financial decisions. Nearly one-fifth of those with debt said they had received letters and calls from collection agencies.

While the low interest rate environment can keep payments lower, a quarter of respondents said they were worried that a rate hike could increase payments.

Some two-thirds of millennials with debt reported that it had negatively affected their everyday life, compared with about half of baby boomers and three-fifths of Gen Xers with debt.

The AICPA said most concerning was the survey finding that of those with debt, millennials were twice as likely as boomers to worry about it. Thirty-seven percent of the younger cohort said their debt caused them to stress about everyday financial decisions.

‘Good’ Debt

Investing in yourself — say through education or professional enrichment, or investing in real estate — is considered by many a good kind of debt to take on. Seventy-one percent of those with debt in the poll agreed that certain debt can be a smart investment and a way to improve one’s long-term financial situation.

However, “good debt” still adds to overall debt levels, the AICPA said, with 41% citing their mortgage and 23% their student loans as driving their debt.

The most commonly cited causes of survey respondents’ debt were:

  • Everyday expenses or bills – 44%
  • Not enough income – 36%
  • Car payments – 33%
  • Health care costs – 32%

“In many cases, it makes good financial sense to invest in yourself in the form of taking out student loans for higher education or taking on a mortgage as an investment for you or your family,” Anton said. “It’s important to be realistic about the long-term costs and benefits of any debt you take on.

“Job markets can change and housing markets have peaks and valleys. Even so-called good debt can linger, accruing interest and negatively impacting your entire financial life.”

Still, 42% of survey respondents expected their debt level to go down in the next five years, more than twice as many as those who thought it would go up.

How to Pay Down Debt

The AICPA national CPA financial literacy commission offered several tips to help Americans put together a plan of their own to pay down their debts and help put their minds at ease.

The commission notes that sundry apps and other technology tools are available — many of them free — that can help track saving and spending in real time. “Using technology, like automated payments, can help reduce the amount you have to remember every day.”

Especially for the compulsive or impulsive shopper, it’s important to think about whether a potential purchase is going to strengthen you as a person or add value to your investment portfolio. “In other words, is that new TV worth the additional monthly payment and finance charges?”

Taking an inventory of where you stand financially, including obtaining your credit score and report, “is a great way to assess the damage, come up with a plan and move forward in a positive direction.”

Finally, it’s important to know how much money is coming in, required outflows and where expenses can be cut down. “Create an inventory of total debt on hand, including type, institution held, interest rate and maturity date. This will give you a solid idea as to how much you have that [you] can repay per month.”

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