Average Debt is Now Highest Since 2011: How to Dig Your Way Out of the Hole

• Author: Jessica Williams
• Posted: 2024-07-28

Within the first two months of the year 2020, the U.S. economy plunged into a monetary recession. Combined with the crisis of a global pandemic, many households incurred debt to cope with challenges that may have included unemployment and housing uncertainty. According to a report from Experian, the outstanding U.S. consumer debt balance mushroomed from $800 billion in 2019 to a record high of $14.88 trillion by the end of 2020. This 6.0% increase in debt represents the highest rate of change recorded in well over a decade.

In addition to the challenges of a recession and pandemic, the median household income of middle-class families has dropped for the first time since 2011. According to the U.S. Census Bureau, the median household income decreased from $69,560 in 2019 to $67,521 in 2020. Because this represents a 2.9% drop in household income and a 1.9% decrease in salaries for all workers, it is no wonder that many people feel worried over their expenses in the coming decade. Fortunately, the story is not all gloom and doom. By exploring available options, anyone struggling financially can take the steps to get out of the hole quickly and efficiently.

Overhaul Your Budget

If you find yourself in a financial hole, the first step is to overhaul your budget. The classic method for creating a strict budget is the 50/30/20 plan. This plan dictates that you allow 50% of your income needs like housing, food, insurance, and health care. In addition, the plan allows a maximum of 30% for purchasing any perceived "wants" or items that you can live without. If you cannot meet your basic living expenses with the first 50%, then this budget requires that you deduct from your wants until you can pay for all of your needs. Finally, this budget requires that you use the remaining 20% for debt repayment or your emergency fund. This budget provides a simple framework for living within your means while you obtain more disposable income.

Select Your Side Hustle

The next step to getting out of the hole quickly is to set up your side hustle. When choosing a side hustle, you might encounter suggestions that require elaborate preparations and upfront costs. For individuals who are already in debt, however, an upfront investment is often impractical. It is more efficient to choose a reputable company with minimum starting requirements and clearly defined payments arrangements. For example, many individuals choose to work for personal-shopping apps (such as Instacart or Shipt) that pay weekly and enable average earnings of up to $20 per hour. Considering that the most-established apps also provide mileage compensation and allow workers to retain 100% of their tips, it is often a safer bet to sign up for this contract work rather than attempt to invent your own hustle and hope for the best. By recruiting members of your household to perform a side hustle, you can bring in extra income to disperse into your budget as needed.

Plan Your Last-Quarter Expenses

During the final months of the year, expenses ranging from winter weather to family holidays can effectively crush a budget. Plan well in advance to avoid spending the hundreds or thousands that households tend to spend this time of the year. For example, households with the strictest budgets tend to avoid traditional gift distribution in favor of bulk goods for creating handmade presents like soaps, candles, and care packages. And instead of a wish list of the latest consumer goods, you can also request that extended family members give store credit or gift certificates instead. You can then use these gift cards to purchase household necessities.

Explore Your Options for Help

If you have creditors and still have trouble keeping your head above water, the final step is to ask for help. Many companies have 30-day or 60-day grace periods for customers with responsible payment histories. If your record is less than stellar, you can also request a quote for debt consolidation or lump-sum settlement. Keep in mind that creditors prefer negotiating with the customer instead of a third-party consolidator or agent. It is also important to note that you should never pay exorbitant fees for a third party for debt consolidation. Instead, you can request that the debt mail a written quote for the amount needed to pay your balance in full.

Facing a recession and decreased average income is never pleasant news. But with proper planning, you can make the right decisions to improve your financial outlook for the better.