Americans say they would prioritize saving and debt reduction

prioritize saving and debt reduction

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Credit Sesame discusses the news that Americans would prioritize saving and debt reduction in 2024.

At least, that’s what they would do hypothetically if they received a hypothetical pay raise. A recent survey suggests that some consumers are starting to get the message that rising debt, late payments, defaults and low saving rates cannot continue. Too many households practice unsustainable financial habits. Coming out of pandemic lockdowns, people went on an epic binge of spending and borrowing.

The Federal Reserve Bank of New York’s Survey of Consumer Expectations Household Spending Survey found that in 2024, respondents would like to put a higher priority on debt reduction than they have in recent years. How many will put their good intentions into action?

New York Fed survey shows hypothetical good intentions

The survey found that 38.4% of households would, in theory, put an unexpected 10% pay increase towards paying down debt. That’s up from 33.8% a year earlier and is the highest reading since August of 2016.

On top of that, 45.6% say they’d put a 10% pay windfall towards saving or investing. So combined, that makes 84% of Americans who would put the extra money towards improving their long-term finances rather than towards immediate spending.

This suggests that people are starting to get the message that they need to save more and borrow less. Notably, the survey question concerned a hypothetical pay raise rather than how people intend to handle their current financial resources.

Saving and borrowing behaviors belie those good intentions

What they are doing with their income currently tells a different story. As of late 2023, the personal saving rate of American households stood at 4.1%. That’s well below the 50-year average of 7.6%.

The year-end numbers aren’t in yet, but it appears very likely that 2023 marked the eleventh consecutive year in which American households increased their debt.

While people say they would put an unexpected pay rise towards saving and debt reduction, they have yet to start putting their good intentions into practice.

Don’t wait for a windfall to begin good financial habits

The question from the New York Fed survey asked what people would do with an unexpected 10% pay raise. Most people aren’t fortunate to receive unexpected pay raises. This may mean the good intentions expressed by the responses are unrealistic.

Rather than dreaming of unexpected pay raises, a sudden inheritance from an uncle you didn’t know you had, or a lottery win, people may be better off basing their financial habits on resources they actually have.

If you have low savings and/or high debt, the key to improving your finances is coming up with a budget that makes room for debt reduction and saving within the pay you’re currently earning.

Paying off debt can be like giving yourself a raise

Financial discipline is easier to talk about than to actually do. People are reluctant to budget for debt reduction or saving if it means sacrificing any of their current lifestyles.

In the long run, though, improving your financial discipline doesn’t have to involve making sacrifices. If you crunch the numbers, you’ll find reducing debt can be like getting a pay raise.

According to the latest Survey of Consumer Finances (SCF) from the Federal Reserve, the median family income in the United States is $70,260. The same study showed that the average amount of credit card debt is $6,120 per family. However, that isn’t representative of how big a burden credit card debt is to families with those balances.

Slightly under half (45.2%) of families have credit card debt. So, adjusting the average amount of debt for the percentage of families that carry that debt reveals an average balance of $13,540 for families with credit card debt.

At today’s average credit card rate, a balance of that size would incur $3,080 a year in interest charges. That’s what a typical family with credit card debt can gain by paying off their credit card balance. On a typical family income of $70,260, that would be the equivalent of a 4.4% raise, on top of whatever regular pay increases the breadwinners in those families were able to earn.

It doesn’t take long for a little budget discipline to turn into the ability to afford a better standard of living. As an added incentive, the credit score improvement that would be likely to result from paying down debt would reduce future borrowing costs. When you consider those benefits, the money you put towards debt reduction should seem less like a sacrifice and more like an investment.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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