Statistics are powerful. Here are a few that tend to shatter some illusions that most Americans have regarding personal finance and money management. Government statistics tell us:
- ·The average household in the United States has about $7,000 in credit card debt
- ·The average 50 year old in America has only $2,500 in savings
- ·Average credit card debt for 65 to 69 years old grew 217 percent over the last ten years to $5,844
Why do so few Americans live in true financial freedom? A primary cause that leads to heavy personal debts is the American economy. In the United States, we are encouraged to accumulate massive debts before the age of 30. Let’s follow the financial path of Joe the average middle-class American from ages 18 to 30. At age 18, Joe decides he is going to college. At the end of 4 years, Joe has accumulated $25,000 in college loans. This is about the average amount that a college student will incur in college loan debt through 4 years of study.
Joe also incurs an additional $5,000 in credit card debt. Upon graduation, Joe buys a car for $10,000. Joe’s total outstanding debt now stands at $40,000 and Joe is only 23 years old. This is normal for Americans, and this huge hold of debt is how most Americans start their professional careers. Within a few years, Joe will purchase his first home, and he will incur an additional $100,000+ of debt. His debt total by age 30 will probably be close to $200,000.
Then, as most Americans begin earning more money in their late 20’s and 30’s, they simply increase their monthly spending, and never erase credit card debt or make any real headway toward building substantial net worth.
Net Worth
Net worth is defined as your assets minus your liabilities. Most Americans are heavily indebted with liabilities—car payment, house payment, credit card debt, department store debt. The key to winning the money management game and building substantial net worth is to accumulate assets and discard liabilities.
Emergency Savings Account
The first step to erasing credit card debt and building net worth is to eliminate bad debts, specifically all credit card debt. However, the first step to erasing those debts is not to pay them off; instead, the first step is to build an emergency savings account of $1,000. When most people incur an unexpected expense such as a random car repair, medical bill, or other expense, they pay for it by putting it on the credit card. This simply extends the debt cycle and keeps one imprisoned financially. By building an emergency savings account, you will be able to finance your own unexpected expenses. When one does come up, simply use money from the emergency savings account, and then pay yourself back as quickly as possible by replenishing the balance to $1,000.
How to Erase Credit Card Debt
Once the emergency savings account has been built, the next challenge is to erase credit card debt. Track all of your expenditures for one month. Keep every receipt and write down every expense. Then, at the end of the month, sit down and honestly review where you are spending your money. List out all the expenses that could be cut—the movies, dinners, Starbucks, etc. Commit to cut these expenses from your budget and then begin funneling all this extra cash toward paying down credit card debt each month.
This is much easier said than done, but it is essential. The only way to practically get out of debt is to cut expenses and direct that increased cash flow into paying down debt. It won’t be fun or exciting in the short-term, but it sure will feel great when your credit card balance is $0!
Bio: This article was provided by Forex Traders, an online resource currency trading and global market news.
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