Even before the coronavirus pandemic shut down many parts of the U.S. and put millions out of work, Americans held an average of $26,621 in personal debt, excluding mortgages.
That's according to Northwestern Mutual's 2020 Planning & Progress Study, which surveyed over 2,600 U.S. adults in mid-February. While that's a staggering amount of debt, it's actually lower than the average of $28,900 survey participants reported having in 2019 and the $38,000 respondents reported in the 2018 survey.
Those with debt are putting about a third of their monthly income toward paying it down and more than two thirds have a plan in place to pay off their outstanding balances. That may change, however, as Americans continue to experience the effects of the coronavirus pandemic.
Paying down debt shouldn't be a priority if you're struggling
Over the past seven weeks, about 33.5 million Americans have filed for unemployment benefits, according to the Labor Department. Experts at the St. Louis Federal Reserve expect that number to grow.
With many Americans struggling with a loss of income, financial planners say those feeling the impacts of the coronavirus may need to think twice about prioritizing paying off their debt. "Not all debt is created equal and not all debt is bad," says David Mendels, a financial planner and professor at New York University. Even if you do have "bad" debt, such as carrying a high credit card balance, you need to rank paying it off within your other financial priorities.
When times are tough, what matters is being able to pay your bills and buy necessities. That takes cash, so you may need to put your debt repayment plan on pause to free up some money in your budget. "As long as you can keep paying your bills and keep putting food on the table, you can get through the tough times," Mendels says. "It is when you come up short that you end up in trouble."
Holding off on paying down debt can feel contrary to what Americans usually hear, but being debt-free does not equal having wealth. If you pay off your $5,000 credit card balance, but you have nothing in savings, you're only one paycheck away from being back in debt.
Additionally, many banks and financial institutions are offering relief programs right now that will allow you to defer payments or lower your interest without harming your credit score or incurring late fees.
Keep paying down debt if you can
If you can afford to keep paying down debt and still make ends meet, then continue repaying your debts as much as possible, says California-based certified financial planner Henry Hoang. "For the many Americans who are actually saving more money due to lowered spending toward traveling and entertainment, they will be much better in using this as an opportunity to pay down their debt balances," he says.
It's helpful to remember that paying down debt now frees up money in the future to spend and invest, not to mention adding to your peace of mind, Hoang says. If you can, you may want to consider applying for a balance transfer credit card offering a 0% APR and use that low interest to help pay off more of your debt at a faster pace.
Not sure where you fall? Do a quick "risk level" check on your money, says Dallas-based certified financial planner Craig Cowles. Ask yourself: What is the risk of losing my job?
If you've already lost your job or you're at a high risk of getting laid off soon, consider your income options. Find out how much unemployment benefits will cover and how long will they last. Consider applying for a temporary job and factor in how much income that will generate. Then rank what money needs to come out of your account in this order: food, shelter, transportation and finally, savings. "Don't worry about the debt now," he says.
Aim to build up three to six months worth of cash for now, Cowles says. If you only have enough to cover the necessities, then don't worry about the debt now: "Right now ... cash flow is absolutely king."
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