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Debt ballooning

Consumer debt for the bottom 90% of U.S. households surged by $300 billion this year — the biggest jump ever recorded. This cohort includes 118 million households across the nation.

Meanwhile, the Federal Reserve defines “consumer debt” as an aggregate of credit card, student loan and vehicle loan balances along with all other consumer-related loans.

Put simply, nearly everyone is more underwater this year.

“A big part of the increased borrowing is attributable to higher prices,” the New York Fed wrote in a recent blog post.

Inflation now stands at 8.3%, while wage growth hasn’t kept up with rising costs for 17 consecutive months. And so the gap between how much money families earn and how much they must pay for food, groceries and basic necessities has been plugged by higher borrowing.

However, a group of American households seems to have avoided this debt surge. The Fed’s data indicates that household debt for families in the top 10% was flat this year.

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Why the rich are doing better

Inflation impacts all consumers. When the price of wheat rises, everyone pays more for bread whether they’re rich or poor. But that’s where the similarities end.

Wealthier households can rely on assets and savings to mitigate the impact of inflation.

The stock market and real estate boom during the pandemic created a wealth effect for the wealthiest families. However, ordinary families saw their savings rate surge temporarily and then decline to its lowest since 2009, which means they have to borrow to meet rising expenses. High-net-worth families on the other hand, can just sell a few shares or dip into their savings account to keep up.

This leaves the average American family in an impossible situation. The widening wealth gap and ballooning debt is lowering living standards for nearly everyone — except the rich.

How to beat the debt trap

But even if you're not at the top of the income ladder, there are ways to avoid this debt trap. Reducing consumption, boosting savings and enhancing income could all help you mitigate the impact of inflation without having to end up borrowing more.

Diverting some hours to freelancing and consulting work could boost your income. A survey by Upwork found that a freelancer could make up to 44% more than a traditional job.

Meanwhile, shopping at discount retailers could reduce your weekly and monthly grocery bills. The CEO of Dollar General said that even six-figure income earners were more likely to shop at discount retailers this year.

Finally, a robust savings strategy could help you reduce your reliance on debt. If you manage to reduce your consumption and increase your income with freelance work, you could deploy some of that excess cash into robust dividend stocks like Slate Grocery REIT (SRRTF).

The company owns and manages a portfolio of grocery stores anchored by big brands like Wal-Mart and Krogers. In fact, 94% of its tenants are grocery stores and 64% could be considered essential businesses. The stock offers a lucrative 8.6% dividend yield — that’s higher than inflation.

These strategies may not lift you into the top 10% of wealthy households but they could certainly help you reduce your reliance on debt.

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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

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