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Consumer debt binge

Tina’s home loan is fairly typical. She believes her house is worth about $424,000, and the outstanding mortgage on it is $273,000. As of the second quarter of 2023, the average American had a mortgage balance outstanding of roughly $241,815, according to Experian.

Unfortunately, Tina seems to have overextended herself on credit card debt, which is more expensive. The 30-year fixed-rate mortgage average is 6.6%, according to the Federal Reserve, while Tina’s credit cards have double-digit interest rates.

Tina said she used her credit cards for a wide range of purchases. Cards financed stuff for the house and kids as well as “vacations that we shouldn’t have gone on,” she admitted. Now her family’s credit card balance is nearly 20 times larger than the average American’s balance of $6,365, based on Experian’s data.

Her car loan is similarly oversized. Tina owes $80,000 on the vehicle, but her dealer offered only $58,000 to repurchase it and her independent research revealed that the car is worth no more than $60,000. Experian’s estimate of the average auto loan in Q2 of 2023 was just $23,479.

There’s also student loans. Altogether, Tina believes she owes $233,000 in consumer debt.

It might sound like a staggering sum, but Tina’s not the only person facing a mountain of debt. Americans were collectively sitting on auto loans worth $1.59 trillion at the end of the third quarter in 2023, according to the Federal Reserve. Meanwhile, the collective credit card balance was $1.08 trillion, while student loan debt was $1.6 trillion during the same period. All three forms of consumer debt grew since the third quarter of 2022.

To break out of this debt trap, Kamel suggested that Tina may need to make the “ultimate sacrifice.”

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Ultimate sacrifice

“This might be one of those situations where you make the ultimate sacrifice of selling the house,” Kamel told Tina.

Many American homeowners have been reluctant to sell now that interest rates have risen so significantly. But in Tina’s situation, selling her house could unlock some cash to pay down her debt and ease the pressure on her finances. Delony also recommended selling the car in a private sale to get a better price than her dealer is offering.

Tina and her husband might have to rent for some time, but the asset sales should put them in a better financial position.

Holding back tears, Tina admitted that her spending habits must change. “It has to stop, because we want to retire in five years and we know it’s not possible if we don’t change,” she said.

However, Delony believes Tina and her husband might also have to sacrifice their retirement plan. “That’s 100% what you’re looking at,” he told her. “I don’t see a picture where you’ll retire in five years. The quicker you can grieve that … [and] shoot for 75 instead of 65, then it’s going to give you a little gas in the tank.”

Unfortunately, this is a common situation for Tina’s peers too. A survey from F&G Annuities & Life, Inc. found that 64% of pre-retirees had considered or already taken action to postpone their retirement, with concerns about lack of money and inflation being the leading causes.

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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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