4 Ways Baby Boomers Can Get Out of Debt in 2024
Debt is the scourge of financial planning. Debt not only diverts cash flow from investments, it also accrues interest — often at very high rates.
According to the St. Louis Fed, for example, the average credit card rate on an account that accrues interest was an 22.63% as of February 2024. At those rates, debt that isn’t paid off immediately can get out of control rapidly, particularly for baby boomers who are either in or near retirement.
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To determine the state of debt in America, GOBankingRates recently conducted a survey of 1,039 Americans. Among the 10 questions asked was a query about financial goals. For 27% of Americans in the 55-64 age group, commonly classified as baby boomers, getting out of debt was the top priority — well ahead of the 23% who wanted to save more money.
Debt is a major burden for many Americans, and boomers are no exception. According to the U.S. Government Accountability Office, roughly 45% of credit cards have balances, and even many with high household incomes (above $150,000) are unable or unwilling to pay off their balances.
The easiest time to pay off debt is when you have a good job with rising income, and this is no doubt the primary reason why getting out of debt is such a high priority for the boomers in our survey. As boomers head into retirement, they likely will transition to living off fixed incomes, making debt reduction much more difficult.
What are the best steps for boomers to take to get out of debt this year?
Build More Room Into Your Budget
Most Americans have likely heard that a budget is an important financial road map that can help them make prudent financial decisions. Yet, few actually do it.
According to Gallup, only about one-third of Americans actually write down or create a computer budget to track their monthly income and expenses. This can easily lead to overspending and debt creation, as it’s hard to know what your limits are when you don’t have a written outline in front of you. So, if you’re one of the two-thirds of Americans without a formal budget, it’s time to get started.
Once you’ve created a budget, you can see at a glance where your money is going and if you’re overspending. In many cases, budgets are eye-opening. In fact, it’s only at this stage that many people notice that they are spending, say, $500 per month on dining out when they think they are spending just $200.
Trimming discretionary spending — or any areas of overspending — is a great place to start, but to get out of debt you’ll need to be sure you have a line item for it. In other words, in addition to trimming your overspending, you’ll have to consciously direct some of your income to paying down your debt. Until it’s paid in full, you should work on making this part of your budget as large as possible.
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Pay More Than the Minimum Due
Many Americans maintain revolving balances and simply pay the minimum amount due every month. That simply won’t cut it if you’re looking to get out of debt quickly. In most cases, the minimum amount due is barely enough to even cover the interest you were charged, meaning most of your payment goes to interest instead of principal.
That’s a dream scenario for the credit card companies, as it extends the amount of time they get to collect interest from you. To get out of debt, commit to paying much more than the minimum payment due every month.
Use Balance Transfer Offers To Give You More Time
It’s hard to make headway on paying down your debt if your credit card charges you over 20% in interest annually. To maximize your payments and give yourself some extra time to get out of debt, consider using a 0% balance transfer offer.
While you’ll usually have to pay an upfront fee of between 3% and 5%, you can then aggressively attack your debt without having to worry about the balance growing every month. Typically, 0% balance transfer offers last between 12 and 21 months.
Pick the Avalanche or Snowball Method
If you have more than one outstanding debt, you’ll have to pick the strategy you want to use to pay it all down the fastest. Mathematically speaking, the so-called “debt avalanche” method makes the most sense, as it involves paying off the debt with the highest interest rate first. However, some pundits, including financial personality Dave Ramsey, advocate the “debt snowball” method instead.
With the debt snowball, you instead attack your smallest outstanding balance first. The idea is that behaviorally, people are more likely to stick with a debt repayment plan when they feel the momentum of getting “wins.” In other words, according to Ramsey and others, the satisfaction and feeling of accomplishment you get by getting balances down to zero, one by one, helps sustain you for the duration of your debt repayment plan.
Whichever method you select, stick with it. Endure the short-term pain and sacrifice while keeping the long-term goal of a debt-free life in view.
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This article originally appeared on GOBankingRates.com: 4 Ways Baby Boomers Can Get Out of Debt in 2024