According to Experian, as of the third quarter of 2023, the average American held $104,215 in debt. You're probably very familiar with the negative side effects of debt and how hard paying it down can be, but do you know that by age 45, you should be debt free?
There is no specific age to pay off your mortgage, but a common rule of thumb is to be debt-free by your early to mid-60s.
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
Running up $50,000 in credit card debt is not impossible. About two million Americans do it every year. Paying off that bill?
For example, one rule suggests having a net worth at 70 that's equivalent to 20 times your annual expenses. If you spend $100,000 a year to live in retirement, you should have a net worth of at least $2 million.
The statute of limitations on debt in California is four years, as stated in the state's Code of Civil Procedure § 337, with the clock starting to tick as soon as you miss a payment.
At the close of 2019, the average household had a credit card debt of $7,499. During the first quarter of 2021, it dropped to $6,209. In 2022, credit card debt rose again to $7,951 and has increased linearly. In 2023, it reached $8,599 — $75 shy of the 2024 average.
The Gen X debt situation
The cohort also has the largest share of people with debt, nearly 99% carry some type of balance, LendingTree found. Gen Xers led the way in three of the four categories analyzed. The group — between 44 and 59 years old — has the highest median credit card, auto loan and student loan balances.
Most consumer debts will “expire” after three to six years, meaning a creditor or debt collector can no longer sue you for them. You're still responsible for paying old debts, but waiting until the statute of limitations runs out might help you avoid future legal issues.
Financial planners often recommend replacing about 80% of your pre-retirement income to sustain the same lifestyle after you retire. This means that if you earn $100,000 per year, you'd aim for at least $80,000 of income (in today's dollars) in retirement.
That said, the typical age of financial independence should be between 20-23 years old, according to a Bankrate survey. Break the numbers down by cost category, and differences of opinion can be pretty wide.
Financial Stability: Being free from debt can help give you financial freedom and stability. You won't have to worry about paying interest, late fees, and penalties, which could affect your finances. Less Financial Stress: Debt-related stress can affect your mental and physical health.
The $1,000 per month rule is designed to help you estimate the amount of savings required to generate a steady monthly income during retirement. According to this rule, for every $240,000 you save, you can withdraw $1,000 per month if you stick to a 5% annual withdrawal rate.
The Minimum Salary To Be Upper-Middle Class
To be part of the top 20% of the middle class, you need to earn $106,092 and $149,160, — depending on your geographic location — according to a recent study by GOBankingRates.
With those time ranges in mind, it may be reasonable to hold cash to cover one to two years of living expenses (beyond predictable Social Security and pension income) in addition to your daily use account. The exact amount you want to have also depends on your risk tolerance and the amount you have saved.
So, for the purposes of the study, Bank of America set a threshold — households spending at least 90% of their income on necessities could be considered living paycheck to paycheck. By that measure, around 30% of American households are living paycheck to paycheck, according to Bank of America's internal data.
According to Experian, average total consumer household debt in 2023 is $104,215. That's up 11% from 2020, when average total consumer debt was $92,727.
Examples of Bad Debt
High-interest loans: Loans that have unusually high fees or interest rates include high-rate installment loans that you find online, payday loans and auto title loans.
"Assuming that your mortgage or rent are going to consume the lion's share of that ["needs"] category, I recommend keeping credit card payments below 10% of your monthly take-home pay if you aren't in a position to affordably pay off your entire balance each month," he says.
Wealthy family borrows against its assets' growing value and uses the newly available cash to live off or invest in other assets, like rental properties. The family does NOT owe taxes on its asset-leveraged loans because the government doesn't tax borrowed money.