Got Debt? Don’t Fret.

For What It's Worth -

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You made it to Thursday!

LinkedIn might feel like a bleak place these days as more people change their statuses to #opentowork. This week, Spotify, 3M, and The Washington Post became the latest in a string of companies to announce layoffs since the beginning of the year, joining Amazon, Google, Microsoft, NBC News, and Salesforce (to name a few). And it’s not just humans — even the M&M’s spokescandies have been pushed out of their roles — although we suspect we haven’t seen the last of them.

Even if you haven’t been directly impacted by job cuts and took today’s news that the economy grew 2.9% in the final quarter of 2022 as an opportunity to breathe a sigh of relief, you’re likely wondering what these recent layoffs signal about the economy, so it’s helpful to put them into perspective. As Axios points out, tech workers have been disproportionately impacted as the sector adjusts to a business-as-usual state after historic growth early in the pandemic. Yet employment in other sectors, like construction and durable goods manufacturing, remains stubbornly strong, and some of the largest US employers still face labor shortages, which are pushing up wages for those who need them most. Walmart just became the latest retailer to raise starting wages for hourly workers.

The economy is likely to remain in a weird place for the foreseeable future, so we’ve rounded up a few articles and tips to help with your other pressing questions. If you’re…

  • …confused about the implications of the US hitting its debt ceiling, CNBC explains what it means for your money.
  • …wondering if we’ll see a recession this year, NPR summarizes some of the current economist predictions.
  • …curious about what we can expect from next week’s Fed meeting, Axios shares some clues.
  • …stressing about how to pay down your debt, keep scrolling! We have a whole article on that below. Finally, it’s earnings season! So far, company results have been a mixed bag, leading stocks to wobble. We’ll be continuing to watch the numbers roll in and how markets react, so expect more updates on that next week.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are few links to resources and past stories relevant in these turbulent times:

News you can use

  • Wealthy customers are pulling their cash from big banks in search of higher yields elsewhere, reports The Wall Street Journal. Bank of America and JPMorgan have seen deposits in their wealth units decline by 17%, and Wells Fargo’s wealth-management deposits dropped by 28%. If you too are wondering how to take better advantage of today’s high interest rates, we’ve got some tips to find your yield of dreams.
  • ESG funds attracted positive investment flows in 2022 even as money was pulled from broader funds, according to Refinitiv Lipper data. Moreover, sustainable funds performed in line with the rest of the market during a turbulent year. For example, the Morningstar US Sustainability Index fell 18.9% in 2022 while the S&P 500 (that many use as a benchmark to compare themselves with) fell 19.4%. That said, it is hard for any investor to celebrate double-digit losses.
  • Microsoft is betting big on artificial intelligence. Alongside laying off 10,000 employees this week, the tech giant announced its third investment in the generative AI platform OpenAI, which will include $10 billion over multiple years, according to The New York Times. You can learn more about OpenAI and other ways to invest in AI in the FWIW archives.

Attacking your debt

Among the top trending Google searches in January, besides “Prince Harry” obviously, was “how to pay off credit card debt.” It’s a popular financial resolution for the new year, and for better or for worse, debt is the American way. We know the federal government recently hit its debt ceiling (again), but the average American owed $96,371 as of 2021. More than 190 million Americans have at least one credit card. Half of all adults have at least two cards, and 13% have five or more credit cards. The New Yorker’s daily cartoon last Thursday captured the national mood. With interest rates increasing, reducing this debt is more important than ever.

If you’re carrying a lot of debt, you probably spend a few sleepless nights a week wondering how to get out from under it. With rising interest rates and the potential for a recession still being pondered by many of the experts we’ve been talking to, your debt demands your attention and action. Paying off debt can improve your life in many big and small ways. It will reduce your stress, improve your credit score, and put you on the path to a financially secure future. We’re here to help you take your first steps.

Time to budget and organize

If you’re struggling with denial or shame about your debt, it’s important to know you’re not alone, and it’s possible to dig yourself out once you confront it. Start by making a list of all your loans, including the total amount owed, the monthly minimum payments, and the due dates.

You need to aim to pay more than the minimum required each month to effectively chip away at your debt. According to the popular 50/30/20 rule, 50% of your income should be devoted to your needs, like housing, transportation, groceries, utilities, etc. Your loans’ minimum payments are considered “needs” and should fit into this category. 30% of your income is for your wants, like entertainment and eating out, and 20% is for financial goals, like saving, investing, and paying off the rest of your debts. This is just a simple guideline to keep you on track; you can tweak it as necessary. If you can cut your spending, you’ll have more money to attack your debt.

Whether you should prioritize paying off debt over saving or investing depends on how unmanageable and expensive your debt is. Regardless, experts say it’s important to first build an emergency savings fund with at least three months’ worth of expenses. This way, you can avoid going into more debt in case of a setback. Withdrawing retirement account funds to pay off debt is only wise in specific circumstances, as AARP explains.

Choose your payoff method: snowball or avalanche

Of the total $16.51 trillion in debt Americans are carrying, mortgages account for almost $12 trillion, and the rest includes student loans ($1.57 trillion), car loans ($1.52 trillion), and credit cards ($0.93 trillion). Millions of Americans are also saddled with medical debt or predatory payday loans.

When you’re tackling different kinds of debt, experts say there are two effective approaches: snowball or avalanche. In both cases, you pay all your monthly minimum payments first, then use extra cash to focus on one loan at a time until it is completely paid off. Take the money you were devoting to the first loan each month and aim it at the next in line. (Radio personality and debt guru David Ramsey advises paying off any tax debt first.)

With the snowball method, you start paying off your smallest loan and work your way up to the bigger ones. The psychological benefit here is similar to a to-do checklist. As you pay off each small loan, your sense of achievement grows and you’re motivated to keep going.

In the avalanche method, you start with the loan with the highest interest rate, and once that’s paid off, you continue to the next highest interest rate loan. By taking on the most expensive debt first, you will pay a lower amount in interest over time compared to the snowball method, but it’s an uphill trudge that requires commitment.

More help

There are a few options you can look into for more help. Debt consolidation allows you to combine several loans into one new loan so that you’re only making one payment each month, but watch out for fees, higher interest rates, and longer terms. Another option is transferring your high-interest credit card balance to one with a 0% APR period, but these could end up costing you dearly.

If things are really bad and you’re unable to make payments, don’t hesitate to contact your lender to discuss a more manageable situation, like debt forbearance, deferment, or settlement.

You can also work with a non-profit credit counseling organization, but make sure they are reputable and trustworthy. The FTC has some tips on this. Beware of debt settlement companies, which are often ineffective scams.

As you know, we focus on investing here at FWIW, but we also want to be clear that every expert we talk to prioritizes reducing debt and building up your emergency fund BEFORE investing. We are here for you now, and we will be here for you when you have built up a financial foundation to where investing makes sense.

Before you go -

Does all the debt talk have you wondering how to earn some extra dough? You could earn $1,000 for eating cheese before bed.

** FWIW team members own shares of 3M, Alphabet, Amazon, JPMorgan, Microsoft, and Walmart. We also rarely turn down an opportunity to eat cheese…

Want to learn a bit more about the writers behind FWIW? Have an idea you would like us to cover in the future?