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3 Reasons You're Broke

Christy Bieber, The Motley Fool

Around half of all Americans couldn't fund a $400 emergency, most Americans have far too little saved for retirement, and as many as 65% of Americans have reported losing sleep over money woes, according to CreditCards.com.  

Long story short, many Americans struggle with money. And, while there are absolutely situations where uncontrollable factors cause money worries -- like health issues -- there are also many circumstances where financial mistakes are the root of the problem.

In fact, here are three reasons Americans end up in over their heads and coping with money troubles. 

Broken piggy bank

Image source: Getty Images.

1. Carrying a big credit-card balance

Close to 40% of U.S. households carry at least some credit-card debt, and the average debt for households that carry a balance is $16,048. 

With a five-figure debt balance, monthly payments are high, and you'll pay a fortune in interest.

Let's say you owed $16,048 at 15% interest with a minimum payment equal to interest plus 1% of the balance. Your minimum payment would start at around $361 monthly. And, if you paid only the minimum, you'd pay $19,539 in interest, and it would take you 382 months -- 31 years -- to become debt free. 

If you were instead able to invest $361 per month in a 401(k) over 31 years and earn a 7% return, you'd have almost $477,000.  

When you carry a credit card balance, every purchase costs more because of interest. Don't make your everyday purchases more expensive. Instead, buy only things you can afford to pay for when your credit card bill comes due. Living on a budget and saving for big purchases makes that possible. 

If you're already in debt, get serious about getting out. Consider a consolidation loan to reduce your interest rate so repayment becomes more affordable. And, make extra payments by reducing spending or taking on a side hustle. If you pay $800 monthly instead of the minimum, a $16,048 balance could be paid off in just two years, and you'd save almost $17,000 in interest. 

2. Paying an expensive car loan

At the end of 2017, the average new car loan hit a new record of $31,099, and the average loan for a used car hit a new record of $19,589.  

Americans are taking longer loans, buying costlier vehicles, and making higher monthly payments than at any time in history. In fact, the average monthly payment for a new car reached a record $515, and the average monthly payment for a used car hit a new high of $371 in 2017, according to data from Experian. 

If you're paying $515 monthly for a car that loses value every day, that's $6,180 per year you can't use to max out an IRA or put money into an emergency fund. And, most people have a car loan for all but around six years of their working life, because they get new vehicles shortly after their loans are repaid. 

Instead of always paying interest on a depreciating asset, buy the lowest-priced used car you can safely drive, drive it for as long as possible, and finance it for the shortest term possible.

Keep making "car payments" once your loan is paid off, and pay for your next car in cash. Then, rinse, and repeat -- drive your paid-for car into the ground, and save payments for your next vehicle. You'll have enough for a new car long before it's time to stop driving your old one, and can put the rest of the "payments" into retirement savings or toward accomplishing other financial goals. 

Alternatively, if you live somewhere walkable, get rid of the car altogether and use a rideshare service or a rental when you need a vehicle. Or, if you're a two-car household, see if you can work out a way to share just one vehicle. You'll save on car payments, maintenance, gas, and insurance. 

3. Paying housing costs that are too high

If your housing costs you more than 30% of your income, you're paying too much for housing, and accomplishing other financial goals will be really hard. 

This 30% threshold has long been the standard, but unfortunately, around one-third of households are exceeding it. 

If you live in a high cost of living area, staying below the 30% limit can be really difficult. You may need to resort to creative approaches, such as getting a roommate or listing your home on Airbnb. Don't rule out moving as an option, especially if your employer is open to a telecommuting arrangement, as there are plenty of affordable locales that are great places to live.

If you don't live in an expensive area, housing costs still may be too high if you've opted for a big house or luxury apartment. Under these circumstances, ask yourself if your costly abode is really worth the financial struggle.  And don't forget: Bigger and costlier housing comes with costs beyond just the mortgage, including higher property taxes and maintenance expenditures.

These costs typically can't be justified by viewing your house as an investment, either, since the stock market historically outperforms real estate. So, explore whether it's possible to find a cheaper living arrangement.

If you don't want to move, consider whether a side hustle could bring your income up enough that you can meet the 30% threshold. Otherwise, more careful budgeting and sacrifices in other areas of life -- such as eating out less and spending less on entertainment -- might be necessary to afford your expensive house. 

Tackling the big stuff can help you to improve your financial life

If you have a lot of credit card debt, high monthly car payments, and an expensive house, dealing with these money drains may seem like it will require huge lifestyle changes.  

The reality is, a cheaper car will still get you where you need to go, sacrificing for a short time to pay off debt will allow you to enjoy life more later on, and cutting housing costs means you'll have fewer money worries, so you'll sleep more soundly under a smaller roof. 

It's just a matter of deciding what you want your money to do and living the lifestyle that gives you the freedom to become financially secure. 

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