That we hear, and it makes us sad every time we hear it, and yet it keeps not changing. Fifty-seven percent of Americans can't come up with a thousand dollars in an emergency. This is where, if you were sitting in a room with someone speaking, say, "Hey, look to the person to your left, look at the person to your right. One of those two folks can't come up with a thousand dollars." That is not a great place to be from a financial standpoint. By the way, you don't have to look to the right; either you or that person.
I think it's interesting. Let's give it a little positive spin this year. This is something you can pretty much set your clock to; 60% of Americans can come up with a thousand dollars. Fifty-seven percent, we have had a slot historically, but I'm thinking we're probably going closer to 60%. This also ties in, and we didn't include this in a slot, but it's been making the rounds on social media in the last few days. I just want to point out that only 51% of Americans have more savings than they do credit card debt. That's awesome. That's someone who doesn't understand how money works. Lots of paycheck-to-paycheck folks out there in the American economy.
So, what do you take away from this? What's the thing that you can glean and say, "Okay, how do I use this stat?" Well, the emergency fund, the money that you keep in savings, the "uh-oh" money, is the barrier that exists between you and the unknowns in your life. So, if you do not have that critical part that keeps your life out of the ditch, you're probably doing it wrong. It's so important. Brian and I make it one of the very first things we think people should focus on. Yeah, that's why if you go to resources in the financial order of operations, number one is deductibles covered, and I'm going to go more specific: your highest deductible needs to be covered. Because this is what's going to keep you from running your financial life into the ditch and then never recovering.
If you look at how many bankruptcies are caused by medical problems or other big things that you're just not planning for, you'll never get out of the financial gates of building wealth and success unless you can at least cover those speed bumps that might come your way right at the beginning of the process.
All right, Brian. You just said 51% of Americans, or only 51% of Americans, have more in savings than they have in credit card debt. So, that means that potentially we have a credit card problem in this country. That leads to our second mind-blowing money stat: that over one-third of Americans carry a credit card balance month to month. One out of three says, "You know what? I'm not going to pay this off every month. I'm going to buy something today, and rather than pay for it at the end of the month, I'm going to carry that balance over and over and over again."
Yeah, credit cards are one of those things where it really is a binary decision. You know, it's a zero or one. And the fact is, if you can pay it off every month, credit card use is okay. But as soon as you start running into credit card debt, it's really a no-way situation because that is blowing up your financial life, and you're using compounding interest against you. You're turning a powerful force for the good into something that is quickly destroying your life in a very fast process. And we even have some stats that shed more light on this.
Well, if you look at this, credit card debt now is over a trillion dollars. I mean, so it's not a problem; one trillion dollars of credit card debt is a big, significant problem that still exists in this country. And listen, this is—I think there's some deniability on this because people are just embarrassed about it. Twenty-one percent of people don't know if they even have credit card debt. Come on, that 21% of people don't want to admit that they have it. That's exactly it. Forty-three percent don't know the interest rate they're being charged. I'm actually surprised that number's that low. I bet a lot of people don't know the interest rate they're paying. By the way, it's probably over 20 percent. Sixty-nine percent don't understand how compounding interest works. So, I mean, these are the problems and why people are lured into these situations.
So, I just say, back to the binary decision, if you're not paying your credit card off every month, you just might not be a credit card-type person, and just stay away from it. And so, what's the takeaway here? You have to know your numbers. You have to understand how this works, what is your income coming in, what is your outflow going out, and you need to learn how to budget. Because if you're racking up credit card debt, that means that you are living beyond your means, you are robbing from your future self to pay for yourself today, and you're not doing it right. Because compound interest can be your favorite ally, or it can be your fiercest adversary, and you want to make sure that you don't let it start working against you.
Do you smell that, Bo? I think I smell a case study. A case study, because I think we love showing the numbers so you can actually see because if you're thinking about the incremental decision of acting like the average American, where I'm running and using credit cards the wrong way, or I'm thinking like a financial mutant, and I'm actually, instead of spending and running this debt and using compounding interest against me, let's see what that difference looks like. So, think about this: right now, the average credit card balance in the United States is just under six thousand dollars. It's five thousand nine hundred and ten dollars. Well, if you were to make the minimum payment on that, which comes out to about two percent of the outstanding balance, you'd be paying a hundred and eighteen dollars per month to try to get that debt paid off. And if you did not incur any additional debt, you'd have it paid off right around nine and a half years. That's so sad. Well, over that nine and a half year period, that fifty-nine hundred dollars of debt actually cost you seven thousand six hundred and sixty-one dollars in interest alone. So, you have literally thrown money away. That is compounding interest working against you.
What happens if you were to flip the script? What happens if you were to do it the right way? And instead, what if you took that one hundred eighteen dollars every month that you were paying as the minimum payment on your credit card, and you instead invested it for nine and a half years, starting at age twenty-five, assuming a ten percent annualized rate of return? Well, in the next nine and a half years from twenty-five to just before your thirty-fifth birthday, that money will have turned into twenty-two thousand dollars. So, instead of paying off a six thousand dollar debt, now you have twenty-two thousand dollars saved up. But that's only part of the story, right? Because think about this. That's just the first ten years that we've had this going on. What happens the rest of the time if that money continues to work? That's right. If you just, without saving another dollar, if you just let that twenty-two thousand dollars continue to grow all the way till retirement, all the way out until age sixty-five, and if we assume a ten percent rate of return, that one decision not to incur that credit card debt, not to have to make that one hundred eighteen dollar payment, could actually lead to almost half a million dollars in retirement: four hundred and sixty-six thousand dollars in retirement. It matters. Let compound interest work for you, not against you. And don't fall into the mental trap that people think just because you're getting a two percent cash reward on your credit card use. For more information, check out our
free resources.
