Groceries, gasoline, rent and outstanding debts, inflation and painful price hikes have many Americans concerned about their financial present and future. And with fears that a recession could be lurking in the not-too-distant future, it’s important that people get their affairs in order.
NPR reached out to financial experts on how to better navigate these turbulent times. Here’s the advice they gave from their respective fields.
Income and personal finance do’s and don’ts
On top of her role as an assistant marketing professor at the University of Pennsylvania’s Wharton School — one of the world’s leading business programs – Wendy De La Rosa works to to improve the financial lives of those with low-to-moderate incomes. She co-founded the Common Cents Lab, which combines behavioral science and economics to improve people’s financial well-being.
According to De La Rosa, people cannot budget or save if they aren’t making enough, and that gets harder with everyday items going up in price. To get ahead, she recommends individuals take steps to bring in more money, starting with asking for a raise.
“With costs of living rising, I think it’s an appropriate conversation to have,” De La Rosa said.
At the same time, the best way to achieve a meaningful boost in income is to land a position with the competition, De La Rosa said.
“In this tight labor market, where employers are essentially falling over themselves to try to find talent, if you feel like you’re being undervalued at your workplace, now is probably the time to start searching for another role,” she said. “Now is the time to polish off your resume, to get out there, see what you can get. And at the very least, ask for a raise at your company.”
The next problem to tackle is credit card debt.
As federal rates rise, so does the interest on your credit cards, which has hovered around 15% in recent years, according to Nerd Wallet. But rates can be as high as 25% to 30%.
An individual’s rate is more often than not established when they’re younger, when they have little to no credit, resulting in a higher rate, De La Rosa said. And though an individual’s credit score improves over time with punctual payments, most credit card companies don’t change their interest rate — unless you ask.
De La Rosa said tip No. 1 is, “Go ahead, pick up the phone, call your credit card company and ask them to lower your interest rate. … Many, many years ago, I did a small pilot where I brought people into the lab and had them sort of call your credit card company. And about 40% of them had success either getting a promotional 0% [annual percentage rate] or just getting a credit card interest rate decrease.”
An important detail worth noting, which many people may be unaware of, De La Rosa said, is that most credit card companies collect interest on overdue payments daily, not monthly. This is why it is imperative to get that balance back to zero as quickly as possible.
If you’ve got a mountain of credit card debt, don’t wait until the end of the month to make one large payment. Instead, try to make payments weekly, or as frequently as possible, to avoid paying any more than absolutely necessary.
Having said that, De La Rosa isn’t advising individuals throw every dollar they have at their debts. People should have some sort of cash savings available for emergencies.
“If you’re near the middle-income threshold, where the average family earns about $60,000 a year, you might want to think about two to three months of emergency savings,” she said. “But all of that is dependent on where you are on the income spectrum and how much room you have.”
Advice for renters and prospective homebuyers
Jessica Lautz is the vice president of demographics and behavioral insights at the National Association of Realtors, America’s largest trade association made up of experts in residential and commercial real estate markets. Lautz said that after approximately two years of real estate market mayhem, things are finally cooling down to a pre-pandemic pace.
At the same time, the median sales price in the nation is at an all-time high, at more than $400,000, a 14.8% increase from last year, according to NAR. Those prices can be attributed to the simple law of supply and demand: There have been far more prospective home buyers than homes for sale.
With the Federal Reserve recently hiking interest to a 40-year high, mortgage rates are also on the rise, with a 30-year mortgage averaging 5.89% as of last Thursday, according to Bankrate.com. Lautz said this could be an opportunity for homebuyers who missed out on home after home, as rising prices narrow the pool of potential buyers.
“They’re facing slightly less competition that they had in the last year. … We were seeing a median of five offers for every home. That has gone down slightly, but that doesn’t mean that there’s not competition today,” Lautz said. “We know that for buyers who are actively in the market today, they have to have a higher household income then other buyers in the past because interest rates have gone up, but home prices are still increasing at the same time.”
Getting into your first home is more difficult than upgrading later in life because of the down payment requirement, Lautz said — which is why it’s important to start by finding a mortgage broker and real estate agent who know your area. These professionals can help establish a budget as well as clear up common misconceptions about the homebuying process.
“Some of the old-fashioned rules, like you need 20% down to enter homeownership, just may not be true depending on the loan product that you choose,” Lautz said. “The typical first-time homebuyer just put 6 to 7% down, for the last several years.”
That’s still a lot of money. For most people, a home is going to be the single-largest purchase of their life. And first-time buyers often struggle to come up with the tens of thousands of dollars to cover the down payment and closing costs. However, today’s rental market is expensive as well.
“We have seen many rental units are going for 30% more than they had just last year in some areas of the country,” Lautz said. “So, if you’re in that situation and you have the ability to pull together a down payment and closing costs, it might make much more financial sense to actually purchase a home, especially if you plan to stay put.”
Many young buyers today are getting into homes by thinking unconventionally, Lautz said, like living with family for a period of time to save up for a down payment or renting a room out in their new home to subsidize costs. Some buyers are even going in on properties with friends and splitting the mortgage and bills.
For those who have been looking high and low for a home to no avail, or were outbid time and again, perhaps it’s time to make some compromises. Consider looking in a different part of town that may be up and coming or sacrificing some of your wants and needs so you can secure a purchase, Lautz said.
In a few years’ time, after the market returns to a sense of normalcy and buyers have equity built up from mortgage payments, they can return to the hunt for their dream home, moving up the property owner ladder.
“When you do purchase a home, you’re paying towards your mortgage, but at the exact same time, [your] home should be appreciating … So, you know that when you do go to place your home on the market it likely will be for a higher price than what you did pay for it,” Lautz said. “So, you’ll be able to pay off what’s left of your mortgage and then actually get money back for your next down payment as a move-up buyer into your second property or third property and so on.”
Things to consider about student loans
According to the Education Data Initiative, more than 43 million borrowers have had the luxury of having their federal student loan payments on pause since the COVID-19 pandemic began over two years ago. That pause is set to expire on Aug. 31, though it could theoretically be extended again.
President Biden is reportedly considering forgiving up to $10,000 of student debt per borrower. But with so much up in the air, Barry Coleman, vice president of counseling and education at the National Foundation for Credit Counseling, said people should “Hope for the best, prepare for the worst.”
“We won’t know until it’s announced whether or not that actually happens. … It would amount to roughly $321 billion in federal student loan forgiveness, which is significant. And in that case, it would also completely eliminate federal student loan balances for approximately 11 to 12 million borrowers,” Coleman said. “That would be life changing for many consumers, if they didn’t have to worry about that much debt.”
Instead of keeping their fingers crossed, Coleman recommends borrowers take advantage of the last few months of the pause to make payments on their principal, if they can afford it.
For those who don’t have the means to make payments on the principal of their loan during the current interest-free grace period, he advises at least making with a plan. Since March 13, borrowers haven’t had to account for their student loans in their budget. But with inflation driving up the price of everyday goods — on top of rent, credit card payments and more – running the numbers and coming up with a budget should be a priority.
“If and when these payments resume, understand where you are, where you will be after August 31, and just plan accordingly,” Coleman said.
People can plan using the Department of Education’s loan simulator. If they find that their loans may be too much of a financial burden, they can apply for an income-driven repayment plan to design a more manageable payment plan.
Additionally, it’s important that borrowers double check that their contact information is up to date in case some form of forgiveness be issued. The Department of Education has to be able to reach you to discuss any updates about your debts.
He also noted that there are other paths to debt forgiveness. According to the Department of Education, the Public Service Loan Forgiveness Program may forgive the remaining balance for qualifying applicants after they make approximately 10 years of payments. This includes government employees at the federal, state, local and tribal level, service in the U.S. military as well as non-profit work.
Full-time teachers who complete five academic years at a low-income school are also eligible for up to $17,500 in federal student loan forgiveness. And any U.S. servicemember who is receives a 100% disability rating from the Department of Veterans Affairs and is deemed totally and permanently disabled could have their federal loans discharged.
Individuals struggling to get financial affairs in order should reach out to the NFCC, Coleman said. As a non-profit organization, most of the NFCC’s services are offered free of charge. They work with individuals to develop a plan to help them achieve their financial goals.
“I think it would be time well spent if a borrower participated in a counseling session just to sort of see where they are at and get some expert advice,” Coleman said. “We will provide that service regardless of whether someone can afford to pay or not.”
Honesty and the importance of putting yourself first
For many, addressing financial issues can be uncomfortable; it’s not a happy endeavor, De La Rosa said. Which is why people put budgeting and other money talk near the bottom of their to-do list, all the while drowning in debt or struggling with spending control.
Calling credit card companies, going through subscriptions, creating a budget or evaluating spending habits are all relatively minor tasks, but nonetheless require time.
This is why De La Rosa suggests individuals take a “financial health day.” Either a day or a block of time dedicated to siting down and addressing finances.
“We all have subscriptions that we know we should cancel. We all know that we should probably finally enroll in our company’s 401(k) . … But we are just lacking the time, Right? We don’t prioritize ourselves because we’re busy prioritizing everybody else around us, and we are just too tired at the end of the day,” De La Rosa said. “Love yourself enough to prioritize yourself right now. And whether that means asking for a raise, searching for another job, putting time in your calendar to do all the financial things that we’ve talked about, these are things that you’ve been putting off.”
For couples and families, it’s important to be an open book. Pretending money monsters don’t exist won’t make them go away. Financial issues are one of the leading causes of divorce, De La Rosa said, which is why it’s important that partners and family are on the same page when it comes to money ups and downs.
When people feel financially insecure, De La Rosa said, “Basically half of your brain is thinking about your financial constraints and is unable to really focus on other kinds of problems.”
It is mentally exhausting. Which is why it’s important to achieve a sense of balance.
Money does — to some extent — buy happiness, De La Rosa explained. So, if you find yourself grinding day in and day out, it is OK to spend a little to help pick yourself after a long week.
“One of the things that we know is that people get more pleasure and happiness out of buying experiences than material goods. So, if you have to choose … choose to have the experience,” De La Rosa said.
It can be as simple as going to the movies with friends or loved ones, for example. And if that’s a little outside the budget, get creative. Some places offer free movie screenings in parks, and you can treat yourself to snacks. What you can or cannot do when money is tight is only limited by your imagination.
“You can turn almost anything into meaningful experience. And that’s what I would just hope that people can do during this time, right? It is so taxing to have to think about your financial situation all of the time.”