The growing burden of the US national debt: consequences for household financial stability

The Unit­ed States faces a seri­ous eco­nom­ic chal­lenge with its ris­ing nation­al debt. Extend­ing beyond gov­ern­ment finances, this issue has posed a threat to the finan­cial sta­bil­i­ty of house­holds across the nation. This arti­cle will detail the effects of the increas­ing US nation­al debt on house­hold finan­cial sta­bil­i­ty, sup­port­ed by key data and trends.

As of the first quar­ter of 2024, total vehi­cle debt has surged by 84.7%, increas­ing from $875 bil­lion in Q1 2014 to $1.616 tril­lion. This dra­mat­ic rise reflects a sub­stan­tial esca­la­tion in auto loan debt, which now accounts for 9.2% of total Amer­i­can con­sumer debt, sur­pass­ing stu­dent loan debt, which stands at $1.595 trillion.

In com­par­i­son to the pre­vi­ous year, which record­ed a $39 bil­lion rise in U.S. house­hold debt, the lat­est data reveals a broad­er and more trou­bling trend. While 2023 fig­ures high­light­ed sig­nif­i­cant cred­it card debt at $1.1 tril­lion and auto loan debt at $1.6 tril­lion, the ongo­ing increase in vehi­cle debt under­scores a notable shift in the debt land­scape. Mort­gages con­tin­ue to dom­i­nate Amer­i­can con­sumer debt, rep­re­sent­ing 70.3%, yet the sig­nif­i­cant growth in auto loan debt sig­nals a press­ing finan­cial challenge.

The ris­ing pro­por­tion of auto loan debt rel­a­tive to oth­er types of con­sumer debt sig­nals emerg­ing finan­cial strain that could jeop­ar­dize the long-term eco­nom­ic health of many house­holds. Cer­tain US cities are expe­ri­enc­ing par­tic­u­lar­ly severe con­di­tions. WalletHub’s lat­est report shows Greens­boro, North Car­oli­na, at 7th and Raleigh, North Car­oli­na, at 25th for increas­ing debt lev­els, with Durham and Char­lotte also rank­ing promi­nent­ly.
These rank­ings under­score regions where debt is increas­ing at an accel­er­at­ed pace, which may sig­nal sig­nif­i­cant finan­cial insta­bil­i­ty for a sub­stan­tial num­ber of residents.

Boston expe­ri­enced the most sig­nif­i­cant increase in con­sumer debt dur­ing the sec­ond quar­ter of 2024. The aver­age cred­it card bal­ance in Boston rose by 6% from Q1 to Q2 2024, reach­ing $9,096. Per­son­al loan bal­ances increased by 3.5%, while auto loan bal­ances saw a more mod­er­ate rise of 1%, total­ing $23,649. North Las Vegas, Neva­da, and Madi­son, Wis­con­sin, also record­ed sig­nif­i­cant increas­es in var­i­ous forms of debt, which illus­trates a broad­er trend of esca­lat­ing house­hold liabilities.

This rapid accu­mu­la­tion of debt pos­es sig­nif­i­cant risks. High­er debt lev­els can lead to finan­cial strain for house­holds, mak­ing it dif­fi­cult for indi­vid­u­als to man­age their finances effec­tive­ly. As Cas­san­dra Happe, a Wal­letHub ana­lyst, notes, increas­ing debt isn’t always bad, but it becomes prob­lem­at­ic when it accu­mu­lates too quick­ly for peo­ple to man­age on-time pay­ments. With high-inter­est rates, bor­row­ing can become unsus­tain­able, thus cre­at­ing a vicious cycle of debt and finan­cial instability.

The nation­al debt, which has bal­looned to over $31 tril­lion, inten­si­fy these issues. Obvi­ous­ly, high nation­al debt lev­els can lead to high­er tax­es and reduced pub­lic spend­ing, both of which neg­a­tive­ly affect house­holds. Increased tax­es, for instance, reduce dis­pos­able income and make it hard­er for fam­i­lies to save and invest; reduced pub­lic spend­ing can lead to cuts in essen­tial ser­vices, fur­ther strain­ing house­hold budgets.

More­over, the nation­al debt’s impact on inter­est rates can­not be over­looked. Exces­sive nation­al debt can lead to high­er inter­est rates as the gov­ern­ment com­petes with the pri­vate sec­tor for bor­row­ing. This, in turn, increas­es the cost of bor­row­ing for house­holds, affect­ing every­thing from mort­gages to auto loans to cred­it cards. As inter­est rates rise, so does the cost of ser­vic­ing exist­ing debt, which adds addi­tion­al pres­sure on house­hold finances. 

This does not end here at all; the grow­ing bur­den of debt also has sig­nif­i­cant psy­cho­log­i­cal impli­ca­tions. Finan­cial stress, accord­ing to a study by the Nation­al Library of Med­i­cine, can lead to men­tal health issues, includ­ing anx­i­ety and depres­sion. This stress affects not only indi­vid­u­als but also their fam­i­lies and com­mu­ni­ties, cre­at­ing a rip­ple effect that can impact pro­duc­tiv­i­ty and over­all well-being.

In response to these chal­lenges, it is cru­cial for indi­vid­u­als to adopt pru­dent finan­cial prac­tices as advised by experts like Traci S. Williams, PsyD, ABPP, CFT‑I. One approach is to focus on low-risk invest­ments to grow sav­ings. A rel­e­vant exam­ple is invest­ing in cer­tifi­cates of deposit (CDs), which pro­vide reli­able, fixed-rate returns on a lump sum of mon­ey over a fixed peri­od. High-yield sav­ings accounts are anoth­er option, offer­ing high­er inter­est rates than reg­u­lar sav­ings accounts. US trea­sury bills, notes, and bonds are con­sid­ered very low-risk invest­ments, backed by the full faith and cred­it of the US gov­ern­ment. Mon­ey mar­ket funds, which invest in short-term, low-risk assets, and fixed annu­ities, which guar­an­tee a fixed rate of return, are also recommended.

These low-risk invest­ment options offer a secu­ri­ty blan­ket, ensur­ing that indi­vid­u­als do not lose their sav­ings to mar­ket volatil­i­ty. By invest­ing wise­ly, house­holds can build a finan­cial cush­ion that helps them man­age debt more effec­tive­ly and mit­i­gate the impact of eco­nom­ic uncertainties.

Anoth­er key strat­e­gy is to devel­op a viable pay­off plan for exist­ing debt. Focus­ing on pay­ing down the high­est-inter­est bal­ances first while main­tain­ing min­i­mum pay­ments on the rest can help reduce the over­all debt bur­den. This approach, known as the debt avalanche method, min­i­mizes the amount paid in inter­est over time and accel­er­ates the path to becom­ing debt-free.

It is also impor­tant to be mind­ful of the types of debt one accrues. High-risk invest­ments, such as those in for­eign emerg­ing mar­kets, can offer sig­nif­i­cant returns but come with the poten­tial for sub­stan­tial loss­es. For most house­holds, it is wis­er to stick with low-risk invest­ments that pro­vide steady, reli­able returns, ensur­ing finan­cial sta­bil­i­ty in the long run.

Finan­cial lit­er­a­cy plays a cru­cial role in man­ag­ing debt and build­ing finan­cial resilience. Stud­ies show that under­stand­ing the basics of per­son­al finance — such as bud­get­ing, sav­ing, and invest­ing — can empow­er indi­vid­u­als to make informed deci­sions. Edu­ca­tion­al resources and finan­cial coun­sel­ing ser­vices can pro­vide valu­able guid­ance by help­ing peo­ple man­age com­plex finan­cial sit­u­a­tions and avoid com­mon pitfalls.

Hence, amid con­cerns about a poten­tial reces­sion and a sig­nif­i­cant glob­al finan­cial cri­sis, the grow­ing bur­den of the US nation­al debt has far-reach­ing con­se­quences for house­hold finan­cial sta­bil­i­ty. Cities like Boston, North Las Vegas, and Madi­son exem­pli­fy regions where debt is ris­ing sharply, under­scor­ing the need for pru­dent finan­cial management. 

With over $2.7 tril­lion in auto loans, cred­it cards, and per­son­al loans, cou­pled with the rapid accu­mu­la­tion of new debt, house­holds face sig­nif­i­cant finan­cial chal­lenges. Fur­ther­more, the num­ber of indi­vid­u­als not in the labor force but active­ly seek­ing jobs increased by 366,000 to 5.6 mil­lion, accord­ing to the July report of the U.S. Bureau of Labor Statistics.

The data is clear: the grow­ing US nation­al debt and ris­ing house­hold lia­bil­i­ties are crit­i­cal issues that demand atten­tion. Tack­ling these chal­lenges direct­ly allows indi­vid­u­als to pro­tect their finan­cial sta­bil­i­ty and sup­port a more robust, resilient econ­o­my. If action is not tak­en in time, the sit­u­a­tion could dete­ri­o­rate, poten­tial­ly lead­ing to broad­er eco­nom­ic issues such as slow­er growth and increased finan­cial inse­cu­ri­ty with­in communities.