5 Things Keeping Americans From Financial Freedom

Jennifer Calonia
July 1, 2014

Fourth of July serves as a reminder of how the nation's founding fathers fought to earn America's independence from Great Britain. But nestled deeply in Americans' everyday finances is the reality that financial freedom is an ongoing struggle.

The average American household carries a debt of $203,163 for financial baggage such as mortgages, credit card balances and student loan debt, according to a NerdWallet analysis in April. What's more harrowing is that this figure doesn't account for other debts, such as auto loans and personal loans that further weigh down individuals.

Despite the reality that American consumers collectively carry more than $11 trillion in debt, you can chip away at this insurmountable amount at a personal level. By recognizing the reasons why you're in debt in the first place, you can free yourself from financially paralyzing debt starting this holiday weekend.

5 Reasons You're Not Financially Independent

Getting rid of this kind of debt in a short period of time may not be reasonable for everyone, but using the upcoming long weekend as inspiration to make a small change in how you approach debt can mean hundreds -- if not thousands -- of dollars saved over time.

1. Student Loan Debt

Getting accepted to a prestigious school is always something that college-bound students strive to accomplish. While attending an elite university is an admirable goal, shouldering an expensive bill may not be worthwhile in the long-run.

The Project on Student Debt, a research nonprofit, reports the average senior from the class of 2012 graduated with $29,400 in student loan debt.

What to do: It might be too late to start your college career at a cheaper, two-year community college, but you can make sure you're reducing your principal loan balance faster by writing to your lender.

If you're paying more than the minimum balance on your student loan every month, you're off to the right start. The problem is that your good intentions may not be benefiting you in the way you expect. Lenders often apply overpayments to the interest you've accrued, instead of using these excess payments to pay down your principal balance.

While you're enjoying the barbecue at your family's Fourth of July festivities, write a letter asking your lender to apply any monthly overpayments directly to your loan principal, exclusively. Use your smartphone to type out a draft to get the process going, then refine and send to your lender when you return home.

2. Credit Card Debt

Credit cards are a helpful financial tool for a well-rounded credit history, which means lower loan rates and more money saved down the line. Too often, however, cardholders get carried away with purchases.

Even shoppers who swear to pay off each monthly balance in full often forget how much they've accrued on the account over their entire bill cycle, leading to sticker shock when it's time to make a payment.

What to do: If you know you've made a few Fourth of July charges on your card, avoid the risk of getting stuck in credit card debt by paying off purchases as soon as you leave the store. Again, use your smartphone to make a speedy payment that same day, so you never spend more than you can afford.

3. Keeping Up With the Joneses

Wanting the latest gadget or newest-model car is a trap that seems harmless, but deeper behavioral concerns are at play when you're spending thousands of dollars a year just to keep up with Mr. Jones.

What you may forget is that looming average $203,163 American household debt that the Joneses are struggling with themselves. They're likely not any more well off than you, and the need to one-up each other is deepening the financial burden you both face behind closed doors.

What to do: If you haven't already, open a separate online savings account for your monthly discretionary spending allowance. This should only be a small percentage of your monthly income, like $100 per month, so you don't feel deprived of spending, but aren't going overboard.

4. Auto Loan Debt

Another result of keeping up with the Joneses is the massive auto loan debt that households -- especially those with multiple drivers -- carry. In the last quarter of 2013, the average auto loan amount buyers borrowed was more than $27,000, according to Experian Automotive.

What's worse is that auto loan terms are getting longer and longer, with some ranging from six to eight years. If, for example, you've signed up for a six-year loan for a vehicle with a manufacturer's suggested retail price of $27,000 (which doesn't include taxes and fees), edmunds.com calculates that the value of your car will depreciate as much as $16,953 in its first five years -- and you don't even own the car outright.

What to do: Use your day off on Friday to find out whether an auto loan refinance can help you save money over the life of your loan. The goal is to refinance at a lower interest rate, while shortening the length of your auto loan.

This simple step, even if it means you're just comparing refinancing rates online to start, has the potential to save you money in interest charges.

5. Neglecting Your Credit Report

As contradictory as it seems, everyday finances rely on how well you've maintained your credit, but in order to have good credit, you have to go into debt. With the credit scoring model, it's beneficial to have various types of accounts to prove you're responsible with using credit.

What to do: Remember that credit diversity, new accounts and age of your credit accounts comprise a large portion of your credit score, with factors such as a history of on-time payments and overall credit utilization taking up the rest of the pie.

Instead of juggling all those factors, take a look at your credit reports this weekend (they're available for free once a year at annualcreditreport.com) to identify any errors adversely affecting your credit profile. Identifying and fixing a mistake could easily improve your score.

Following these easy steps this Fourth of July weekend can help you make the right moves to regain your financial independence.

Jennifer Calonia writes for GoBankingRates.com, a source for online banking, the best CD rates, savings account rates, personal finance news and more.