Many people only dream of becoming debt-free because they do not even know what it is like to be debt-free or how to use debt responsibly. Whether they entered adulthood with the burden of student loans, found themselves duped by easy-access high-interest credit cards peddled to those with no credit history, or needed to finance their first car to get to their first job, debt becomes a reality that they’ve never really lived without.
For others, consumer debt mounts more gradually over time as the cost of living exceeds their paycheck — a car repair here, a bridesmaid dress there, a trip to the emergency room this month, and their kid’s travel baseball fees next month. They don’t have the cash and before they know it, their credit card balances get out of hand.
And for many, excess consumer spending simply gets out of control — brunch with friends, a few extra rounds of golf, a house in the right neighborhood with shiny new cars in the driveway, family vacations, designer clothes — and even high earners can find themselves in a mountain of debt, shame, and regret.
It’s easy to judge someone who finds themselves in debt if you’ve never been there, but the truth is, people struggle with debt for a variety of reasons. Whether they accumulated debt while striving for better opportunities, dealing with life’s unexpected expenses, or they overextended themselves believing they could catch up quickly, bad debt often ends up haunting them for years.
Good Debt vs. Bad Debt
For the majority of Americans, living completely debt-free is unrealistic. Most people can’t afford to pay cash for important major investments, such as a car, home, college education, or starting a business. The good news is that not all debt is bad. Responsible use of debt can be a helpful tool in creating a comfortable lifestyle and providing leverage for a better financial future.
Creditors know that good debt, such as a mortgage, is an investment that may grow in value over time and contains future profit potential. Bad debt, on the other hand, tends to be used for purchases that lose value quickly, and are therefore risky. As a result, consumers that get caught in a cycle of bad debt are working against high interest rates and find it difficult to keep up with payments.
To avoid bad debt, a good rule of thumb is to avoid using credit to purchase things that are not essential. If you can’t afford to pay cash, take a hard look at how necessary the item is. If you can do without it, don’t go into debt for it. In other words, if you make a commitment to live within your means, you can use debt for good.
Why is it important to be debt-free?
While it is true that you can use good debt to your advantage, bad debt can get you into trouble. Irresponsible use of debt is costly, and it can take a toll on you that goes beyond immediate financial burden.
Debt is Expensive
When you use debt irresponsibly as a consumer, you are paying significantly more for everything than those who pay outright or settle up before interest hits. With high interest rates, you pay more for your debt and for extended periods of time. The longer you take to pay off your debt, the more you pay overall.
We’ve all read stories about people who have been making their minimum student loan payment for a decade and owe more now than when they left college. Car payments are now commonly stretched over seven years, so consumers who finance are paying exponentially more than those who pay cash. People are financing almost twice the price for furniture than they would if they’d paid in full on the showroom floor.
High Debt Lowers Your Credit Score
Your debt level makes up 30% of the formula credit bureaus use to determine your credit score; so the amount of debt you have is one of the biggest factors in determining your creditworthiness. Even if you strive to be debt-free, you will need a strong credit score if you want to rent an apartment, qualify for a mortgage, borrow money for a business, and get favorable auto-insurance rates. Poor credit can even prevent you from passing a background check to get hired for a job.
Debt Impacts Your Health
Studies have found that people who struggle to pay off their debt are twice as likely to experience mental health problems, such as anxiety and depression, particularly when there is a stigma associated with the debt.(1) People with high debt stress also tend to experience more physical health problems, such as muscle tension and back pain, migraines, high blood pressure, stomach ulcers, and heart attacks. Ridding yourself from the psychological burden of debt can help you breathe more freely and take better care of your overall well being.
Debt Impedes Progress
Having monthly debt payments limits the amount of money you can put towards financial goals. It’s more challenging to build a sufficient rainy day fund when a high percentage of your income is paying down past debts, leaving you open to more debt when emergencies arise in the future. It may also prevent you from saving up enough money to purchase a car without financing it, forcing you to go into more debt.
Until you eliminate the burden of debt, it’s difficult to create financial security and practically impossible to build wealth. Monthly debt payments hold you back from moving forward.
Debt Interferes with Freedom
When you are saddled with excessive debt, it interferes with the choices you can make in life. High debt levels keep people stuck in jobs they hate and trapped in troubled relationships far longer than they would without the added financial weight.
Monthly debt payments can prevent you from pursuing dreams, realizing your potential, building wealth, and generally living life on your terms.
What steps can I take to become debt-free?
Working towards becoming debt-free is one of the most powerful decisions you can make to improve your quality of life. Here’s how you can become debt-free.
Face Up to Your Debt
One of the biggest mistakes people make with debt is to ignore it. Whether it’s anxiety, shame, or a self-defeated attitude, they would rather pretend it doesn’t exist. But the debt isn’t going to pay itself so you have to face it head-on. Take a hard look at your balances and get clear on your numbers. Even if the amount is scary, knowing what you’re up against is an important first step.
Stop Accumulating Debt
If your goal is to be debt-free, you have to stop accumulating debt as soon as possible. That may seem to go without saying, but the problem is this is often easier said than done. If you are addicted to shopping, you may need to get support from a therapist to curb your spending. If you are overextended and relying on credit cards just to get by, you may need to drastically reduce your cost of living by selling your house or cars. It will be difficult, but you have to stop the bleeding before you can save yourself.
Start a Debt Snowball or Debt Avalanche
A debt snowball is a debt repayment method that works by tackling one debt at a time. The idea behind this method is that quick wins will provide a sense of accomplishment and motivate you to keep going. So if you pay off small debts you will gain confidence that you can tackle your bigger debts over time. A debt avalanche focuses on paying your debts with the highest interest rates first. The idea behind this strategy is to pay as little interest as possible so that your debt is less expensive over time.
Both strategies work; it’s up to you to decide what’s best for your debt level and circumstances. Either way, the trick is to always pay more than the minimum required payments and put as much money as possible toward paying down your debt, which requires cutting back on your expenses and finding ways to increase your income.
Get a Debt Consolidation Loan
For some people, a debt consolidation loan can be helpful. While it does not generally reduce the amount of the debt itself, it can potentially lower the amount of interest you are paying, reducing the overall cost of your debt. What makes debt consolidation attractive for many people is the ease of having one payment and one debtor versus managing multiple debts.
If you are considering a debt consolidation loan, look at the interest rates and terms carefully, be sure to look out for transfer fees you may incur, and keep in mind that consolidating your debt may affect your credit negatively. Not every debt consolidation offer is a good one.
Life After Debt
Getting out of debt is a huge accomplishment and one that should make you proud. Once you become debt-free, you can start living life differently.
Stick With the Plan
Though the burden is lifted and you are free to explore more opportunities, it’s important to stick to your budget, stay disciplined, and work to remain debt-free. Even after all of the sacrifice and hard work, it’s not uncommon for people to slip back into their old habits or convince themselves that they’ve done it once, they can do it again.
Rethink How You View Debt
Once you’ve eliminated unwanted debt and you are able to live debt-free, you can begin to rethink how you view debt. This can be dangerous territory if you have not fully overcome poor financial habits, but you may be able to leverage debt for financial gain. Debt-free purists will disagree, but many people are able to use debt responsibly again within reason.
Would you rather save for 15 years to buy a house or purchase a home using a 15-year mortgage? Would you rather spend 10 years working your way through school on minimum wage or take out a student loan to cover your degree in a well-paying field?
Using debt to make home improvements, to get a certification that may increase our income, or to invest in your business can pay off big. Using credit cards responsibly to tap into rewards programs will allow you to enjoy some fun perks. Again, it’s not the debt that hurts you but the way you use it.
It’s up to you to decide whether or not debt is worth it, every step of the way.
Brendan is the Managing Director for Waymark Wealth Management. He has extensive experience in comprehensive wealth management. His focus includes retirement planning, behavioral finance, investment portfolio construction, education funding, insurance & risk management, taxes, charitable giving, and estate planning. Brendan has an ability to take clients' complex visions and distill them down to simple action plans, helping them move from where they are today to where they want to be tomorrow.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.