This is Your Life on Debt

This is Your Life on Debt

Remember all of those “This is your brain on drugs” PSAs that ran in the ’90s? Well, consider this your debt wake-up call. Debt is bad, and it’s bad for your finances. To understand just how bad debt is, think of it like you would a smoking habit – costly, definitely not “cool”, and seriously expensive.

 

The average U.S. household with debt carries $15,762 in credit card debt and $130,922 in total debt. (Courtesy of Nerd Wallet) While some of this may be related to poor spending decisions or eating out too much, not all of this debt is from reckless spending. More Americans than ever are using credit cards, 2nd mortgages, and personal loans to get by because of low or stagnant wages.

That’s not okay. If you can’t survive on your current income, taking on debt isn’t an option – you either need to make more money or live more cheaply. Adding to your debt is asking for a life of debt collectors, poverty, and a never-ending cycle of financial blows. Not to mention all that financial stress may literally kill you. The emotional impact of carrying around a high debt burden is no joke.

This might sound like I’m preaching here, but let me tell you: debt sucks. I have a ton of it (thankfully, mostly student loans & I’m on track for loan forgiveness), but still, my credit card debt is like a giant albatross weighing me down every time my friends ask about going on a trip somewhere or I use one of those “Am I saving enough?” retirement calculators. I’m going to keep feeling this way for the next 18-24 months too…because that’s exactly how long it’s going to take me to finally get rid of the credit card debt.

Many finance experts out there try to tell you there is good debt and bad debt. They are wrong. There might be bad debt and slightly-better-but-still-bad debt, but that’s about the only distinction there is for debt. It’s all bad, all the time, and you will never meet your personal finance goals with a bunch of debt hanging over your head.

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

The average American with any type of debt pays $6,658 in interest payments each year. Credit card debt — one of the most expensive types of debt — costs consumers an average of $2,630 per year in interest, assuming an average APR of 18%. (Courtesy of Nerd Wallet) As of today, I’ve already spent $561.40 on credit card interest this year…and it’s only April.

If the possibility of throwing away several thousand a year in interest isn’t scary enough, you’re high debt load may also be tanking your credit score…which will only make it harder and less ideal for you to take on slightly-less-bad debt, like a mortgage or car loan, in the future.

Not all debt is equal.

Under the right circumstances, mortgage, student, and car loan debt can help strengthen your financial position…but it can also strengthen your position while you’re aggressively paying it off. However, credit card debt — and other debt with high interest rates — needs to be avoided and paid off as soon as possible.

Debt is debt, and it’s all bad. If you need to take on debt in order to buy a house or car, do it, but do it responsibly. Don’t take on more than you need (sorry, that McMansion may not be in your price point), and be aggressive at paying it off – speed is the name of the game.

 Wake-up to the Importance of Debt

We all need to get our debt under control. Start by figuring out how much debt you have, and then create a plan to pay it off. Remember, being ashamed of your financial situation won’t make it go away, and in many cases, may only make it worse since you’ll be accruing more interest while you sit in denial of how much debt you have. Not to mention, the emotional toll of racking up debt and not doing anything about it is going to suck.

After you figure out how much debt you have, go to AnnualCreditReport.com and pull your credit reports. You get one free report once a year from each of the three credit reporting bureaus. It’s important to figure out exactly what your entire financial picture looks like when you hop on the road to debt freedom.

Once you know how much debt you have and what your current credit situation looks like, you can devise a plan to eradicate it. Go forth & eliminate debt! Imagine how great we’re all going to feel when we don’t have any (personally, I plan to get myself a cake & then eat it all).

Happy debt repayment,

ECD

 

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