Why It’s Important to Get Out of Debt
You may have heard of the millennial terms FOMO ( “Fear of Missing Out”) and YOLO ( “You Only Live Once”). Both of these ideas or attitudes are often used as hashtags in social media, as a justification to saying yes to impulses like going to concerts or football games, weekend trips to Las Vegas, fancy Sunday brunches, or high-end shoe splurges. This is a common theme in early career twenty-somethings, with high student loan debt and entry level salaries. Every bit of their paycheck is spent, and often, credit cards are used as a bridge to live beyond income and enjoy an indulgent lifestyle. However, you should never let millennial attitudes be a justification for living beyond your means. True financial happiness is not instant gratification from credit card purchases based on peer pressure, but rather financial freedom, elimination of debt, and home ownership.
The following are six reasons why it’s important to get out of debt:
1. You Won’t Have Financial Emergencies
The biggest financial emergencies are job losses and medical emergencies (human or pets), unexpected car repairs, or a car accident. Another common financial emergency is changing living situation, such as your landlord selling the property you rent and forcing you to move suddenly. If you are paying down debt, many financial experts recommend securing an emergency fund as soon as possible. Once you get out of debt and have several months of income in savings, you won’t have financial emergencies because you will have the funds to handle unexpected expenses as they arise. Elimination of emergencies is closely related to the next point, elimination of money-related stress.
2. You Won’t Have Money-Related Stress
According to the American Psychological Association, despite improvements in the U.S. economy, money and finances are the top source of stress, more than work, family responsibilities or personal health concerns. Some people even put their health care needs on hold because of financial concerns, skipping doctor or dentist visits, or even going without insurance. Stress about money is a huge source of conflict in relationships, especially if one party perceives the other party to be responsible for excess spending or not contributing what they should. By not having debt and having money in savings, you will not need to worry about how you will pay bills each month. If you are in a relationship where bills are shared, get on the same page with your partner about eliminating debt, and create a budget.
3. You Will Have Less Bills to Pay
Getting out of debt will eliminate extra bills, reducing the amount of money that you will owe every month. Once you eliminate your debt, you will be surprised at how few bills you actually need to live simply, and how much your monthly expenses will go down. Some financial experts recommend the “snowball” method of eliminating debt and bills, by paying down the lowest balance debt first, eliminating one credit card at a time until they are all paid off. Every time you eliminate a debt, you will have more money to put towards the next one.
4. You Can Save More and Earn Money off Your Money
Once you can start contributing money to high-interest savings accounts each month, you’ll be able to earn money off your money. Although it may take time to generate a savings account of 3 to 5 months of your income, once you do, you will begin to earn money daily in interest. Look for high-interest savings accounts such as Ally, GreenDot or Discover.
5. Your Credit Score Will Improve
Your credit score will go up as your credit utilization goes down and you use less of your available credit. Installment loans such as mortgages will have less of an impact on credit than revolving credit card debt. As your credit score improves, when you do need a loan for a car or home purchase, you will qualify for a lower interest rate, and be able to save money on loans.
6. You Can Teach Family Members Smart Money Habits
Kids are very aware of what is going on, even when you don’t think they are paying attention. They pick up on your habits, even daily trips to the drive-through. If you are a parent, you can help your child learn smart money habits by talking to them about money and what things cost. Many children are told “money doesn’t grow on trees” but not what that means, what things costs, or what healthy habits are. By getting out of debt, you can be a model for your children of how to manage money effectively. Once your children are old enough, you can teach them how to use a debit card and manage spending.
Changing Your Habits
If you have debt, you are not alone, and should not feel alone in your journey to be debt-free. Eliminating debt can look different for different people, depending on the amount of debt they have, their income, and their priorities. You don’t necessarily need to never go to Starbucks, shop only at Goodwill, or obsessively clip coupons, but you should balance your budget and understand where you’re spending money, and where you can save money. The daily latte is a common example. If you have free coffee at your job, you can skip the drive through latte on the way to work. You can drive your existing car longer and when it’s time for a new car, buy a new-to-you car vs. a new car or lease.
The first step to getting out of debt is simple: write down all of your debts, your balances, interest rates, and monthly payments. You can do this on a notepad, or on a Google Sheet on your computer. You can find many debt reduction spreadsheets online. Once you understand what you’re working with, set goals for yourself and decide which debt you will pay off first, whether it is the debt with the lowest balance for highest interest rate. Along with a debt elimination strategy, come up with your leftover spending money and budget. Set aside a monthly budget for carefree spending like meals out or lattes. Even if you have a large amount of debt, with some discipline, self-control, and planning, you can improve your situation, reduce the amount of money you owe. and turn things around for the future.