Talking about money—with friends, family, coworkers—can often inspire feelings of guilt and shame. It's understandable: money is a delicate subject and everyone's situation, goals and opportunities are different. Talking to your friend with the well-stocked emergency fund when you're still struggling to figure out how to get out of credit card debt can leave you feeling inadequate or ashamed of your own spending habits. It's easy to feel like you're falling behind or not doing enough for your financial future, especially if you have debt.
“Finances are often ranked as the top source of stress for Americans,” says Ken Lin, founder and CEO of Credit Carma. “Financial difficulties – especially due to debt – can seriously affect people’s confidence in their financial well-being, but not necessarily.”
Financial wellness is all about establishing overall financial health and learning to successfully manage your finances. Doing so means you're well prepared for economic challenges, of course, but practicing financial wellness can also have positive mental health benefits, including boosting self-confidence. And contrary to what you might think, having debt doesn't necessarily inhibit your ability to have good financial health.
“It's okay to have some debt,” says Brian Walsh, a certified financial planner with SoFi. “Really, when it comes to anything related to personal finance, there is no right answer for everyone.”
Managing debt well
Having debt does not inherently prevent you from having financial well-being, but only if that debt is managed well: letting debt get away from you is an obvious sign that you don't have your finances under control. Whether you have long-term debt – like student loans or a mortgage – or have recently accumulated debt due to financial challenges, your approach to paying it off can have big implications for your overall financial confidence and financial well-being.
“If you're living with debt in a way that feels out of control or full of regret, it can undermine your financial confidence,” says Kimberly Palmer, personal finance expert at NerdWallet. “However, debt is not always associated with negativity. Some types of debt help you achieve other goals, like student loans that help you pursue the life you want or a mortgage that helps you get the home you want. It really depends on why you took on the debt and how you are managing to pay it off. If you've made a conscious choice to take on debt and pay it off within your budget each month, this may seem like a positive thing.
The key to managing any type of debt — even recently accumulated high-interest debt, like credit card debt incurred after you unexpectedly lost a job or income — is to make a plan to pay it off. (You must first stop accumulating debt, of course.) Even a one-year plan can increase your confidence in your ability to pay off debt, thereby increasing your overall financial well-being.
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Understanding that not all debt is equal
The first step, according to Walsh, is to understand whether your debt is a problem. “Not all debt is created equal,” he says. Generally, any debt with an interest rate higher than 7% is bad debt, while anything with an interest rate lower than 7% is good debt. Paying off bad debts — so called because they accumulate large amounts of interest quickly, thus increasing the total amount you owe — should take precedence over eliminating good debts completely.
Palmer suggests thinking of low-interest debt payments as just another monthly bill. At SoFi, Walsh recommends a modified snowball approach to paying off debt: Make the minimum payment on all your debts, then work to pay off the smallest bad debt balance first, even if it doesn't have the highest interest rate. high. Once the debt is paid off, move on to the next smallest balance, and so on.
Mathematically, paying off debt this way may take longer than eliminating your biggest balance or highest-interest debt first, Walsh says, but there are more visible signs of progress, so people feel motivated and encouraged to keep paying off debt. It's important to stay motivated: a consistent, regular payment plan is the only way to eliminate all debt, and losing motivation mid-plan and giving up can erase all your progress.
Making it your mission to reduce the amount of debt you owe doesn't mean you have to sacrifice non-essential spending.
“Paying off debt doesn't necessarily mean you always have to say 'no,'” says Lin. “Instead, it's about prioritizing your expenses in a way that still allows you to enjoy your life while constantly working towards staying debt free.”
All three experts agree that it's all about balance and moderation: You want to avoid accumulating more debt, but you can find a balance between paying it off slowly and continuing to work toward other financial goals, like saving for retirement, buying a home, or saving for a big vacation or extravagance.
“Even if you pay off debt, you can still pursue other goals and activities,” says Palmer. “You just need to fit your debt payments into your overall budget.”
Limiting what you borrow
The first step to achieving financial well-being while in debt is creating a plan to manage that debt, but that's not a possibility for everyone, especially now when unemployment is at an all-time high and many are facing financial hardship. If you're accumulating debt to pay for essentials, there's probably little you can do until economic conditions change; In this situation, you want to intentionally go into debt and do everything you can to limit how much you borrow.
“Ultimately, it’s about surviving in the short term while minimizing long-term damage,” says Walsh.
By minimizing how much you borrow, you reduce how much you will have to pay in the future whenever you can make payments again. You also make it easier for your future self to continue working toward other financial goals, goals that may have to be put on hold for now. Accumulating debt can lengthen the time it takes you to reach your goals, but it doesn't make it impossible as long as you make a plan to manage that debt.
“It’s not going to ruin everything in the future,” says Walsh.
Financial well-being is in the planning. Make a plan now and your future financial health will benefit.
