The TRUTH About Debt

Most articles about debt begin with the same tired stats. “Did you know 175% of Americans are in debt to the tune of $70 bajillion potatoes?” (Numbers made up for effect, obviously.) I don’t want to write that kind of post. (Not just because I find research on government sites tedious.) I want to get to the truth about debt. Sure, the articles with all the stats are probably true. But let’s get into the real TRUTH – the real stuff that actually means something. What does debt mean for you? How does it feel? What should we do about it?

Let’s start with the ONE thing I want you to take away from this post. (It’s too important to make you read too far!) Debt is a mindset thing. Not a numbers thing. Say it again! Debt is a mindset thing. Not a numbers thing. 

I’ve written before about how to build a healthy money mindset. If you’re looking to kick your debt, evaluating your mindset is the #1 step you MUST take. Read on to learn more truth about debt!

Having debt doesn’t define you.

It’s not a secret that many, many people in the United States have consumer debt. This is your cue to say “OK, Captain Obvious.” The fact that you have debt isn’t a statement on your character or your integrity or your intelligence or …. (fill in the blanks). People who hold the highest office in the land (ahem), who own companies, play professional sports, lead churches and teach children have debt. You’re not alone in this. Deep breath.

Having debt doesn’t mean you’ve made bad decisions.

Everyone has their own story and makes their own decisions. We all try to do our best with the information and resources we have at the time. Some decisions look different in hindsight because we have more information and know how it plays out. Sometimes even good decisions can lead to debt. Things like furthering your education are EXPENSIVE and no one I know has access to a money tree. (hmu if you do)

Debt is a teeny tiny part of your financial story.

Think ahead to 5 or 10 years from now. Think of all the experiences you’re going to have in that time. All the jobs and the income. The meaningful relationships with the people around you. Places you’ll visit. 

Ah! What you’re feeling now is PERSPECTIVE. Debt is a piece of the narrative, but it’s not the beginning and end of your story.

Credit card companies and banks benefit from your debt.

Those high interest rates and fees go right into the pockets of your credit card company and/or bank. AND! The longer your debt sticks around, the more money they get. So it’s in their best interest (pun intended!) to keep you in debt.

When you kick your debt to the curb, you’re actually bucking the norm. When you kill your debt, you’re refusing to allow those credit cards and bank companies from tying you down. 

You’re the real rebel here. Viva la personal finance revolution!

Your debt payoff strategy must be sustainable.

Do I believe it’s important for us to pay off debt as quickly as possible? 100%. But, deprivation isn’t sustainable for the majority of us. (If you’re spending more than you make, let’s talk. In that case, maybe a little deprivation is necessary.) But in most cases, it’s possible to pay off debt without depriving yourself of all the things you like most. Will it require some conscious decisions and potentially even adjustments to your lifestyle? Sure, but paying off debt can require some time, so the approach has to be sustainable.

It has to be based out of an abundance mindset. We don’t want to get six months in and feel so burned out we backslide.

Related post: The ULTIMATE Guide to Paying Off Your Debt

The Red Flags of Debt

Debt doesn’t have to be a big, bad, scary thing. But it is something we need to address. And quite frankly, we need to address it as quickly as possible (but sustainably!). If you disassociate any emotions from it, and review from an objective point of view, you’ll see the following red flags waving in the wind:

High interest rates mean you’re paying lots of extra money on that debt.

A store credit card with a $2,500 balance and 22% interest will require more than THREE YEARS to pay off if you’re only paying the minimum balance. AND you’re going to pay more than $1,200 in interest. Minimum payments equal maximum interest.

You can save your future self money by paying off your debt now.

Your debt negatively affects your credit score.

Credit scores indicate how likely you are to pay back your debts. They’re calculated based on five different factors. One of those factors is the AMOUNT of your debt, and that level of debt makes up about 30% of your credit score. Good credit scores allow us to receive lower interest rates when we want to do things like buy a new car or a house. A good score is important because it saves us money and time on future loans.

Debt likely delays your investing years. Or at least, minimizes the amount you’re able to invest.

In the previous example, if our money is designated toward paying down our $2,500 debt balance, that’s money that cannot be used toward the growth of our investment portfolio. And if it truly does take three years for you to pay off, that’s THREE years of growth you’re missing out on!

Debt minimizes the amount you’re able to save.

When you’re not able to save, and don’t have a cushion built up for emergencies, you’re more likely to go into debt. A perpetuating cycle that’s difficult to get out of. 

And speaking of that…

Debt takes an emotional toll.

When you’re continuously trapped in the debt cycle, there’s an added emotional aspect that can’t be discounted. If you’re in a precarious financial position, or even if you PERCEIVE yourself to be in a precarious financial position, it can create anxiety that’s hard to shake.

Debt limits your freedom of choice. 

If you’re continuously making monthly minimum payments on debt, you’re locked into that cycle. There’s an opportunity cost. That money isn’t working for you. It’s not available to help you start your side hustle business. It won’t take you to Europe. You can’t use it to purchase a new outfit or a gift for your new niece.

And Yet More Truth About Debt: The Great Mortgage vs Investing Debate

High-interest debt needs to be paid off, on the double, my friends! 

BUT. What do you do when it comes to lower-interest, higher-volume debt like a mortgage? This is a never-ending topic in the personal finance world, with no real TRUE answer. The truth about debt is it’s personal, and never has that been more apparent than in this case! 

The Case to Not Pay Off Your Mortgage

You’re likely paying less than 5% interest on a mortgage (and if you’re paying more, now’s the time to look into refinancing, my pal). If you invest the money you’d use to pay down your mortgage, you’ll likely return more than 5%. So, financially speaking, you’ll come out ahead to throw money into investments. 

Bottom line: Choosing not to pay off your mortgage means you’re investing money that will earn you interest.

The Case to Pay Off Your Mortgage

However, we’ve established that debt can take a pretty serious emotional toll. If being complete debt-free will give you more peace of mind, there’s nothing wrong with attacking your mortgage debt. If you’re preparing for retirement, a mortgage-free lifestyle can be incredibly appealing. 

Or, if you have an adjustable rate mortgage and anticipate your mortgage payments will increase, you can make a good case to focus your energy here first. 

Bottom line: Choosing to pay off your mortgage means you’re paying off debt that costs you interest.

Either case can be argued, and neither one is wrong. 

In Conclusion

I hope you feel like you’re now swimming in truth about debt, and have a bit more clarity around what debt means to you, what impact it can have on your life, and why it’s important (in most cases) to pay it off as quickly as possible. Thanks friends!