Many millennials have an unhealthy relationship with debt. Wait, don’t throw the popcorn yet, keep reading. From the early days of primary education, debt and personal finances have not been taught in a practical way. You may have taken a civics course that talked about economics and even glossed over the budgeting conversation but never provided applicable skills to build upon.
What was your first experience with debt?
- For many millennials, financing education was the first experience they encountered with debt. Mere 18-year old’s and their parents signing documents without a clear and complete understanding of the implications that student loans would have on their futures. This is the number one reason young adults go into debt. Student loans have become a topic of conversation in most households especially those looking to establish economy mobility in the form of purchasing their first homes. Young adults carrying large student debt are looking to have some relief as they try to accomplish the grand old American Dream. As many are facing repayment coming soon, the silent whispers are growing louder as there is a resounding hope that President Biden will make good on his campaign promises to eradicate student loan debt for millions of individuals.
- People go into debt is for big purchases such as cars, homes, furniture, boats, RVs etc. These purchases typically carry lower interest rates and manageable payments for a longer term. Because these purchases require significant cash investment, individuals who have the option to finance often will. Though some of these purchases such as cars depreciate or lose value fast, financing provides access to purchase whereas home mortgages appreciate or gain value, so equity is increased. Equity increases your net worth while depreciating assets decrease your net worth.
- People go into debt is because they run into an emergency and are low on cash. Many Americans do not have at least $400 in cash to cover an emergency expense, so what do they do? They use credit. Often using credit costs more than using cash however for someone who is low on cash resources, credit provides a saving grace to cover expenses. If you are financially unprepared for emergencies, you will often run into having to use credit to cover emergencies. One way to help yourself is to build a savings nest egg of at least $1000 and replenish it each time it dips below. This will provide some security against an unexpected expense.
- People go into debt is because they are trying to build credit. I remember being in Civics class and being told that to have a credit score you must start with a credit card. Well, that is not entirely true. When you don’t have any established credit, you have a blank slate which can work in your favor. Not having debt freed up your money to do other things like saving and investing. A healthy financial life includes managing money well and keeping debt low. If you have no debt, focus on building your cash up to put you in a position to stay debt free.
- People go into debt to build assets. This is called leveraging debt. Business owners and investors use debt to finance projects with the expectation that they will have a return on their investment. This article gives 5 Ways Debt Can Make You Money and is certainly worth reading.
If you are ready to get a plan in place to become debt free, book an initial consultation with me so you can move you forward to your freedom!