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Do you hear the word “debt” and instantly think of it as shameful, bad, or even scary? If so, you’re not alone. According to the latest statistics, the average American household has $135,768 in debt — including mortgages, student loans, car loans, and credit card debt. On top of that, 7 out of 10 people say that debt is necessary in their lives, but they wish they didn’t have it.
Many of us have debt, so why is it something that we want to get rid of (or feel ashamed to talk about)? With that in mind, let’s start talking about debt: why it’s not as bad as you thought it was, how debt can actually improve your life, and what you can do to tackle it.
The Different Types of Debt
Do you think of debt and instantly think “Bad!”? Well, we are here to bust you out of that attitude, right here, right now. First, let’s talk about the three different types of debt, including real-life examples of them.
- Good debt: Could you afford a house without a mortgage (aka debt)?
- Bad debt: Are you paying a high interest rate (6%+) for that new car?
- Ugly debt: Did you put that weekend in Cabo or that shopping spree on a crazy-high interest rate credit card… and only pay the minimum?
Which kind of debt do you have? Many of us have a mix of all three. As you can see, not all of it is shameful and terrible. Not all of it is good, either.
Now, let’s talk about how you can prioritize and evaluate your debt, so you can start to feel more empowered and less stressed about your finances.
4 Ways to Tackle Your Debt
The first step in taking charge of your debt? Deciding which debts you might want to keep, which you want to pay off, and which to avoid altogether. If you’ve got debt you’re worried about, here are four ways to tackle it (and your feelings about it).
1. REFRAME AND REDEFINE DEBT.
Some debt allows you to do great things with your life, like those student loans or that investment in your side hustle. In these scenarios, it’s important to reframe the word “debt” and turn it into “leverage.” Leverage helps you get to new places you couldn’t go before, which is why some debt is actually a good thing.
2. PRIORITIZE YOUR DEBT.
When you have multiple types of debt, there is a hierarchy you can use to determine which ones are good, bad, and ugly. Generally, debt with high interest rates — usually credit card debt — is the one you should try to pay off ASAP. Got something with 0% or 1% interest? Don’t be in a huge hurry to pay it off just because it’s debt. Focus on your higher rates first.
3. KEEP DEBT AT BAY.
A lot of “financial gurus” like Dave Ramsey will tell you debt is dumb. And while we don’t agree on everything Dave says, we do agree that it’s best to avoid debt you can’t afford.
Here’s a quick rule of thumb to keep your debt lower than your income: follow a 3:1 ratio. That’s an assets-to-liabilities ratio; for example, you may want $300k in assets vs. $100k in debt. You’ll always have a positive net worth if you strive for that golden ratio.
4. START TO LOOK AT PEOPLE AS EITHER LEVERAGE OR DEBT.
It’s not just money that counts as debt, and it’s not just money we can use as leverage. Debt is a mindset, and it overflows into the relationships you have with people. Are you surrounding yourself with people that make you feel weighed down or emotionally in debt? Or are you making an effort to build relationships with people who help you move up in the world?
Reframing Your Relationship with Debt
If you’re like many of us and you have debt, whether it’s student loans, credit cards, or mortgages, you’ll definitely benefit from reviewing and reframing your relationship with it.
Not only should you understand the three different types of debt and how to tackle them, you should also aim for a more balanced view of your money and how you spend it. A better relationship with debt can relieve some of the guilt or shame you have surrounding it, plus give you the tools you need to offload the debt that’s not serving you.
Our [FREE] Know Your Numbers email series will help you figure out how to pay down debt while not foregoing the important things in life (like paying bills and saving for the future).
The opinions voices in this material are for general information only and are not intended to provide specific advance or recommendations for any individual.