This is the third post in a multi-part series on how to manage your finances so you can build up your savings, have a safety net, and still live comfortably today without having to live paycheck to paycheck. Click here for part 2, which discusses how to manage your checking account.
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Debt is a major issue
Generations X and Y have a big problem. They’re getting paid less and working more than the generations that came before them. They’re paying more for college. They’re paying more for housing. Their salaries aren’t going anywhere. Everything said, they got a pretty raw deal. But, there’s also another problem. Young professionals are spending. A lot.
Make no mistake, though, it’s not just the baby boomers’ kids that are in debt. A huge number of Americans are in debt for more than just their mortgages.
The different types of debt
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Sometimes, you have to borrow money to get ahead. School loans are almost a necessity for many students, especially with the skyrocketing costs of college. In fact, according to a 2008 report from the American Savings Education Council and the AARP, 32% of all members of Generation Y have outstanding student loan debt.
Necessary debts, such as those that come with student loans, are investments in your future earning potential, or “self-investment” debts. We need them – fortunately, these debts usually come with delayed payments and lower interest than the other types of debts – the “lifestyle debts.”
“Lifestyle debts,” the bad debts, are the high-interest debts that can generally be avoided. The most common of these is credit card debt. According to the same report mentioned above, 57% of young professionals have some sort of credit card debt.
Sometimes, this is valid debt. Credit cards can be used to pay off anything these days, including expenses that are unavoidable, or related to basic needs. But more often than not, those cards are probably being used for lattes, electronics, clothes, cars, and other such items.
Regardless of the type of debt you have, it’s important to create a plan to get out of it.
Planning to get out of debt
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If you’re saddled with thousands of dollars of debt, chances are, you may not know how to start paying it off. Try this:
Open up Excel, make a list of every single debt you owe, along with their interest rates, total amounts, and any other important terms. Now, take a step back and absorb what you just put down. Is it a lot? Is it manageable? Is it mostly good debt (self-investment) or bad debt (lifestyle debt)?
Now, try to figure out if you can stop the bleeding.
Is the majority of debt lifestyle-related? Are you spending too much on things you don’t need? If so, make a commitment to stop right now. If you have too much credit card debt, you may want to cut up your credit cards and use debit cards instead. If you’re making payments on a sports car, maybe you should trade it in for something less expensive. Are you paying too much on rent? Look for a cheaper place. Before you can start generating money by trading, you’ll need to get the rest of your finances in order, because you don’t want to be trading money that you need to pay off your apartment for the next month.
Let’s assume you’ve been able to take care of your lifestyle debt, but you’re still owe a lot of money. What do you do?
