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How to Manage Debt

Good debt vs. bad debt

Debt doesn’t have to be a bad thing. Taking on some debt might allow you to achieve your goals or fulfill your dreams. Borrowing money can help you complete your education, purchase a home or fund your small business. Other kinds of debt could simply be necessary, like borrowing to cover an unexpected medical expense.

Mishandled debt, however, can become a serious financial and emotional burden. Debt turns bad when it is made up of loans that you cannot repay. And it gets worse when you accrue high interest and/or fees that exceed the value of your purchase. Bad debt might also include loans from questionable sources, like payday lenders who may offer quick cash at terms that are disadvantageous.

Before you get scared off by learning about debt, consider this: Understanding debt and planning for your financial future helps you be mindful of your money. Your core values will guide your approach to money management. If you budget and track expenses, you’re taking time to plan for what you value most. You’ll also be more likely to recognize situations in which you might overspend; special occasion spending like travel, birthdays, graduations or anniversaries, for example.

In other words, learning how to manage debt comfortably and when to pause before borrowing can help you enjoy the opportunities that good debt can provide while avoiding bad debt pitfalls.

Understand the role of debt at your age

Borrowing can be an important financial strategy at any age, but people tend to change the way they borrow as they get older. We all carry different amounts of debt and have different reasons for borrowing money; financial needs vary based on age, health, family and many other factors. The trick is to understand why debt ebbs and flows as your life changes, and to plan ahead.

Why Age May Affect Borrowing Habits

Generally speaking, after entering adulthood with little or no debt, many 20-somethings may rapidly accumulate debt for the first time (outside of student loans), says Katherine Lucas McKay, financial security program manager for The Aspen Institute, a Washington, D.C.-based nonprofit think tank that produced a study called Consumer Debt: A Primer in 2018.

Those years of young adulthood are, for many people, the time when salaries can be the lowest of their careers. At the same time, they may begin to face rising expenses as they buy their first homes or have children. Borrowing peaks for many in their mid-30s. After that, people start gradually paying off debt, a trend that accelerates as they get closer to retirement.

This trend of debt starting low and swelling mid-life before tapering off as retirement approaches generally holds true for people of all generations, from the oldest members of the Silent Generation to the youngest Gen Z group.

However, there are significant generational differences with debt management. Baby boomers, for instance, have higher mortgage debt at their age than the earlier Silent Generation born around the Great Depression. They are also the fastest growing segment for student loan debt, according to Generational Borrowing Habits, a report from San Antonio-based marketing company Harland Clarke. Student loan debt held by borrowers 50- to 80-years-old more than doubled during the past 12 years, Harland Clarke found.

“The Gen X pattern looks pretty similar, although student loan plays a bigger role and their housing experience was a little different,” McKay says. Because these consumers are younger, it’s not yet known how well they’ll follow the usual trajectory of reducing debt as they approach retirement, McKay adds.

Millennials are also likely to diverge from the pattern. That is thanks in part to more student loan debt but also to rising mortgage interest rates. “You’ll have a greater proportion of this generation with more debt per person,” McKay says.

How you can manage debt, at any age

Just as each generation has different reasons for borrowing, they tend to take different approaches to managing debt, says Katie Ross, manager of education and development at American Consumer Credit Counseling, a nonprofit debt management advisory company in Auburndale, Massachusetts.

In your twenties, it’s really important to get in the habit of budgeting and tracking expenses. Resist the urge to indulge in spending. The occasional splurge, sure. But eating dinner out every night is a hard habit to break once it’s started. The goal is to pay down student loans while other expenses such as mortgages and children are at a minimum. Contribute to your retirement fund (even if that seems impossibly far away) and start an emergency fund. Creating good financial habits early will help maintain your financial health in the future.

In your thirties, the goal is to keep credit card balances low and be aware of your debt-to-income ratio because it has a big impact on your credit health. Set savings goals to cover larger purchases, life events or big travel. Keep thinking ahead about your financial planning. Maintaining the good habits you began in your twenties can help secure a low interest rate for a mortgage, build an emergency fund and save for retirement.

Moving into your forties, assess your debt honestly. Many people are at the height of their earning power, so it is a good time to pay off higher interest credit card debt and any other non-tax-deductible debt (like your car loan). Look to refinance loans you can’t eliminate so that you pay less in interest and fees. Reevaluate your financial goals. If you can, boost your retirement savings contributions.

In your fifties, the balance between paying down debt and saving for retirement becomes even more important. It’s smart to pay down major debts as fast as possible so that can save more for retirement. Pay off your highest interest rate debt first to get rid of your total overall debt faster. Paying off your mortgage may not be the most advantageous choice—do the math and see if refinancing is a better option. Once you turn 50, you’re eligible to make “catch-up contributions” to your retirement funds. Let your 401(k) grow; you could still face penalties if you borrow from it.

Turning 60 could mean retirement, which seemed so far away, is around the corner. If you can extend your earning years, and thus your contributions to savings, do it! Work toward a debt-free retirement by paying off as much of your higher interest debt as you can. Try to avoid taking on new debt. And, continue to reevaluate your budget, expenses and financial goals. Reducing expenses now can help you enjoy the retirement you’ve worked so hard for.

No matter what your age, a debt consolidation loan can help

Regardless of your age or life stage, a debt consolidation loan can help you eliminate higher interest credit card debt. These loans generally feature lower interest rates than credit cards. And, importantly, they have fixed monthly payments on a schedule designed to completely pay off the personal loan within the foreseeable future. When you put a time limit on debt, you’re better able to plan for both the day you pay off the debt (you can circle it on your calendar) and for your financial goals beyond.

Looking for more debt management tips? Read our post on How to Pay Off Debts Faster.