Defying Debt

Justine Nelson never intended to be tens of thousands of dollars in debt, but when her parents —  who had been paying her tuition at Kansas State University — were hit with their own unexpected financial hardship during her sophomore year, Justine was forced to take out a student loan to complete her degree.

After graduating in 2011, she landed a job at an ad agency making just ten dollars an hour when she received an official notice from the Department of Education that she owed $35,000.

“By that time, I was living back home with my parents,” she recalls. “I was so overwhelmed. I was like, ‘How am I going to be able to realize my dreams of living in a big city with my own apartment?’”

But it served as a turning point. “That letter woke me up. Either life was going to have me or I was going to have it. And that’s when I decided that debt wasn’t going to interfere with my life plans. I had to take action.”

She eventually moved out of her parents’ house and into an apartment with roommates. But for the next few years, Nelson lived on a tight budget. She drove a 12-year-old car and rarely used the air conditioner to avoid driving up her share of the bill. A monthly Netflix subscription was one of her limited splurges. More than half her annual income, which by that time was $37,000, went towards paying off her loans. Impressively, she accomplished it in under three years. Nelson, now 34, has since founded her own business, Debt Free Millennials, to help those in similar positions understand and manage their debt and maintain financial stability. It’s no easy task. “For millennials, we’re in such a sweet spot in our lives. We’re getting married, we’re having kids and we’re trying to buy our first home. But the inflation we’ve been experiencing in the past three years has made it difficult for us to achieve as fast as previous generations.”

Inflation is, of course, an obvious explanation for the debt crisis many Americans — regardless of their age or stage of life — are facing today. “Inflation deserves a big chunk of the blame,” confirms Richard Barrington, a financial analyst at Credit Sesame, a personal finance company and the first platform to provide free access to consumers’ credit scores. “It’s made the debt problem worse. Last year saw the highest inflation in 40 years. And it didn’t help that inflation was rising faster than wages. When paychecks come up short, it’s only natural for people to reach for their credit cards to fill in the gap.”

Beyond the economy, there’s often a social component at the root of the problem.

The rise of increasingly seductive and innovative methods of advertising combined with aspirational and, in many cases, unrealistic social media portrayals of wealth has contributed to overspending.

“A lot of Americans are taking on debt to support their lifestyles,” Barrington notes. “You see someone’s boat or hear about a great vacation, but you don’t see the debt payments they’re making. You just see the things they have and it’s like, ‘Well, I’m entitled to a little luxury too.’” Investment strategist Cassandra Cummings refers to it as the “lifestyle creep.” She explains: “People think they see how other people are living and they think they should be living like that, not knowing how it’s being financed.”

It’s a competitive form of peer pressure that can be hard to resist, especially among young adults. “I think there’s a level of impatience when it comes to, ‘I just want to live my life and I’m going to make it happen no matter the cost,’” says Nelson. “And what really happens is we end up drowning in payments.”

The toll debt can take on mental and physical health is alarming. According to Barrington, a recent Credit Sesame survey revealed that 69% of people with credit scores below 670 said they were kept awake at night due to financial stress.

What to do if you find yourself on the other end of a five or even six-figure negative balance? There are a number of paths forward, each of which requires rigorous accountability and self-control. The first step, says Barrington, is to stop the bleeding. “Make a budget that isn’t dependent on continued borrowing. If you have to borrow to meet your month-to-month expenses, your household budget is not sustainable.”

From there, decide how you want to approach your debt relief: starting at either the largest or least amount owed. Focusing on the least amount owed first, also known as “The Debt Snowball,” means making minimum payments on everything else. “It works so well,” offers Nelson, “because you get that instant gratification of paying off a really small debt quickly. It’s like a hit of dopamine. ‘Wow, I made that happen. Now I can move on to the next.’”

Another option, known as the “Avalanche Method,” prioritizes paying off your debts with the highest penalties in order to eliminate as many excess fees as possible. “In the long run,” Nelson explains, “it’s the way to save the most money on interest.”

Cummings says any plan put in place should aim to get you out of debt within 24-48 months. If you feel really in over your head, she advises it may be time to call in a credit counselor or debt relief organization that can offer guidance on streamlining or consolidating your payments.

And while social media can contribute to the kind of envy that inspires overspending, it’s also created channels of information and support in the form of personal finance influencers and online forums. “The biggest upside is the direct engagement you get with your audience,” explains Nelson. “I have a private Facebook group where people are laying it all out. They’re saying, ‘I’m considering debt settlement, what does that look like? I have a high interest credit card, which one would you pay off first?’ We’re creating the visibility to say it’s okay to be vulnerable. It opens up communication with others who may have already done it right and who you can learn from and helps you not feel so isolated. You feel connected to a community.”

Climbed out of debt? Congratulations! Now the goal should be maintaining financial solvency, which means sensible budgeting, careful planning for large purchases and responsible use of credit cards. Credit cards, when paid in full at the end of every month, are essentially short-term, interest-free loans with the potential of additional currency like points, miles or cashback offers. Making purchases you’re unable to pay off every month, however, can quickly devolve into a cycle of carrying balances, making minimum payments and slowly eroding your net worth. From both a practical and psychological point of view, being pragmatic about the lifestyle you can afford is key. “Living a debt-free lifestyle is a lot less flashy than borrowing and buying a lot of material things or vacations,” Barrington says, “but you’ll be a lot more comfortable.”

Once you are debt-free, you can prioritize building your retirement savings and look for ways to grow your capital. “Buy land, they’re not making it anymore,” Mark Twain is quoted as saying. Those words carry truth. Real estate, notes Barrington, is a long-term asset that normally appreciates over time. Financing a mortgage is using what he refers to as “good debt.”

“Debt that you use to buy long-term assets is much more favorable for building long-term wealth.”

As 2024 approaches, it’s important for all of us to examine our finances and make the necessary adjustments. “Debt balances are higher than ever,” concludes Barrington. “And soaring interest rates have made it more costly to carry it. People get complacent. They get used to assuming it’s always going to be available but because of recession fears and recent bank failures, lenders are starting to tighten credit standards.”

“Controlling debt is always a good idea, but there are several reasons it’s especially important now.”