How to Overcome Debt and Eliminate Financial Stress

If you haven’t done so already, check out the Podcast I launched last week with Grant from Millennial Money. We’ve been spending weekends and a few extra work nights putting together our first 10 episodes! We’re obviously real excited to get them out and look forward to releasing more podcast throughout 2017. Now, onto today’s post on how to overcome debt and eliminate financial stress.

Before I dive in, I want to clarify: If possible, we should be accelerating the rate at which we pay down debt.

That’s what we’re doing right now —  maxing out our pre-tax retirement accounts and now paying down debt.

Now that that is out of the way, let’s launch into today’s topic:

How to Overcome Debt and Eliminate Financial Stress

According to TransUnion, the average credit card debt in America is $5,437. That amount TRIPLES for those who carry a balance month to month.

That’s legitimately scary.

As I’ve mentioned before, millennials are graduating with so much debt that they’re postponing marriage and having children.

After college, the next logical step for many of us is to buy a home. As life events take place, the amount we owe only goes up.

Debt is everywhere! At the end of the day, it’s a way of life.

This article will focus on 3 critical factors that can help us overcome the stress associated with debt.

The first is near and dear to my heart since I’ve had plenty of lengthy discussions about it. I’m guessing you have, too.

Good debt vs Bad Debt

I’ve seen this topic come up more often lately and I wonder why.

Having learned about personal finance in business school, we’ve been taught the power of leverage and of debt financed growth. Both receive a bad rap, but the most helpful way I can explain them is that being able to afford a home with a mortgage is a good thing.

But, I get it.

Some say all debt is bad.

Some say all debt is good (I’ve seen it argued).

I’d imagine most people fall into a bucket where they classify some debt as bad and some debt as good.

I’m in this camp since I see a car loan as bad debt but, as mentioned above, I see mortgage debt as good. It isn’t great to have mortgage debt, but it is good because the debt enabled someone to purchase the home in the first place. If everyone was required to have the full purchase price without being able to take on a mortgage, then only the elites could afford homes.

So, we can conclude:

No debt is great.

But, debt can be good if it is an investment in income producing assets such as education.

Remember, good debt doesn’t mean we can ignore a financial analysis of our ROI. Good debt doesn’t mean you can take it on blindly without understanding your opportunity costs.

Labeling it good debt and closing your eyes is the wrong way to cope with debt.

Which brings me to my 2nd point:

Appreciate Debt as a Motivator

I’m not saying you have to like it, but debt often has the ability to wake us up. Once we have that extra bit of clarity, we can see through that consumer matrix and realize what truly holds  value to us.

A lot of people give themselves credit for developing financial habits that help them crawl out of debt. What I see less and less of, is people appreciating the fact that the mountain of debt created enough pressure for them to pull it together in the first place.

That one “aha,” moment often comes from saying, “enough is enough.”

Ideally, we can learn the lesson without the debt, but as in my case, debt served as the spark.

My story began when I wanted to teach myself how to never be in a financially stressful situation.

So, if you’re not motivated I hope you don’t take this the wrong way! I’m not suggesting to take on debt to find your motivation.

Far from it.

I’m suggesting we give debt its credit. 😉

Debt as a Hedge Against Inflation

The last piece of good news out there is debt serves as a powerful financial tool. If you have debt, then you are actively hedging against inflation.

Hypothetically, if inflation were to shoot up, then everyone will likely receive an equally weighted increase in their salaries. The principal amount of debt stays fixed and will not rise in such an environment. Interest rates may fluctuate, but the amount you owe will not change due to inflation.

This is the same piece of wisdom people tout about when it comes to paying their last mortgage payment. In the beginning the mortgage payment might appear huge, relative to your budget. Over time, thanks to inflation, the last payment is often very small relative to our budget.

Conclusion

Not all debt is bad, especially debt that can help us obtain income producing assets such as an education. Even if we have bad debt, then let is serve as motivation to never face that financial stress again.

Worst case scenario, debt will always serve as a hedge against inflation.

How has debt helped you in the past? Any other tips or tricks for overcoming the stress associated with having a mountain of debt?

-Matt

12 comments… add one
  • Mrs. Picky Pincher Dec 19, 2016, 7:23 am

    We’re in the process of conquering $225,000 of debt (including a mortgage). Credit card debt is what convinced us to strive for FI in the first place, so I have debt to thank for lighting a fire underneath me. While debt’s something to be avoided, I don’t think our society as a whole will ever be completely debt free; I’m not sure that would be a good thing, actually. But for me personally, of course, debt freedom is going to be awesome. 🙂 We’re set to retire by the time I’m 35 if all goes well, and I have credit card debt to thank for that.

    RIP, $10,000 credit card debt. 🙂

    • Distilled Dollar Dec 19, 2016, 7:35 am

      I agree! Debt is a part of our lives, and while getting out of debt is a great personal journey, I don’t think everyone everywhere will ever hit that goal, all at the same time…or at least I hope not! 🙂

      We have a bit of consumer credit overhanging out heads after our recent engagement. Looking forward to having it all gone in the next few months!

  • Roadrunner Dec 19, 2016, 9:39 am

    I totally agree with the above. Generally I hate debt apart from mortgage (which should also be chosen wisely, not maxing out your limit etc.). But hey, if I find a great deal that could guarantee me 50% return, what’s wrong with a 30% cost of borrowing (I use big numbers on purpose)?
    The main problem is credit card debts as you also point out. High interest rate plus consumed or depreciating assets are not a good combination…

    • Distilled Dollar Dec 19, 2016, 11:09 am

      Well said. I’m glad you built in a large enough moat on your big numbers. Even if the house returns “only” 35%, you’ve still covered your cost of borrowing and are making money.

      Mortgages also offer an opportunity to buy a large asset with little down. I can’t exactly put a downpayment on a large index fund purchase so the opportunity cost equation changes with housing.

  • Financial Panther Dec 19, 2016, 2:14 pm

    Obviously, I’d have preferred to have never been in debt before, but I can say that it definitely proved that I don’t need to spend a ton of money to live perfectly fine. Really, crushing that debt off quickly opened up a ton of doors for me and motivated me to leave a job once I had the debt cleared. So as a motivator, debt isn’t so bad.

    • Distilled Dollar Dec 19, 2016, 4:48 pm

      That’s encouraging to hear. Sadly, that pressure can serve as a prerequisite to greater things down the road (myself included).

  • T@TheTirelessWorker.com Dec 20, 2016, 2:46 am

    Interesting article Matt!
    I never thought to view debt as a hedge against inflation, but I must say this is really true and it makes me feel a little bit happier to have debts. Jokes aside, I think the best way to start eliminating debt is to have a plan, how much you will pay every month to reduce your debt. I know it sounds boring, but it works!

    • Distilled Dollar Dec 20, 2016, 6:53 am

      I don’t expect any crazy rates of inflation, but nice to know if anything happens, at least my debt will erode on its own. 🙂

      I agree that the first step is making that mental decision that enough is enough. If we’re not committed to seek out an end result, such as eliminating debt, then we’re bound to get swept up in another direction. Having that game plan helps us stay centered on the path to overcome debt.

  • PeterB Dec 20, 2016, 3:03 am

    Totally agreed. You can classify debt as good or bad based on its purpose. Buying a home, pay for education, funding a business, buying assets, even I can imagine some situations where a car loan can be considered as good debt. The important thing is that the decision behind it should be rational. Good examples could be:
    -buying a reasonable car vs buying a truck for commute
    -buying a medium sized house for a family vs a mansion for two people
    -paying for an “elite” education vs an affordable and similarly good one without the hype

    • Distilled Dollar Dec 20, 2016, 6:50 am

      Well said. Those are great reasons for debt. I even agree that a car loan COULD be considered good debt, depending on the circumstances.

      Thanks for the comment!

  • Full Time Finance Dec 20, 2016, 9:15 am

    Debt is but a tool. Leverage can get you bigger returns or cost you your nest egg. Overdoing debt can bury you. Ultimately I view this one as a personal question. Your reaction to the usage of debt, self control, and risk tolerance define the way you should utilize debt. In my case we use debt when returns exceed the cost of debt on like risk profiles. Others with higher tolerance might leverage low risk mortgage debt for investments in stocks or real estate. On the other end of the perspective we have those at need to be debt free as it becomes a spiral. On the bad size some people use it as a crutch which ultimately undermines their financial security.

    • Distilled Dollar Dec 20, 2016, 3:50 pm

      I wish the word leverage wasn’t so damaged by the Great Recession, since, as you put it, leverage can be a powerful tool to help us. Of course, there’s the bad end of the spectrum, but sometimes the right debt is exactly what’s needed for an individual to get to the next step.

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