I have debt.
A few years ago that sentence would have sent me into a total tailspin. I was always so adamant about not carrying credit card debt (still am, btw) and I even bought my first car in cash. Debt was not a part of my financial life.
But right now, it is.
I’ve always avoided writing about debt before now. As someone who never had it, I much preferred to let other people tell their stories, and I didn’t feel like I had anything to add (…because I didn’t). Not to mention, every debt story I heard was a bad one, and the people telling them were so, so, so excited to be out of debt. I wasn’t going to contribute from my “I’ve never had debt” perspective, but I was happy to listen and learn from them.
Of course, going into debt, I assumed I’d feel the same way as my personal finance friends, and want to prioritize paying down debt above all else. This was my chance to experience what paying down debt was like! I was going to crush it! I was so prepared!
Paying off debt isn’t what I expected
I never could have predicted that I would be totally chill about my debt, especially given that I am an aggressively un-chill person in general, and especially when it comes to money. But against all odds, that’s been my reaction more than anything.
Having debt kind of feels the same as not having debt, which is a bit unnerving. It made me feel like maybe I was doing money wrong, like maybe I missed some crucial memo that I should be panicked about this.
But the more I thought about my reaction, the more I realized that I wouldn’t be reacting this way in every situation involving debt.
The first type of debt: unplanned
For example, if I found myself with a credit card balance that was going up every month, I would not be calm about it. It would be a sign to me that something had to change ASAP, and would serve as a clear warning sign that the balance between “money coming in” and “money going out” needed to shift.
That type of debt—unplanned debt—I wouldn’t be chill about, and I think that’s most of the debt people write about trying to get out of. It makes sense, because having the support of an online community as you make those changes, and adjust your money systems, is huge.
And controversial opinion coming in hot: I think most student debt falls into this category as well.
Say what you will, but I don’t think any 18-year-old really understands what it’ll feel like to start paying off $25,000 (or more, or much more) on an entry-level salary. I think that realization, when your debt repayment kicks in after school, is definitely unplanned—as is the impact it’ll have on your money while you repay it.
So if you’re hustling to pay down credit card debt, or student loan debt, my reaction probably feels unnerving chill, like I very much did miss a memo somewhere.
The second type of debt: planned
But not all debt happens to you. Debt is a financial product, and just like any financial product, it can get you into trouble if you use it poorly—but that doesn’t mean it’s inherently evil.
Right now, my debt is a car loan I’m sharing with The Fiance, and I feel really comfortable with our choice to use this particular financial product. We went into it with a clear, short-term payoff plan, and we’ll have the car paid off in under three years. We made sure to pay attention to the total cost first, and then figure out how that amount worked with our monthly budget and our payoff timeline.
Basically, this was an informed, planned decision to use a financial product, with a full understanding of the cost.
Do I think you can get yourself into trouble with planned debt? Yes, of course.
It’s far too easy to look at your monthly payments and think adding just one more isn’t a big deal, and end up stretched beyond your limit for years thanks to long payoff periods and rising interest rates. This is not carte blanche to take on whatever debt you want as long as you plan it.
But if you plan it well, make an intentional choice to use this financial product, and stay within your means… I don’t think debt needs to be a total panic emergency.
Exactly how I’m handling my debt
That doesn’t mean I’m not excited to pay off this debt, though. I’d love to get the $500 a month back in our shared budget, and throw that towards retirement savings in my RRSP instead—but I’m not abandoning my other goals to do it.
We made the choice to keep our payoff timeline short (and strict) as part of our debt payoff plan, and in most months, I’m comfortable with our payments being a good and realistic portion of our budget to put towards the goal of being debt free. We could have gone with much lower payments over a longer timeframe, but we didn’t—so most months, that’s all we do about the debt.
On top of that, when I have “extra” money, I put a portion of it towards the debt to accelerate our progress, save money on interest, and move up our debt-free date. For example, about 30% of my tax refund is going straight to the car loan—but notably, and obviously, that’s not 100%.
I still have other goals, and the biggest one is to build up my personal emergency fund. That’s where the bulk of my tax refund is going this year, and for the first time ever, I’ll have a fully funded emergency fund. Sure, that money could go towards debt if I wanted it to… but I don’t. Debt payoff doesn’t always have to be your sole and only priority, especially if you’re not comfortable abandoning your other financial goals.'Debt payoff doesn’t always have to be your sole and only priority, especially if you’re not comfortable abandoning your other financial goals.'Click To Tweet
You might be! Which is just as legitimate a choice, but it’s always going to be a personal choice.
There’s no single right way to pay off debt
Even when you’re talking about the two really standard methods of getting out of debt, the debt snowball and the debt avalanche, there’s no single “best” way or “only” way to pay off debt. Sure, mathematically, you can find the most cost-effective way, but to do that ignores that we’re human beings who feel things and have thoughts that aren’t “maximize efficiency at all costs.”
Could I potentially save some money if I threw all my savings efforts at paying off the car loan, since the interest rate on it is higher than I’ll earn on my emergency fund savings? Sure. Would I be comfortable with the plan? Heck no.
It turns out, every wishy-washy email I’ve ever sent to readers who ask me how to tackle their debt is really what I would do in real life: “It depends, and I think you should do what makes you most comfortable, while still paying it off in a reasonable-to-fast way. Oh and don’t cut out your entire fun budget.”
Sure, there are some basics, with unplanned or planned debt, including:
- Understand how much your debt is going to cost you, and adjusting accordingly (high-interest debt is much more urgent than a line of credit with a reasonable rate, for example)
- Figure out how it fits into your financial priorities
- Make a plan to pay it off, and stick to it
- Understand how much you’ll save by paying it off early, and do that when you can
But if you’re doing all those things, and feeling like you missed the “panic” memo?
Don’t. It is possible to have debt, manage it, pay it off on a reasonable timeline, and not let it become your sole financial focus.
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Check out what “the experts” recommend you put towards debt every month with the One Minute Budget, based on your actual income (and a balanced plan!)
Hey Desirae, it’s great how you’re dealing with debt in a way that is practical and you can actually follow through with. Versus starting strong then losing steam, for example.
I personally will no longer get into debt as much as I can as I came from paying off more than 100k in debt in the last 7 years. (It was a relief!) But I can see how someone who goes into it mindfully with more self-control might find your approach workable. It’s too much of a slippery slope for someone like me though.
Btw, I have adopted your fun budget approach and I love it!
Thank you so much Daisy! And you’re totally right, this approach isn’t going to be a good fit for everyone – but yayayay fun budgets!
Didn’t you write about one of the best investments being in yourself? Wouldn’t student loan debt then in most situations be “good” debt?
I agree that you address the idea about taking debt seriously in regards to term and overall financial situation. In some cases taking out a car loan makes a lot more sense as you can get a favourable rate on a shorter term and putting up that much cash up front is not usually that desirable but most car loans are not naturally structured like that.
The issue with student loans and other low-key predatory lending is that the government (Canada) hands people a default setup of a 10-year repayment period with low(er) monthly payments. If you’re not that financially literate (which a lot of people finishing university aren’t) you will end up paying ~$6,000 interest over ten years on a $10,000 loan if you “take advantage” of the “grace” period. The grace period isn’t actually 6 months of “grace” though as the interest is still compounding at the highest principal of your loan even though there are no monthly payments required.
Take that same student loan of $10,000 dollars though and triple your monthly payment and you will pay ~$1,200 of interest over ~3 years. It is just kind of evil that there isn’t choice given to those who are financially illiterate on those terms and the average person just kind of accepts what is given to them.
The same thing happens in the auto industry where a lot of these loans are structured over 8 years meaning you spend almost 175% of the cars value with interest, almost paying for 2 cars over those 8 years. I wouldn’t say debt is bad but the people that benefit off of lending (banks, car dealerships, the government) are more than happy to give people low payments on debt that they realistically shouldn’t take on.
Anyways, debt isn’t always bad but I find that most institutions who dole it out tend not to care that much if it is good or bad. That approach is really only okay in the current era of cheap credit, but bad habits die hard.
I totally agree with this, Joel! And I definitely don’t think student debt is bad debt at all, just debt that I think people don’t fully understand the impact of until after they have it. Investing in yourself is so important, and over the long term, investing in your education can pay off in a big way! (That said… I know a lot of people who used their student loans to fund a whole lot of non-educational experiences, not realizing the impact it would have when they graduated, haha.)
No debt here except a mortgage, but there’s no rush to pay it off. Every once in a while I might throw a couple extra bucks at it, but never enough to make much of a difference in the balance or to hinder other spending & savings plans I have. Will it be nice to have it paid off? Absolutely! Does that have to happen overnight? No way, José!
By the way, does your dinosaur have a name? I really think it should! 🦖
Oh man, that’s the big challenge! (Naming the dino, not paying down the mortgage, although I guess they both qualify lmao.) I need to find something pithy and money-related but not too cute… I’ll keep you posted!
You make an excellent point about debt. Sometimes it’s an emergency that needs to be handled right away, and other times it’s a tool that’s part of a reasonable financial plan. I currently have three kinds of debt: my mortgage (at a low interest rate, plus I am making extra principal payments each month), my car loan (my last ever at a low 0.9% which will be paid off in July), and some credit card debt (dental expenses and a few other necessities). While credit card debt often falls into the emergency category, in my case I don’t feel that it does. The debt is decreasing, it’s at 0% interest, I have the money to pay it off at any time, and I actually received rewards on it. Really the only reason I have it at all is that it helps my cash flow. Thanks for pointing out that debt doesn’t always have to be a panic-inducing emergency.
Thank you so much Gary! You’re totally right, it’s always going to be situation-dependent. If people have the knowledge and tools to assess their situation, they can adjust as required!
Completely agree with your take on it. We had student loans that we just finished paying off and we have a small car loan remaining. Paying off the student loans was much more urgent to me, for many of the reasons you outlined here. Not only the higher interest rate, but also how he debt “felt” to me. The car loan doesn’t bother me in the same way. Of course I want it paid off, but I also want to invest at the same time.
Thank you so much Matt – and SO MANY CONGRATS on paying off the student loans! And high fives for balancing multiple financial goals 🙂
For sure agree that there is maybe an overcorrection afoot where “NO DEBT EVER” is the motto. There are going to be times and stages in life where taking on a little bit of debt becomes a priority, but it’s how you plan for and handle that, that makes the difference. Love your separation of planned v unplanned, and I happen to agree with the unpopular opinion re student debt. When you are an 18 year-old who hasn’t had the life experience to really know the difference between $10k, $50k, and $100k (they just all sound like so much!), it’s hard to have a real grasp on what getting into student loan debt is actually going to mean for your “real life” post-grad!
Exactly! I just think there’s no possible way you have the context required to really understand the choice – not to mention, you’re busy trying to make by far the biggest choice you’ve ever made, and it’s pitched as the one that will “decide your whole life”! 18 year olds have enough on their plate as is, lol. Thank you so much Laura!
I think moderation is hard. Especially if you’re a little too comfortable carrying high interest debt (19%). Still, agree with your point! Not all non mortgage, planned debt is bad. It can be a strategic product if you have a good plan.
I had a studen load (not much) that I didn’t pay down right away because it made more sense to save for a house.
Totally – this all only applies if you’re comfortable and able to practice moderation with debt! Everyone has some things that are best kept to an all-or-nothing approach (you should see me with a bag of chips) and if debt is one of them for anyone, definitely aim for none, not all!
I couldn’t agree more that a lot of student debt is unplanned. I certainly had no idea what I was getting myself into as a 19-year-old signing those OSAP papers for tens of thousands of dollars. Interestingly, my relationship with my student loan debt has actually evolved now that the balance has decreased. When I finished grad school with over $20,000 of debt in 2016, it was definitely “unplanned debt”. There was some serious buyer’s remorse and I had no idea how I had gotten myself into this mess. I was definitely not chill about it, and worked and hustled and budgeted to pay it down, and fast.
Now that the balance seems so much more manageable (just over $3,000), the interest I am paying is minimal, and I know that it will realistically get taken care of in the next six months, I feel so much better about it. And I don’t feel this fire to get rid of it. To me, maintaining this balance is now planned debt – debt that I am intentionally maintaining because I could really use that $3,000 for other savings goals right now. Actually have a post on all this coming next week!
Love how you broke this down, Des, thanks for a great read as always!
Choosing whether to pay off debt or save can be an “it depends” answer! But truthfully it’s one of those questions that deserves a: yes and yes. Yes you should pay off debt and yes you should save – which is exactly what you are doing. Managing to do both – instead of one or the other ensures you are taking care of both sides. Money things require balance and a plan.
This is such a refreshing post – I’m so tired of every financial blog saying the exact same thing. I have a car loan and student loan debt but do I really have to live in my parents’ basement, bring peanut butter and jelly sandwiches to work every day and deny myself any fun until I get it paid off in order to have a solid future? No, I don’t think so. I don’t like paying interest but I also don’t think I need to pay off my debt in a panicked frenzy.
Thank you so much Bethany! I agree – you need to find what’s sustainable for you, and hey, for some people the extreme really does work long term! I’m just not one of them, lmao.
No panic needed. It is interesting that most any financial decision can be justified soundly. Probably rightly so. Many paths.
On the flip side, your loan allowed you to spend more on the car than you would have. That in itself is also probably OK. But, you will likely repeat that overspend 5-6-7 more times in your car purchasing years. It tends to add up. You can justify the next purchase because your loan worked out fine the last time.
Also, your car value is dropping by ~$300 due to depreciation. So, you are paying interest, spending more and the car value is dropping like a rock (especially the first 3 years). Triple whammy.
Lots of considerations. 🙂
Hey Wade, thanks for the comment! I might not have been clear on how we approached this, but we set a budget for how much we wanted to spend on a car before looking at cars, planning how we’d buy, or taking out a loan—so in this case, we didn’t spend more because we were borrowing, and actually spent about $4K less than our max budget. I get that it can be much easier to be flexible when you’re borrowing the money, but I think having your budget locked down ahead of time is a key part of using debt responsibly!
Plus, we bought used, so luckily, a big chunk of depreciation is already taken care of 😂 although because I include it in our net worth, alongside the loan balance, I do update it based on market estimates every few months, and you’re right that it shaves at least $100 off the value monthly! Depreciating assets, man. They’re the worst, lol.
I’m much more chill about our debt than my wife. However, she feels a lot better about it since I can show her we’ve paid of around $80k over the past year, with “only” $90k to go.
Most of it’s mine in the form of student loans. I definitely took more than I needed – which was a huge mistake. The rest is her home, which only has maybe $25k left.
While we’re rapidly paying our debt, we’re not starving ourselves to do so. We budget for fun stuff.