Having Debt Doesn't Mean Your Financial Future Is Ruined: How to Manage It

Talking about money—with friends, with family members, with coworkers—can often inspire feelings of guilt and shame. It's understandable: Money is a touchy topic, and everyone's situation, goals, and opportunities are different. Talking to your friend with the well-stocked emergency fund when you're still struggling to figure out how to get out of credit card debt can make you feel inadequate or ashamed of your own spending habits. It's easy to feel like you're falling behind or not doing enough for your financial future, particularly if you have debt.

"Finances are often ranked as the top source of stress for Americans," says Ken Lin, founder and CEO of Credit Karma. "Financial distress—especially due to debt—can seriously impact how confident people feel about their financial well-being, but it doesn't have to."

Financial wellness is all about establishing overall financial health and learning how to successfully manage your finances. Doing so means you're well prepared for economic challenges, of course, but practicing financial wellness can also have positive mental health benefits, including boosted self-confidence. And contrary to what you may think, having debt doesn't necessarily inhibit your ability to have good financial health.

"It's OK to have some debt," says Brian Walsh, a certified financial planner with SoFi. "Really, when it comes to anything personal finance–related, there's no right answer for everyone."

Managing Debt Well

Having debt doesn't inherently prevent you from having financial wellness, but only if that debt is managed well: Letting debt get away from you is an obvious sign that you don't have your finances under control. Whether you have long-term debt—such as student loans or a mortgage—or you've recently accumulated debt because of financial challenges, your approach to paying it back can have huge implications for your overall financial confidence and financial wellness.

"If you are living with debt in a way that feels out of control or full of regret, then that can absolutely undermine your financial confidence," says Kimberly Palmer, a personal finance expert at NerdWallet. "However, debt is not always associated with negativity. Some kinds of debt help you achieve other goals, like student loans helping you pursue the life you want or a mortgage helping you get the home you want. It really depends on why you took on the debt and how you are managing paying it down. If you made a conscious choice to take on the debt and paying it off fits into your budget each month, then that can feel like a positive thing."

The key to managing any type of debt—even recently accumulated high-interest debt, such as credit card debt incurred after you unexpectedly lost a job or income—is making a plan to pay it off. (You must first stop accumulating debt, of course.) Even a years-long plan can boost your confidence in your ability to pay the debt back, thus boosting your overall financial wellness.

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Understanding That Not All Debt is Equal

The first step, according to Walsh, is to understand if your debt is a problem. "Not all debt is created equal," he says. Generally, any debt with an interest rate of more than 7 percent is bad debt, while anything with an interest rate of less than 7 percent is good debt. Paying off bad debt—referred to as such because it accumulates large amounts of interest quickly, thus increasing the total amount you owe—should take precedence over eliminating good debt completely.

Palmer suggests thinking of low-interest debt payments as just another monthly bill. At SoFi, Walsh recommends a modified snowball approach to paying off debt: Make the minimum payment on all your debt, and then work on paying down your smallest bad-debt balance first, even if it doesn't have the highest interest rate. Once that debt is paid off, move to the next smallest balance, and so on.

Mathematically, paying off debt this way can take more time than chipping away at your largest balance or highest-interest debt first, Walsh says, but it has more visible signs of progress, so people feel motivated and encouraged to continue paying down debt. It's important to stay motivated: A consistent, regular payment plan is the only way to eliminate all debt, and losing motivation halfway through your plan and giving up can erase all your progress.

Making it your mission to reduce the amount of debt you owe doesn't mean you have to sacrifice any non-essential spending, though.

"Paying off debts doesn't necessarily mean you always have to say 'No,'" Lin says. "Rather, it's about prioritizing your expenses in a way that still lets you enjoy your life while working steadily toward being debt-free."

All three experts agree that it's all about balance and moderation: You want to avoid accumulating more debt, but you can find a balance between paying down debt slowly and continuing to work toward other financial goals, such as saving for retirement, buying a house, or saving for a big vacation or splurge. Using a budget app like Zeta can help.

"Even when paying off debt you can still pursue other goals and activities," Palmer says. "You just have to fit your debt payments into your overall budget."

Limiting What You Borrow

The first step to achieving financial wellness while in debt is creating a plan to manage that debt, but that's not a possibility for everyone, particularly right now, when unemployment is at an all-time high and many are facing financial hardship. If you are currently accumulating debt to pay for essentials, there's likely little you can do until economic conditions change; in that situation, you want to take on debt intentionally and do everything possible to limit how much you borrow.

"Ultimately, it's about making it through the short-term while minimizing the long-term damage," Walsh says.

By minimizing how much you borrow, you reduce how much you have to pay back in the future, whenever you are able to make payments again. You also make it easier for your future self to continue to work toward other financial goals, goals that may have to be postponed for now. Accumulating debt can extend the time it takes for you to reach your goals, but it doesn't make it impossible, as long as you make a plan to manage that debt.

"It's not going to completely ruin everything in the future," Walsh says.

Financial wellness is all in the planning. Make a plan now, and your future financial health will benefit.