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Many people assume that all forms of debt are inherently bad. This isn’t entirely true, as certain types of debt can help you achieve goals that would otherwise be outside your reach.
Some debtors are alright with taking on a loan if it pays off in the future. This could be the case if they need to fund their education or start a small business. It’s also common for people to take out loans when they need to pay unexpected medical bills in a short amount of time.
Characteristics of bad debt
The only time debt truly becomes “bad” is when it is managed poorly. If you don’t know how to manage debt, it can spiral out of control and put you in a far worse financial situation than before.
If you are burdened with multiple loans that you can’t pay back, it could be classified as bad debt. To make matters worse, some debt can balloon in a short amount of time due to the high interest rates on certain loans. People often take out high interest loans from payday lenders out of desperation and because they are easy to acquire.
It’s important to learn how to manage debt if you wish to use loans to your advantage, instead of being burdened by them.
Learning how to manage debt at each age
As mentioned earlier, taking out a loan can be beneficial in certain situations. Depending on your age and current financial status, your borrowing habits in the present may differ from your borrowing behavior in the future.
This is because people hold different levels of debt, depending on the present situation they are in. Financial needs often change with time and are subject to many factors, such as age, health, and marital status.
People who wish to remain in control of their finances during different life stages should learn how to manage debt at each age.
How borrowing behavior changes with age
Most people don’t take out loans until they are in their early 20s. This trend has been consistent for decades, and can be explained by the fact that the average person becomes financially self-sufficient at this age.
Living on your own and managing your finances is often a challenge for young people. In addition to the low starting salaries they typically receive, young adults have to deal with paying bills and managing a budget for the first time in their lives. This makes it tempting to seek out loans to ease your burden temporarily.
This borrowing behavior often continues past their 20s and into their early 30s. However, by this point, debtors typically have better paying jobs and have gained some experience with how to manage debt. Following this period, debtors finally start paying back their debt. Depending on their financial situation, this repayment process could take anywhere from a few years to multiple decades.
Differences in debt between generations
People from each generation take on some form of debt in their lives. However, the exact type of debt differs between generations. People born in the 50s and 60s tend to have more mortgage debt than the generation before them.
Individuals born in the late 60s and the 70s also possess mortgage debt, but it is usually overshadowed by the size of their student loan debt. Many people from this generation have started paying back their debt. However, it is still too early to determine how long it will take them to pay back their loans compared to earlier generations.
The current generation (i.e.: people born in the 80s and early 90s) will also have different levels of debt compared to the preceding generation. This is due to the greater popularity of student loans and lower rates of homeownership among millennials. Each of these generations will need to know how to manage debt if they wish to pay back their loans.
How to manage debt in your twenties
People in their twenties are less likely to practice good budgeting habits compared to older groups. They may spend a greater portion of their income on luxuries and non-necessities, which can lead to them accruing higher debt.
This group’s debt is composed primarily of student loans, with mortgages making up only a small share of their full debt. If you are in a similar situation, you can start managing your debt by setting aside money for retirement, and by also creating an emergency fund.
How to manage debt in your thirties
When you reach your thirties, your focus should be on avoiding new debt and paying back your current loans. This can be achieved by using your credit card less frequently and keeping track of your debt-to-income ratio. These practices are useful for protecting your credit score and keeping your new debt to a minimum.
People in their thirties should devote more time to financial planning if they wish to manage their debt. Large expenditures such as vacations and luxury purchases should be paid for using savings that were planned in advance. If your spending habits have remained good, you may be able to secure a low interest mortgage and build up your emergency fund.
How to manage debt in your forties
Many people start to tackle their debt in their forties. After all, this is usually when their salaries are high enough to allow for a significant quantity of savings to be set aside. A good approach to debt repayment is to target your high interest debt and non-tax deductible debt first. You may also be able to refinance your loans to get a better interest rate.
How to manage debt in your fifties
Reaching your fifties changes may alter your priorities again. This is usually when people aim to pay off their debt so that they can start saving for retirement. Concentrate on paying off your high interest debt before tackling your mortgage.
In some situations, it may be wiser to refinance instead of paying back your mortgage immediately.
How to manage debt in your sixties
People usually retire in their sixties. This means they no longer have an active source of income. If you still have outstanding debt, you will need to find some way to pay them off. Many people prolong their retirement until their debt are fully paid off, but still can be difficult for some.
Once you are debt-free, you should focus on budgeting so that your retirement savings last as long as possible.
How to manage debt with loan consolidation
If you are struggling with an overwhelming amount of debt, you can take out a debt consolidation loanfox
to ease the burden. These loans are offered at lower interest rates compared to credit cards. They can be used to pay off multiple high interest debt.