Today, debt has become one of the tallest life hurdles to overcome. Now more than ever, for many, debt accumulation begins during the college years or earlier. The culprit is often student loans, and depending on one’s circumstances, it is a matter of when and not if credit cards will become a part of the total debt. How can this trend be stopped? First, we must understand the issue: more often than not, debt starts to accumulate in view of lack of financial education. A possible solution is education and a total money makeover.
We Act Only When Necessary
Like most issues in life, it is best to understand debt before it becomes a problem – preventative care. However as humans, we typically wait until we have a full blown problem before we attempt to remedy a situation. With regard to debt and our financial health, we approach preventive care for finances in the same manner. Unfortunately, many delay the pursuit of financial education until they already have financial issues.
Debt, The College Years
If we look specifically at those in college, due to the lack of financial knowledge, debts are usually ignored until graduation. Upon graduation, most students are happy to reflect on what they have achieved. Years of study and hard work is rewarded with a degree, friends, memories and a mountain of student loans. The hope is that aside from the degree, new graduates have chosen a career path that allows them to financially support the life they seek. We know that this is hardly the case. For those who seek employment, getting the first job is exciting, but the salary may not be as exciting. The average salary for an individual holding a bachelor’s degree is about $45,000-$50,000 depending on the degree and area of study.
You’ve Got Mail
Whether or not gainful employment is obtained, within 6 months of graduation the grace period for student loans will end. The debts accumulated during college, in short, can no longer be ignored. The bills will literally be in your mailbox. Do not worry, even if you do not provide an updated address, the student loan servicers are typically very good at tracking you down to collect.
Six months following graduation when the bills begin to hit college graduates’ mailboxes, it is a terrible time to begin learning about money, and money management. For those who could not obtain gainful employment, you could not select a worst time. Yet, when the first bill to student loan borrowers turns up in the mailbox, this is the time when many millennials usually decide to learn about money management. Not by choice, but by necessity.
The Total Money Makeover
Graduation removes the luxury of student loan ignorance and the steady supply of play money. Graduation brings financial reality. This reality is beginning to force many millennials to address their financial situation head on. The financial reality is so stark that many millennials are not only aiming to address their student loans, but many are taking steps to be debt-free. For many, Dave Ramsey’s total money makeover has been a go to guide. The total money makeover is a complete mind makeover and a great start to making lifelong financial changes.
Total Money Makeover Principles
The total money makeover works by forcing you to be aware of your finances. This includes listing your debts from smallest to largest regardless of interest rate. Below is a short summary of the method:
- Step 1. Save $1000 for a starter emergency fund.
- Step 2. List your debts from the smallest to the largest regardless of interest rate. Make the minimum payments on all your debts except on the smallest debt. On the smallest debt, pay as much as you can. This is the debt snowball method.
- Step 3. Save 3-6 months of living expenses. 2020 has shown us how important it is to have at least 6 months of living expenses saved.
- Step 4. Invest at least 15% in a retirement account.
- Step 5. Save for children and college.
- Step 6. Pay off your home
- Step 7. Build wealth and be generous.
Your Situation Is Unique
As we can see with these steps, using the total money makeover, the majority of individuals after graduation will be stuck at step 2 – getting out of debt using the debt snowball method. This is completely okay because the goal is to be debt-free. Also, because you are paying off debt does not mean that you should not contribute to a 401K. This is true especially if your employer is providing a match. The total money makeover is a guide and it is best to apply it based on your situation.
The Goal To Be Debt Free
Ultimately, the goal is to become debt free and pursue financial independence. Focusing on paying off debt is important, as interest payments are a detriment to wealth accumulation. How liberating would it be if you were not tied to student loans and/or credit card balances? What would you do if money was not driving all your life choices? What if you could make decisions based on your happiness and not the financials? Your freedom can be achieved by applying a method that you will adhere to over time. Try to apply the debt snowball method to your debts. Find an extra income source and put all extra income towards paying down debt. Build your emergency fund and march toward financial independence.
Being debt free and achieving financial independence requires sacrifices. While you implement the total money makeover, for a while, you may experience no vacation, no eating out, skipping the coffee run, decrease subscription services, and may even have to cancel plans with friends. But this is a start to building the foundation for wealth accumulation. This is a journey that requires consistency. The end goal is to be financially free and financially resilient. Will you allow a night out with friends or your coffee habit get in the way of your financial progress? I think not.
Conclusion
Today, debt has become one of the tallest life hurdles to overcome. Now more than ever, for many, debt accumulation begins during the college years or earlier. The culprit is often student loans, and depending on one’s circumstances, it is a matter of when and not if credit cards will become a part of the total debt. How can this trend be stopped? First we must understand the issue: more often than not, debt starts to accumulate in view of lack of financial education. A possible solution is education and a total money makeover. Journey to financial independence with a method that works for you and your ever evolving financial situation.
Co-Authored by Paigemera A.
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