How to stay out of debt

Managing your money is hard enough as it is when you’re debt-free, adding debt repayments into the mix only makes things more difficult. Unfortunately, the average American debt (per U.S. adult) is $58,604 and 77% of American households have at least some type of debt.

If the thought of debt and credit card payments has you stressed out and you're looking for some peace of mind, then you've come to the right place. We're going to unpack what you need to know about debt and how to avoid it.

Finding proper help

For those of you struggling with astronomical debt payments that may be affecting your mental health or overall well-being, we would suggest contacting an expert or attending Debtors Anonymous. The repercussions of too much debt are real and can be very frightening. Our main priority is your peace of mind and well-being.

Debt can often feel overwhelming. Just the thought of it can be anxiety-inducing but we here at ZayZoon believe that with a proper understanding of good and bad debt, we can help eliminate both and hopefully avoid any unnecessary debt payments moving forward. 

In this article, we will define what exactly debt is and explore its many forms. We will talk about good debt vs. bad debt and when it's okay to take on debt. Then, we will provide tips to help eliminate your personal debt and how to stay out of debt once you’ve finally made it out. 

What is Debt? 

Debt is simply the state of owing money. The most common forms of debt are credit card, mortgage and student loan debt. Other common debts include personal loans and short-term high-interest loans. 

Going through life without enduring any debt at all is extremely uncommon. In a perfect world, you’d never need to go into debt or worry about paying back money you don’t have. But in reality, debt isn’t always necessarily a bad thing.

It’s okay to invest in education if it will help you develop skills to get you further and make you more money in life, and it’s fine to spend money you don’t necessarily have right now if it means buying a home for you and your family. 

Debt: an epidemic

According to the Federal Reserve Bank of New York, aggregate household debt balances increased by $351 billion in the third quarter of 2022. A 2.2 percent increase from 2022Q2. A number so high is almost unfathomable but is a true testament to how common debt is in the United States.

Odds are that eventually, you’ll have to take on some sort of debt. The important part is determining the difference between good and bad debt.

Taking on bad debt can be super stressful and this stress can bleed into many other aspects of your life. On the other hand, knowing the money you owe is considered “good debt” should actually bring you a lot of peace of mind. 

So, how do we better define good debt vs. bad debt? 

Good debt vs. bad debt 

People take on debt for many different reasons and believe it or not, debt can actually help people accomplish some pretty great things.

Most people wouldn't be able to take on post-secondary school or buy a home without owing some type of money. It's predatory loans and excessive spending that you need to be wary of.

Good debt

Good debt is something you invest in that will provide you with value in the long run. Some major forms of good debt would include paying student loans, mortgages or business loans.

Going to university or college, buying a home or starting a business would all be very hard without some type of extra money but each of these examples provides long-term value and will be beneficial to you, which makes them good debts to take on.

Smaller forms of good debt would include purchases necessary for your job, such as uniforms, tools, or other resources that are vital in helping you perform your duties to the best of your abilities.

Investing in your health and well-being can also get expensive at times but would be considered a form of good debt. Making sure you're healthy and comfortable provides tremendous long-term value to you and your loved ones.

You should always look to invest in your future, even if it means taking on debt. However, it's still important to make sure you're analyzing interest rates and ensuring you can make all your payments. High interest rates or an inability to make proper payments could potentially turn good debt bad.

Examples of good debt 

• May be considered an investment 
• Increases in value (mortgages, business loans, etc.)
• Makes life/work/school easier (uniforms, tools, etc.)

Bad debt

Bad debt is taken on when you purchase something that immediately goes down in value or when you make a purchase and don't have the means to make the proper repayments, leading to interest charges and more debt payments. Things like credit card debt with high interest rates or personal loans to pay off other debts would be considered bad debts and very bad for your bank account.

Defining what's good debt and what's bad can be an incredible relief if you're unsure and feeling overwhelmed.

The thought of debt shouldn't scare you but it should be something you always stay conscious of.

Examples of bad debt

• Not considered an investment 
• Decreases in value (the latest smartphone, a new TV, etc.)
• Excessive spending on non-necessities (a new couch, hot tub, etc.)

Eliminating debt 

Whether the debt you owe is good or bad, paying it off as quickly and efficiently as possible is always important. Although some debt is good, the goal should always be to eventually become debt-free and self-sustainable.

Once you've properly defined debt and the difference between good debt and bad debt, it's time to start focusing on eliminating it.

One of the three financial tips we live by here at ZayZoon is to eliminate debt. It starts with creating a budget that works for you, properly contributing to your savings account, and eliminating debt.

Even though we've written at length about the snowball method and avalanche method in the previously cited blog, here's a quick refresher:

The snowball method

• Pay off one loan at a time starting with the smallest overall amount

• Once the first loan is paid off, move on to the next smallest one and work your way up

Pros: Focusing on smaller amounts first will help you build momentum and get the easy stuff out of the way first.

Cons: Paying smaller debts off first isn’t the most efficient way of eliminating debt.

The avalanche method

• Pay off the loan with the highest interest rate 

• Once that’s paid, move on to the loan with the next highest interest rate and work your way down

Pros: Focusing on the highest interest rates first is the quickest, most efficient way to pay off your debt

Cons: Focusing on the interest rate can take more time and energy and won’t feel quite as rewarding as the snowball method. 

Avoiding debt

Eliminating debt takes a tremendous amount of time, energy and self-discipline but once you finally make it out, you'll likely want to avoid slipping back in. Similar to eliminating debt, avoiding it is much easier said than done but like most financial issues, staying conscious of your efforts and putting in the time will get you very far.

If you're fortunate to find yourself without mortgage payments or student loans, congratulations! This is a major accomplishment that should be celebrated but while you celebrate, try to avoid overspending and impulse buys.

Overspending or buying things you don't necessarily need strictly out of impulse can quickly add to your credit card balances. Avoid these unfortunate predicaments by staying mindful of your daily and monthly payments and expenses while sticking to your long-term goals.

Tips on avoiding debt

• Set up automatic bill payments to save time and avoid late fees. 

• Avoid buy-now-pay-later deals, they may seem like a good idea at the time but almost always lead to extra unnecessary costs. 

• If possible, leave your credit card at home. Using a debit card or cash may not always be the most convenient option when shopping for essential expenses but it should help you stay away from poor credit card habits that may lead you down a dark path.

• Align your bills with your pay periods. Contact your creditors and/or billers directly and see if there are any options available that may work better for you. Having your bills and pay period better aligned will help you avoid late fees and penalties. 

• Always check your statements. If you’re able to set up automatic payments and have your bills aligned with your pay period, it's easy to sit back and turn on cruise control. Don’t stress, cruise control is fine but make sure to check your statements at least once a month to make sure nothing weird is going on. 

Final Thoughts

The key to staying on top of your debt is balance. You shouldn't let the thought of debt consume you and take over your life but you also can't just hope things magically go away.

Make sure you have a good understanding of your interest rates. You should know exactly how much you’re paying, whether it’s compounded or not and what other options are available to you. If you’re not completely sure about any of these things, don’t be afraid to ask an expert any questions you may have. 

Look at your past mistakes and try to learn from them. Some unexpected expenses may be inevitable but looking back and analyzing what happened may help you better prepare for the future.

See what financial resources your school or employer may offer. Take advantage of scholarships and grants or see if they offer products like ZayZoon to help better manage and access money that you've already earned.