Understanding Debt
Understanding Debt
Debt is often a difficult subject to discuss: as a financial tool, it can be leveraged to help you take advantage of new opportunities—but it can quickly become a burden that stunts your financial growth or puts added stress on your life. The Imagine America Foundation has compiled some of the most important information to help you navigate taking on debt, paying off debt, and how to use debt to maintain your overall financial health in this edition of our financial literacy series.
Borrowing Money
When you’re ready to find a career training program to help you on the path to a new job, you may not be prepared to pay for that straight out of your bank account. Borrowing money can allow us to pursue opportunities and items that would otherwise be out of our reach. The trick is to know how much money you can reasonably and sustainably borrow without putting yourself into a big hole and wreaking havoc on your financial future.
Any time you consider borrowing money, there are a few key factors you should definitely pay attention to: the loan amount or credit limit, the repayment schedule, the interest rate, and the fees. It can be tedious and confusing to read the fine print, but it’s worth the time and trouble upfront to go through it and to ask questions before you sign. Having a good understanding of these details can make all the difference in knowing what to expect when it’s time to pay back those funds—and help ensure you don’t borrow more than you can comfortably handle.
Repaying Money
Hopefully when it’s time to pay off your loans or your credit line, you’ve done your homework so there are no surprises and you didn’t borrow too much so you don’t feel overwhelmed by the road ahead. Often, that’s just not the case—but don’t lose hope! It can feel daunting when faced with that first bill after graduation, but we’re here to assure you that there’s a light at the end of the tunnel.
You might feel tempted to ignore the situation or choose to skip a payment, but it’s best to always keep paying no matter how small a drop in the bucket it might seem. Get into a routine and make sure all your loans (and any other debts) are included in your budget so that you’re always prepared to at least make the minimum payment every month. When you can, start paying more than the minimum and your payment plan will snowball until it’s gone!
Debt and the Big Picture
There is a standard rule of thumb that you shouldn’t spend more than 30 percent of your monthly budget on housing, whether in rent or on a mortgage. Similarly, you should aim for no more than 20 percent of your monthly budget being required for debt or loan payments. If you’re able to commit more resources toward debt to pay it off faster, that is always a great idea—but this should be the minimum. If your minimum payments make up, say, half of your monthly budget, that leaves you very little margin when unexpected expenses arise or if you want to treat yourself to something outside your standard budget categories.
It can be easy to think of your student loans and other debts as a problem for the future, but doing a little extra homework and a little extra legwork in the beginning can help make repaying your loans feel like a breeze once you’ve graduated and have started the next chapter of your career.
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