If you’re like most Americans, you probably have debt. But don’t worry, you’re not alone. In fact, according to a recent telephone survey of 1,004 U.S. adults conducted by Harris Poll on behalf of the American Institute of CPAs, nearly three-quarters of Americans are living with debt driven by factors like everyday expenses, a lack of income, mortgage costs and student loans. More concerning is the number of Americans whose debt is making them anxious, keeping them up at night and causing problems in their relationships.
I sat down with Dr. Sean Stein Smith, CPA, member of the AICPA’s National CPA Financial Literacy Commission, to talk about how financial planning can help Americans whose lives are negatively impacted by debt.
Jonathan Lynch: For many Americans, living with debt is a mental as well as financial burden. In fact, because of their debt, three-in-ten Americans admit to stressing about everyday financial decisions. For those who feel overwhelmed by their debt, what steps would you suggest they take to take back control?
Dr. Sean Stein Smith: The first thing to realize is that if you are worrying about debt, you are not alone, and this is nothing to be ashamed of. It doesn’t matter how much money you make – there are steps you can take to get back in control.
- First, get your debt organized, meaning make sure you know what how much you owe, and who you owe these dollars to. If you aren’t organized, the odds of getting your finances in order shrink dramatically. Figure out what expenses you absolutely must pay every month. These can include rent and insurance payments, versus variable costs which can include vacations and other travel. Making sure you have enough to cover these fixed costs is good business, and good for your personal finances.
- Second, determine which type of debt you want to pay of first. There are different options out there to consider. Paying off the debt with the highest interest, chipping away at the largest total amount or starting with small debts to build momentum are all valid strategies. Figure out which one works for you and your lifestyle, and commit to it.
- Third, stick with it. Building up this debt didn’t happen overnight, and paying it off won’t happen overnight either, but it’s important that you stick with it. It’s a marathon, not a sprint.
SS: Money, and talking about money, is a topic that is jam packed with stress and potential tension, and this can be connected to family history, past experiences or other issues. That said, it is always important to talk about money, and how to manage it, with your significant other. Much like how “monsters” under the bed aren’t as scary when you actually look under the bed, talking about finances isn’t as scary or stressful as you might think. Money is a tool that can allow you to get more of the things and experiences that you want to get out of life. Getting a better handle on your money will allow you to do the things you want to do with life, so having a tough conversation now will set you up for better conversations, and a better life, down the road.
JL: It is often said that investing in yourself, be it through education or professional enrichment, or investing in real estate, is good debt to take on. How would you advise someone approach taking on ‘good’ debt?
SS: This is a very important point to understand. Debt, by itself, is neither good or bad, but instead is a tool that can allow you to purchase items, experience things, and learn things you might not have been able to do so otherwise. Before taking on any significant debt, however, I recommend taking the following two steps. First, put together a plan that compares the debt you will be incurring versus the benefit you plan to get out of this debt. Second, and especially important, is to have someone else, whose judgement you trust, take a look at your plan. If it passes these steps, then you can start putting together a budget to not only borrow these funds and take on this debt, but to also start thinking of how you are going to pay it back. Investing in yourself is great idea, but like any investment you need to have a plan to maximize the benefit while minimizing the downside.
Debt doesn’t have to be a source of relationship tension or anxiety. For more tools for getting debt under control, visit the 360 Degrees of Financial Literacy website for budgeting calculators, articles about debt malmanagement and a number of other free resources developed to help you, or your clients, on the way to living life debt-free.
Jon Lynch, Manager, Public Relations, Association of International Certified Professional Accountants
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Originally published by AICPA.org