Debt can be a slippery slope. Borrowing money can play an important role in achieving a long-term plan or lifelong goal, but it involves risk. If not managed properly, debt can pile up and overwhelm you. If it reaches high levels, it can feel crippling, negatively influencing your mental health and outlook on life.
However, there is good news — no matter what your debt looks like today, there is always hope and potential for financial victories in your future. With May designated as Mental Health Awareness Month, we want to take this opportunity to address the realities of debt stress and share some tips to help you manage it.
What is Debt Stress?
Debt stress is the worry that debtors can experience when reflecting on what they owe. The obligation of paying back what’s owed and knowing the total amount due can cause physical, emotional, or psychological strain.
Why is Debt Stressful?
Unfortunately, debt and stress can go hand-in-hand, especially if your debt is poorly managed. It can feel overwhelming if you fall behind on payments and creditors or debt collectors keep calling you. Your debt stress can also affect other areas of your life. Dr. Moira Somers, a Canadian psychologist and family wealth consultant, said the following regarding debt stress:
“It depletes people, can make it harder for them to make decisions in the long run and to engage creatively in problem-solving in other aspects of their lives because all of their cognitive resources are being devoted to this financial scarcity problem.”
Debt Stress Syndrome
With mounting pressure to pay bills, there is even the possibility of experiencing stress-related illnesses. According to Credit Guard, the term “debt stress syndrome” is used in medical circles to refer to the state in which debt stress affects one’s physical and psychological health. This “syndrome” can involve the release of stress hormones like adrenaline and cortisol, which increases blood pressure, muscle tension, and heart rate. Along with physical symptoms, debt stress syndrome can affect your emotions, causing feelings of anger, irritability, and depression.
While the effects of debt stress widely vary, debt stress syndrome demonstrates the extent to which debt stress can impact your overall health and everyday life. Regardless of whether your debt is causing you severe pain like debt stress syndrome or just minor frustration, there are steps you can take to help manage it, which we’ll cover in the next section.
How Can I Reduce Debt Stress?
1. Come to Terms with How Much You Currently Owe
The average American owes over $90,000 in debt. Millennials have seen the largest increase in debt in recent years. CNBC reports that the average millennial had approximately $49,722 in debt in 2015, but by 2019, this amount grew to an average of $78,396 in total debt – an increase of 58%.
These numbers can seem staggering. Unfortunately, many do not realize how much they owe or refuse to acknowledge the realities of their debt. However, not coming to terms with your debt is a recipe for disaster. Ignorance is not bliss when it comes to debt.
To create an action plan to reduce your debt, you first need to know exactly what you’re facing. Add up all your debts to figure out how much you owe. Staring at this number can result in anxiety, but it’s the first step to coming to terms with your financial situation. It’s your starting point, not your conclusion!
2. Change Your Mindset
The saying, “treat yourself,” is often thrown around to imply that it’s okay for you to splurge and shower yourself with gifts and self-care. However, if you truly want to “treat yourself,” do so by eliminating your financial burden. If cutting back on lattes and eating out puts you in a better financial position, then yes — by all means, treat yourself by doing these things.
Improving your relationship with money starts with improving your mindset towards money. So, how can you do this?
Fear of the unknown can fuel your stress. If you don’t know much about personal finance, managing your money and reducing your debt can feel daunting. By learning the basics of personal finance, you can be more efficient and confident in performing common tasks like creating a budget, filing taxes, or paying off debt. Educating yourself about finances is one of the best things you can do because knowledge enables you to make informed decisions that will ultimately improve your financial health.
For tips on managing your finances, check out our Flare blog! You can browse through our articles to help improve your relationship with money, which also include articles about banking and saving money.
“Keeping up with the Joneses” is a trap we can easily find ourselves in. When continuing to compare ourselves to others, we make brash decisions just for the sake of attention. If this is an area where you struggle, you may want to consider removing yourself from situations where you feel tempted to buy something you don’t need. You can take a break from social media or unfollow certain accounts as you make progress towards your goal. Who knows — once you start seeing real progress, you may want to keep doing it!
3. Decide on a Strategy to Pay off debt
Making minimum payments on all your debt won’t yield positive results as interest quickly adds up. Paying less now just means you’ll ultimately have to pay more in the long run.
There are several best practices and rules of thumb that you can follow to help you avoid paying excessively on interest and even keep your credit score in good shape. For example, if credit cards are an area of struggle, paying your credit card bill in full each month and keeping your credit card utilization below 30% will keep your spending in check and help build or maintain a good credit score.
If you’re looking at large amounts of debt, there are plenty of strategies that you can utilize to start paying it off and getting it down to a manageable level. The two most common include the debt snowball method and the debt avalanche method.
Debt Snowball Method
You start by listing your debts from the lowest to highest amounts owed for this strategy. Every month, you will make the minimum payment on every debt except the smallest one. For that one, you will use whatever extra funds you have to make as large a payment as possible. The bigger the payment, the faster you will pay it off.
You will continue following this process until you pay off that first loan. Next month, you will add the funds you were paying on that debt to the next smallest loan. This strategy is great because it helps you achieve quick wins and see progress. You’ll see that your plan is working!
Debt Avalanche Method
You’ll focus on paying off debts with the highest interest rates first for this method. You will make minimum payments on the loans at the bottom of your list and put your excess funds into the debts with the highest annual percentage rates. As you pay off your loans, you will add the amount you were paying on the previous debt to the loan(s) with the next highest interest rate(s). These payments will grow larger and larger, avalanching toward the following loan. You will minimize your interest payments and steadily pay off all your debt.
4. Create Your Budget
Hopes and dreams won’t get you out of debt. Sure, they can inspire you and give you something to work towards, but it’s how you spend and save your money each day that will help you pay off debt and bring your goals to fruition. Your budget is where you put your plan into action. Here you’ll decide how much to spend on essentials, wants, investments, and savings. This is also where you’ll decide to cut back on spending so that you can reserve these funds for paying off debt. Once you’ve decided on your debt payment strategy (see the previous step), be sure to account for this in your budget.
There are plenty of budget strategies out there, and some are likely suitable for you. Fortunately, we compiled many popular budgeting strategies and explained the strengths of each in Budget Strategies to Try in the New Year.
5. Don’t Take on More Debt
Now is the time to get rid of debt, not take on more. If you’re reading this, you may already feel stressed with the debt you have, so why add to it? While there are certain instances in life when taking on debt is unavoidable and perhaps beneficial, there’s no point in borrowing money if you’re struggling to pay back what you already owe. During this time, you may benefit from avoiding paying with credit cards and sticking with cash or debit cards. That way, you won’t pay with money that isn’t yours.
6. Trust your Plan & Follow your Budget
Stress can come from an irrational place. Even if you’re following a solid budget and sticking to your plan, self-doubt can intervene and make you question your plan. However, sticking it out and trusting in yourself and the process will yield results. After a reasonable amount of time passes, you can evaluate your budget and plan based on concrete numbers rather than how you feel in the moment. Once you’ve reached this point, you can make the necessary adjustments. Again, don’t jump ship or abandon your plan based on emotion.
7. Take Care of your Mental Health
Basing financial decisions on pure emotion can lead to regret later, but it doesn’t mean that how you feel is unimportant. As you take financial steps to reduce debt, don’t neglect yourself along the way. Make sure you’re not taking away the things that bring you true fulfillment and happiness as you cut back on expenses. For example, if you love going to the gym and it’s a way for you to blow off steam and exercise, don’t cancel your gym membership. Find somewhere else to cut! Balance, moderation, and intentionality will lead to sustainability, and a sustainable budget and way of life will yield better results for you in the long term.
You’re doing this for your overall health, and that includes your mental well-being. If debt stress hinders you from experiencing joy, please don’t hesitate to seek the help you need. Whether it’s candid talks with someone you trust or consulting with a mental health professional, someone to talk to and share with can make all the difference. Please don’t do it alone!