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How Much Is Your Debt Really Costing You?

This post is sponsored by Lexington Law.

Have you ever thought about how the debt you have today is going to affect you three, five, ten, 20 years down the road? Have you thought about the opportunities for growth debt might be holding you back from?

That for me was my main motivation to pay my debt off quickly. I was so tired of having to throw so much money towards debt every month. There were tears shed when I looked at my balances each month. I dreamt of *one* day being able to put that money into savings where it could grow. It could earn more money for me instead of costing me more money over time in interest payments. What I was yearning for was financial freedom.

There were trips I wanted to take, and things I wanted to save for — like a house and a family. Getting serious about paying off my debt and making a strategic financial plan helped me do it faster. Looking forward, I knew I wanted my debt gone as fast as possible. But even so, I never really thought about what my debt was costing me beyond that. After living debt free for four years, I’ve come to have a new perspective on what my life would have been like if I was still making those payments.

Today I want to dive into a few of those reasons. Hopefully, you will walk away from this with a renewed motivation to tackle your debt as soon as possible.

How Much Is Your Debt Really Costing You?

1. Money you could have saved and/or invested.

The best time to start investing money was 10 years ago. The second best time is now.

The more time you have to let your money grow and compound, the more money you will see from your investments. While there are many ways to invest money, one of the biggest things that comes to mind is retirement savings.

As part of the millennial generation, we can’t rely on pensions to help us in retirement. Many companies offer 401(k)s or equivalents, and you also have the ability to open an IRA account on your own to diversify your investments and supplement your plan. These are tax-advantage accounts which is awesome!  If your company offers 401(k) matching, you should in the very least contribute up to what they match — even if you have debt. Otherwise you’re losing out on free money!

Beyond that, though, imagine what you would be able to save if you didn’t need to make debt payments. At the very least you already know that you can live off of you income with your debt payments. You could be putting that money directly into your investment accounts and hardly notice a difference. That money will continue to compound for years, giving you financial freedom and the power to make choices that you want to make and not what you have to make giving your financial situation. And that is powerful.

Not to mention the money you are putting directly towards interest that creditors are pocketing! Some of my loan payments we’re almost 50% interest alone. That means only half of the payment I was making every month was going towards the money I borrowed in the first place. The rest was going straight to my loan providers.

2. Damage to your credit score.

Did you know that your utilization ratio makes up a whopping 30% of your credit score? This is the second biggest factor in determining your credit score. It’s also key because it’s what lenders use to predict future risk and behavior.

The utilization ratio is determined by dividing available credit by used credit to get a percentage. For example, if your credit card has a $5,000 dollar limit and you have charged $4,000 to the card, your utilization ratio is 4,000/5,000 or about 80%.

When it comes to utilization, both Line Item Utilization and Aggregate Utilization affect your credit score and could have a huge impact on your credit score. Your total utilization should generally not be higher than 30%. Read more here on how to keep your credit utilization low (tip number four is a my favorite). Having high utilization can be damaging for years to come, sticking you in a vicious cycle of borrowing and paying back far more than what you originally needed.

Your credit score might be taking a backseat for the moment, especially if you’re young. It feels like you have time to increase it and what does it even mean anyway? Well, for starters it can dramatically affect how much interest you’ll end up paying on a home or car loan (that’s even more debt, by the way). With a low credit score, you’ll end up with a high interest loan because lenders don’t see you as dependable. You being a higher risk to them essentially earns them more money. And that’s exactly what you don’t want.

If the time comes that you need to work on credit repair, the knowledgeable staff at Lexington Law are there to help you remove unfair negative items from you credit report that could be holding you back.

3. Delaying how you want to live your life.

Like I mentioned before, being debt-free is a form of financial freedom. You don’t owe anyone anything and can live on your own terms.

If you were debt-free right now, how would your life change right now? Do you imagine yourself moving out of your parents house? Are you buying your own home in a few years? Are you using your PTO and taking a two-week trip through Europe? Would you surprise your best friend with a weekend in Palm Springs? Do you want to be saving to take your family on a dream vacation in a few years? Would you be saving for early retirement?

Not having to put money towards debt opens up so many options for us. Life doesn’t have to look one way. And it doesn’t have to mean you are working just to pay bills.

Eliminating your debt also means you can be smarter about the debt you take on in the future. It means saving for a bigger down payment and a smaller home loan. It means buying a reliable used car — or your dream car — in cash. There are many ways that reducing your debt burden can rejuvenate your credit and financial life. Even taking small steps every few months can have a massive impact on your financial freedom later in life!

4. Financially pushing back life milestones.

The currently twenty-something generation has developed somewhat of a reputation for delaying traditional milestone. Getting married, buying a home, and starting families are just a few of the things that millennials are pushing off until they’re older.

One of the reasons for this, among others, is the debt we carry. We simply can’t afford to pay for $10-50k weddings. We can’t put 20% down on a $300k home because we are too busy scraping by. Though there are certainly external factors that contribute to this, I am a fan of the “do what you can with what you have” mindset. There is always going to be someone with more money than you, less money than you, more connections, a better education — but that doesn’t change the fact that you have the ability to move yourself up one step in life. We as a generation are redefining the “American dream” that previous generations strived for. Our lives look different, and our dreams look different. And that’s okay.

If it’s your dream to have a destination wedding, paying off your debt can help you achieve that on your own timeline. If buying a family home is on your three-five year timeline, aiming to reduce your debt quickly can help you reach that goal.

It’s true that you can’t go back in time and avoid taking out those student loans. You can’t return a car to the dealership like you would a sweater that doesn’t fit. But you know what? Any effort is better than no effort. Even small changes have a cumulative effect. It’s kind of like compounding your life, in a way. Every so often the action you take will cause your life to improve in positive ways.

Your next steps are to get clear on your financial goals and desires, reevaluate your budget, reduce your debt burden, save for retirement, and figure out which investing options are right for you. Your debt may be costing you a lot, but ultimately the price you pay can be in your control.

About the Author

Nicole Booz

Nicole Booz is the founder and Editor-in-Chief of GenTwenty, GenThirty, and The Capsule Collab. She has a Bachelor of Science in Psychology and is the author of The Kidult Handbook (Simon & Schuster May 2018). She currently lives in Pennsylvania with her husband and two sons. When she’s not reading or writing, she’s probably hiking, eating brunch, or planning her next great adventure.