Eliminating Debt: Why it matters?

39% of Americans have unpaid credit card debt and 21% have student loans. Eliminating credit card and student loan debt is critical to building long-term wealth.

Why is Credit and Student Loan debt so bad?

Two reasons:

  • Financial Flexibility
  • Lost Money

Financial Flexibility

A good indicator of personal financial health is your disposable income. This is your income minus fixed costs (rent, debt payments, health insurance, taxes). Having a high disposable income means you can:

  • absorb unexpected expenses and events such as a job loss
  • switch careers more easily as your budget can handle a pay cut
  • proactively invest extra income to generate more disposable income

These contribute to a lower stress level and provide you with more personal, profession, and investing opportunities.

Some fixed cost likes taxes or health insurance are out of your control. Credit card and student loan debt are two you have control over. Eliminating these will give you more disposable income and financial flexibility.

Lost Money

The average student loan interest rate is around 6%. The average credit card rate is around 15%.

The point of investing money is generating a return. If you view paying off the debt as in investment it presents a great opportunity. You pay thousands of dollars in interest over the course of your loan. Eliminating that interest payment creates cash you would not otherwise have.

You may be tempted to invest because you can generate more return from stocks than you pay in interest on your student loans. Talented investors can do this. But this reduces your disposable income and financial flexibility. Further, there are few investors who can generate returns greater than their credit card interest.

How to eliminate credit card and student debt?

Convinced? Great, now you need to proactively work to eliminate credit and student loan debt. It is a good idea to create a plan. This post on creating financial plans is a good place to start.

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