According to study by Northwestern Mutual and a CNBC report, the majority of millennials between 25 and 34 have over $40,000 in debt.
Contrary to popular belief, most of that debt does not come from student loans. Credit card debt, housing, and payday loans take up a huge portion of a typical millennial’s wallet.
However, student debt is, indeed, a significant factor cutting into the buying power of millennials.
According to 2018 statistics from Nitro, over 44 million Americans have student loan debt with an average of over $37,000, which could keep millennials from making major purchases or crossing life thresholds.
With that $37,000, you could make a 20% down payment on a home valued at $185k, start a business, afford a wedding and reception for 150 guests, or buy a Tesla Model 3 car.
While money doesn’t have the same purchasing power as it did in previous generations, and U.S. wages haven’t kept up with economic growth, the economy isn’t the only thing to blame.
Poor spending habits and financial decision-making are also significant factors in why millennials face so much debt early on in life. If you are faced with excessive debt, regardless of your age, but especially if you’re under 35, here are some suggestions that are within your control and can help to clear your debt.
Prioritize What To Pay Back First:
Not all debt is created equal.
If you're trying to climb your way out of debt, it's best to tackle items with high interest and expensive monthly payments first. Paying items with high-interest and monthly payments keeps them from potentially halting progress.
Sort interest you're paying on credit cards from highest to lowest and pay off high interest debt first. Pay closer to the minimum on remaining payments until you have the funds to cover more.
This is known as the Avalanche Method.
Alternatively, the Snowball Method is a means of clearing debt by paying off the small-interest payments first. Using this method, you will see fewer overall bills because you’ll be able to clear low-interest debt quicker. In the long-run, you will pay more in interest using this method, but it can help keep you motivated by reducing the amount of bills you have altogether.
Pay More than the Minimum Balance
The more money you pay per month, the faster you will pay back your debt. Making the minimum payments on your credit card balances will only push you further into debt as the value of interest adds up.
For example, if you made a $5,000 purchase and only made payments at the 2% minimum, with a standard interest rate of 18.9%, it would end up costing you nearly $20,000 (4X as much) and take over 30 years to finally pay off the debt.
Interest does not take effect until after the first billing cycle. In other words, if you don’t have your balance paid off by the end of the month, you will be charged interest on the remainder.
To avoid paying interest, it is best to limit your purchases to things that you can afford to pay off in full each month. This practice will limit your overall debt and help you avoid the compounding interest trap.
Cut Back Where You Can
While spending less money on food and concert tickets will help your budget, cutting back doesn’t have to mean spending less on hobbies and fun.
Your necessary expenses will likely have alternate options that are more cost-effective. How much do you spend on car insurance? Groceries? Clothing?
If you can find cheaper alternatives of the same products and services you already buy, then switch to them. Even if your savings are small, those small savings add up, and every penny counts. The money you save in one area can be used to pay back debt or grow your savings.
A debt consolidation loan is money lent by a financial institution that you use to pay multiple outstanding debts owed to various sources.
Typically, with credit card debt and small personal loans, the interest rates can be much higher than alternative loan types. If you have debt with numerous lenders, it can make financial sense to pay off the initial debts and consolidate into one easy monthly payment with a more beneficial interest rate.
Build a Motivational Support System
Positive reinforcement and rewards are essential to any self-improvement system. There is no reason why you should not apply this philosophy to paying back your debt as well. Treating yourself with small rewards can be a helpful way to stay motivated.
Whether you’re just finishing school, looking to build a better budget, or just interested in learning how to save better, Florida Credit Union has the tools to help you budget. Stop into your local branch today for a free credit score review. All FCU members are entitled to a comprehensive overview of their credit free-of-charge. Allow us to help you get your score into shape and provide you with all the necessary tips to keep it strong.
To learn more about budgeting for millennials, read our suggest tips in our previous article “Financial Tips for Recent College Grads”.