Learning to Live With Debt

Debt may be a part of your budget for decades to come. Establish a plan for managing it wisely.

In an ideal world, you would pay cash for everything. In this world, however, taking on some debt is often necessary—and that’s especially true if you’re a young adult trying to get by on (hopefully) the smallest paychecks of your career.

See Our Slide Show: 10 Reasons You Will Never Get Out of Debt

Alas, the fight against debt is a lifelong one. According to a 2012 report by credit reporting firm Experian, the average 19- to 29-year-old has nearly $35,000 of debt. That figure balloons to more than $100,000 for those age 30 to 65 before coming back down to $38,000 for Americans who are 66 and older.

Young adults who learn now how to reconcile big costs with lesser pay can free themselves from debt sooner—and prevent debt from overwhelming them along the way. "You have to be strategic," says David Weliver, founder of MoneyUnder30.com. "The debt is going to be with you for a little while, and you need to take a planning approach in which you're constantly vigilant and making progress but not prohibited from enjoying life."

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Nothing to Fear

Not all debt is all bad. "We don't need to be overly afraid of debt," says Karen Carr, certified financial planner with the Society of Grownups, based in Brookline, Mass. "It can make sense in a number of different situations." For example, how many people could cover 100% of home-buying costs up front? Seriously, even squirreling away a 20% down payment is a big challenge, especially for young people today.

Instead of forgoing all forms of debt, be reasonable about what you can afford to take on and whether it's worth it. Before you get a loan to, say, go back to school or buy a house or car, understand what comes with it, including when you need to start repaying, what your interest rate is and other repayment terms.

Credit card debt is a different kind of beast that should be avoided altogether. Keep in mind that credit cards themselves are not necessarily the problem. Actually, they can come with opportunities to save. "When they're marketing, credit card companies want you to feel like it's a smart decision to spend on a credit card. And for a highly disciplined, highly controlled person, it is," says Nick Clements, co-founder of MagnifyMoney.com and a former banker. "You can earn cash back or miles, you get all kinds of fraud protection, and if you pay your balance off in full every month, it doesn't cost you a dime."

That if is the key. Handling a credit card responsibly—using it in moderation and paying it off each month—is good. Not only does it save you from ever having to pay interest, it also helps you build up a solid credit history and improve your credit score. Carrying a balance, on the other hand, is detrimental to your finances—and it's an easy trap to fall into. "For most people who end up in credit card debt, it's death by a thousand cuts," says Clements. "It's not one big purchase; it's an extra $10 here, $20 there, and all of a sudden you've got $4,000 worth of debt and you don't even know where it came from."

To avoid this slow demise, you need to have a budget you can stick to. Keep your big costs, such as rent, as low as you can and well within the means of your entry-level paycheck. (Kiplinger suggests limiting your spending on rent, utilities, and home or renter’s insurance to 35% of your after-tax budget.)

And be honest about what you'll spend your money on. "We always underestimate other expenses," says Clements. "You need to be realistic about what you're going to be doing in your social life and whatever it is that's important to you. Whether it's collecting stamps, going to the bar or the gym, or traveling, you want to set yourself up so that you have enough money to do that." (See How to Create a Budget.)

Paying It Off

If you're already on the hook, inventory all your debts and be sure to fit at least the minimum payments into your monthly budget. "If you're having difficulty meeting the minimum payment, that's the time to call your loan servicer and discuss different repayment plan options," says Carr. It's better to address any problems you might have as soon as possible rather than ignore them and risk racking up penalty fees or dragging down your credit score.

Once you've figured out all your minimum payments, see how much extra you can afford to pay, and make a plan to speed up your debt clearing. (See our Get-Out-of-Debt quiz to learn valuable lessons in building a debt-reduction plan.)

Student loans are likely at the top of your debt list: 60% of 2013 college grads borrowed money to pay for school, and their loan balances averaged $27,300 at graduation. You have a number of repayment options when it comes to this debt. The Department of Education's repayment calculator can help you explore your choices. You might also consider the possibility of refinancing your private student loans. (It's possible to refinance federal loans, but doing so would mean losing certain allowances, such as the option for income-based repayment. Consider carefully whether this route is worth it before you proceed.)

Paying off your credit card debts will likely be your next priority. Carr helps her clients by calculating how long it will take them to clear the debt if they pay only the minimum. "I think once you put actual numbers to this decision, it makes it a lot easier to understand," she says.

Going by the calculations, paying off the cards with the highest interest rates makes the most sense. The sooner you pay those off, the more you'll save in accrued interest.

Another strategy is to tackle the smallest balances first. The thinking is that clearing away even a little debt can build the momentum necessary to keep tackling more and more debt. Weliver, the founder of MoneyUnder30.com, used this strategy when he successfully cleared about $80,000 worth of debt from his life in just three years. "A lot of debt payoff is psychological," he says. "Progress takes months or years, so anytime you can have a little positive reinforcement and close out a small debt and see a zero balance—that's what kept me going."

Also consider refinancing your credit card debt. If you had a card in college, Clements notes, it likely has a high interest rate and few rewards. You may be able to transfer that balance to another card for a better deal. The Chase Slate card is a good choice. It has no annual or balance-transfer fees for the first 60 days and a rate of 0% for the first 15 months. (See Be Strategic With Credit-Card Balance Transfers.) You can find other options at Clements's MagnifyMoney.com, as well as Bankrate.com, CreditCard.com and other sites.

However you prioritize your debts, don’t live too austerely in an extreme effort to pay everything off. It's better to be honest with yourself about the things you'll want to splurge on from to time to time and work that spending into your plans. For example, even when he was in full-on debt-attack mode, Weliver gave himself allowances for traveling to see friends. He even took a big trip to Sarajevo to attend the wedding of his now-wife's college roommate. "It was a setback; I had to pay for the trip instead of paying down debt," he says. "But it was a once-in-a-lifetime opportunity. Of course I don't regret it."

Stacy Rapacon
Online Editor, Kiplinger.com

Rapacon joined Kiplinger in October 2007 as a reporter with Kiplinger's Personal Finance magazine and became an online editor for Kiplinger.com in June 2010. She previously served as editor of the "Starting Out" column, focusing on personal finance advice for people in their twenties and thirties.

Before joining Kiplinger, Rapacon worked as a senior research associate at b2b publishing house Judy Diamond Associates. She holds a B.A. degree in English from the George Washington University.