Debt—when you break it down in its simplest form—is acquired by buying something now and paying for it later.
That means it has the potential to affect your future in a very negative way.
No matter where you are on the debt spectrum, from being fine with how much debt you have to drowning and looking for a way out, there are always thoughts of what you could be doing with the money you are putting toward your debt.
And while there are ways to use debt while also living comfortably and being on track with your retirement and other goals, most of us are not in that place.
Most of us have taken out what I call unnecessary debt, which is the type of debt that can keep you from reaching financial freedom now.
Unnecessary debt is debt that you don’t need to take out to pay for the things you need or want.
It’s the debt you use to finance a vacation over an 18 month period and then do the same thing to another vacation six months down the road.
It’s the debt you use to buy the vehicle with the nicer trim package you can’t afford just so you can keep up with the rest of the folks on your street.
And it’s the debt that keeps you stuck where you are because you can no longer afford to make any financial moves.
So how do you keep your past debt from affecting your future? How do you get to a place where your future self doesn’t have to worry about what your past self did?
There are six ways to do that. Let’s get to it!
You all knew it had to start with budgeting!
Budgeting is the root system of your personal finance tree. Debt is one of the branches of that personal finance tree.
That means your budget—when set up correctly—is used to inform your past, present, and future debt.
And your budget also supplies what your debt needs as well—even if that need is to pay it off and cut the branch off completely.
Set up your budget first to use it to inform and supply your debt situation.
Note: If you want to set up the last budget you’ll ever need that is designed to help you grow financially and grow with you, check out my book, The Root Budgeting System, available on Amazon in physical and ebook. You can learn more here.
When you budget first, your budget will show you where you are in your current debt situation. It’ll show you:
- How much of your income is being used toward your debt every month
- How that ratio of debt to income is affecting the rest of your budget
- What you need to do with your unnecessary debt
- How your debt is affecting your ability to reach your future goals
- How much extra money you have available to pay off your debt
- If you’re already using too much money to pay off your debt
Knowing all that will help you plan for what you need to do with your unnecessary debt.
Not only that, but it will even give you insight into how your necessary debt is affecting your budget and future plans.
Going a step further, it will show you what else you can do to help your debt situation in the future, whether it’s getting more income, suspend some saving for a little bit, or cut back on some expenses for a short time.
2. Pay It Off
A great way to not let your past debt affect your future self is by paying it off.
To do this, funnel all the extra money you have into paying off your debt and continue with that until your debt is paid off.
Just remember to budget first so you know you’re putting the right amount toward your debt.
You can check out my step-by-step guide for a detailed look on how to set up your own debt payoff plan, but here are the steps you’re going to take:
- Figure out how much total debt you have. This is self-explanatory.
- Decide how much money you have to put toward debt. It pays to budget first for this one.
- Choose your payoff strategy. You’ve got the traditional debt snowball, the debt avalanche, or the highest monthly impact.
- Snowball your payments. Always put all the money you’re using for each debt, including the minimum payment, into the next debt after you pay off the current debt.
- Set up a reward system. You deserve to be rewarded for your hard work. Build this into your payoff plan
- Consider sacrificing to pay off debt sooner. Is there anything you can give up temporarily to decrease the amount of time it will take you to pay off your debt?
- Set your plan in motion with automation. I always recommend automating because it makes it easy to stick to the plan.
It is also beneficial to hire a finance coach (like me!) to set up your plan and help keep you accountable and on track.
If you’re interested in setting up a coaching session with me, you can click here to do that now.
3. Increase Your Income
Another way to not let your past debt affect your future is to increase your income.
If you took on too much unnecessary debt in the past, you may be in a situation where you are now living paycheck to paycheck or simply can’t save as much as you need to save.
Increasing your income will reduce your debt to income ratio, give you more breathing room, and allow you to put money toward other things—including investing.
Increase your income by:
- Getting promoted
- Ask for a raise
- Get a new job that will pay you more
- Start a side hustle or side business
- Get a double income (if you don’t have one already)
It doesn’t take much extra money to affect your debt and life in a positive way so increasing your income is never a bad thing.
4. Refinance or Consolidate to a Lower Interest Loan
Refinancing is sometimes shunned in the personal finance community, but if it makes sense for you, then it makes sense for you.
There are definitely some situations where refinancing or consolidating your debt just makes sense. The first is if a majority of your debt is high-interest credit card debt.
Consolidating your credit card debts that can average around 18% (or even higher) to a single personal loan with a 7% interest rate can not only save you a bunch in future interest payments but also lower your monthly payments as well.
And that brings us to our second situation. If you simply have too many different debts, it can lower your total monthly payments by consolidating.
This can free up money for investing in retirement or spending on your values so you stick to the plan more naturally.
Having fewer debts and payments to manage also helps simplify your finances.
Of course, there are a couple of things to watch out for when you’re looking to consolidate your debt.
First, you may have to shop around for a good interest rate. Different banks may have different rates.
In addition to that, your interest rate will vary based on your term length. Usually the longer the loan, the higher the interest rate because the bank is taking on more risk.
Second, I recommend getting an unsecured loan specifically if you can. Unsecured loans usually have a higher interest rate because you don’t have to provide any collateral—but that’s exactly the point.
If something happens and you’re not able to pay the loan, you don’t want to lose what you put up as collateral.
5. Set a Goal to Not Get Into This Situation Again
The last thing you can do to keep your past debt from affecting your future is setting a goal to not allow yourself in this situation again.
That can be easier said than done, and it definitely takes some work.
That being said, there is no downside to refusing to be in a place where your debt can affect your future.
Learn all you can about personal finance.
Figure out how much money you will need in the future and then learn how to invest automatically so your willpower isn’t even necessary.
Budget in a way that is going to work for you and stop trying to follow someone else’s version.
Hire a finance coach that will help you learn, hold you accountable, and get you to where you want to be faster.
You absolutely can keep yourself from being in this position again.
The important thing is to set the goal today.
Your Debt Doesn’t Have to Affect Your Future
Debt doesn’t always affect your future, but it is definitely a possibility—especially the more of it you have.
Being intentional with your debt is just as important as being intentional in your budget as a whole.
Have a plan to pay it off. Budget for it if you decide to finance something. And more importantly, keep your budget up to date and with plenty of you in it.
And as always, I’m here to help.