Debt can be hard. It can stop you doing the things you would like to do and instead lead to worry and anxiety.
A leading study, The Psychological Cost of Debt, by money experts the ascent, found that only 70% of people with debt were satisfied with their life, compared to 83% of those without debt. This study was done in the US, but chances are, we’re not too different.
Having a debt free financial resolution can help you improve your happiness and life satisfaction. In this blog we share some questions to think about to help you decide if becoming debt free is the right resolution for you.
What’s your current situation
Part of thinking about your current situation is to think about the type of debt you have and the reason you have it. The graph below breaks down the satisfaction level by the type of debt people have.
What’s most interesting is that more people with mortgages report being satisfied than those without any debt, and those with only car finance are only slightly less satisfied. This shows that the reason you have debt is important when deciding if being debt free should be your resolution.
For each of your debts, think about the reason why you have the debt and whether this makes your life happier. There are two questions for you to answer to decide if a debt makes you happier:
- Does the debt give you something that improves your life? e.g. the security of owning your own home, and
- Can you afford the debt?
The cost of debt
Debt is not free. It creates a number of costs.
Firstly, there is the obvious cost of paying the interest on the debt. if you borrowed £1000 on a credit card with an interest rate of 18%, when you pay the money back after a year you would owe £180 in interest.
There are other costs as well. High levels of debt can affect your credit score, having a bad credit score can affect how much it costs to borrow money in the future. It can also affect how likely you are to get a mortgage. For more information on your credit score, see our blog How to protect your credit score this Christmas.
Another way debt creates a cost is by limiting your ability to manage uncertain expenditure. If you have low levels of debt and your car breaks down, you can pay to resolve the situation on your credit card and pay this off over a few months. If you already have high levels of debt, life won’t be so easy. Even if you have space on your credit card, the costs of paying off this new debt on top of your existing debt can create problems.
The final cost of debt is that it limits your ability to do the things you want to do. The money you are spending on interest could be going towards something that you want in life, e.g. next year’s holiday.
What is your ideal debt scenario?
Now that you have reviewed your debts, identified which make you happy and reviewed the total costs of your debt, it’s time to think about what your ideal debt scenario would be.
After considering your situation, you may in fact conclude that your ideal scenario might not be being debt free. Instead, it may be making debt work for you.
On top of enabling you to acquire things that bring your life satisfaction (mortgage, new car…) there are other advantages to debt. If you use a credit card to buy something that costs more than £100 you are covered by the Consumer Protection Act. This means that if you booked a holiday with your credit card and the company stops trading, the credit card company are responsible for making sure you get home safely. Just make sure that you make this debt work for you and you are not working for it. Save up the money for your holiday, pay by credit card, and then pay the credit card off before they start charging you interest.
Focus on how achieving your ideal debt scenario will make you feel and what it will enable you to do. Will it help you feel safer, happier, more relaxed? Will you sleep better and worry less? Will the debt you take on make you happier?
Think about the things you would be able to do when you have your ideal level of debt.
Describe your debt free life
Now you know how achieving your ideal debt scenario would feel, describe what it will be like. These questions might help:
- What debt do you have?
- What is the debt enabling you to do?
- What can you do now that you couldn’t do before?
- Why do you want to have the level of debt you want to have?
- What are the best types of debt for you to have?
- What will you be able to do that you currently can’t do now?
Getting to your ideal debt level is hard work
Firstly, be honest with yourself on why you have the debt you have. If you find money management difficult, you are going to have to put in hard work to create and stick to a budget. If you shop to make yourself feel better, you are going to have to put off purchases.
There are going to be hard choices. If you have £5,000 of credit card debt (interest 18%) and you made repayments of £200 a month, it will take you 2 years 8 months to pay off the debt (at a total cost of £6400). If you saved £3 a day by taking packed lunch to work and used the money to pay off the debt, you would pay the debt off in 1 year 11 months. If you and your partner made packed lunches you would pay it off in 1 year 6 months (at a total cost of £5,760). This means you would pay off the debt 1 year and 2 months early and save yourself £640. Oh, and for the next year and 2 months all your money would be your own!
It’s a hard choice to make, that’s why we need to remember how good achieving your ideal debt scenario will be. When you have to make hard choices, think about that future feeling and all the things you will be able to do.
Are the hard choices worth the happy feelings you’ll have in the future? If so, a new year’s debt resolution may be for you. Take the time to write it down, making sure that is a SMART resolution and you include why you are doing it. e.g. I am going to (action)…., so that by (time) I will be able to (what you will be able to do).
Get started now
A great way to get started is to use the Stag Protect budget planner. This will help you work out what you are spending your money on and help you identify areas where you can cut back.
In the new year we will be releasing more articles aimed at helping you get in control of your finances. Don’t forget to follow Stag Protect, on Facebook or LinkedIn, to see when our next blogs are published.
What next?
Here are a few ways you can explore your options with Stag Protect.
