Gen Z: 4 Ways To Think About Debt

Young brunette curly female reading her bill papers, looking stressed.
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How should young people today approach debt? Most of Gen Z has managed to avoid steep debt, with 53% keeping it under $1,000. However, over 31% already have accumulated more than $5,000 in debt, and for over 20% of Gen Z, that number is above $10,000.

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In today’s ever-fluctuating economy, here’s how financial experts encourage young people to think about debt.

1. Debt Affects Your Finances Long Term

According to recent GOBankingRates survey data, nearly 52% of Gen Zers learn about finances from parents and family. If you didn’t grow up learning how debt can impact your finances, it’s important to do your research before obtaining any loans.

Simply put, debt is any money you owe anyone for any reason, said Levon Galstyan, a certified public accountant with Oak View Law Group. Often, lenders will charge interest, so it’s important to weigh whether you can afford the payments before taking on any debt.

“Your earning is your greatest wealth-building tool,” said Galstyan. “But debt is all about paying off the past. In this way, it will continuously create a hole in your wallet and hamper your monthly household budget. You can’t move forward like that. So you should find ways to get rid of it as soon as possible.”

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2. Not All Debt Is the Same

Some types of debt can impact your finances more than other types, explained Galstyan.

For example, interest rates for a mortgage are usually lower than for many consumer debts. Plus, you invest in your future wealth by building equity in your home with each monthly payment.

Student loans also often have lower interest rates — and the interest payments may even be tax deductible, said Galstyan. This, too, can be an investment because your education could open up employment options and increase your future income.

Credit cards, on the other hand, often have a higher interest rate. As a result, if you don’t pay off your balance in time, you can find yourself in steep debt that grows quickly.

A recent GOBankingRates survey found that only 33% of young people aged 18 to 24 pay off their credit card bills completely each month. However, almost 11% only make the minimum payment and more than 14% pay more than the minimum but never the full balance.

“Your financial well-being can be destroyed by plastic, and interest rates are the silent murderer,” said Galstyan. “Interest payments can increase the debt length if you cannot pay your credit cards in full each month.”

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Galstyan also recommends staying away from other forms of high-interest debt, such as payday loans or unsecured personal loans.

3. Debt Costs Money

Corina Cavazos, CFP and managing director of advice and planning at Wells Fargo Wealth & Investment Management, said it’s important to understand how debt costs you money thanks to interest.

“At a high level, your money will have to work harder for you when debt is involved,” she said. “You are now paying the cost of the need or want plus the cost of borrowing the money.”

For example, let’s say you put $10,000 on a credit card for a dream vacation. With an 18% interest rate — and if you only pay the minimum payment of $250 — you’ll pay an additional $5,385.76 on interest alone.

“Your money had to work a little over 50% harder to pay for that vacation and will have to continue to work for another five years to pay that debt off,” Cavazos said.

4. Pay Off Debt as Fast as You Can

Brendan Sheehan — MSFP, CFP and managing director at Waymark Wealth Management — said paying down your debts should be a high financial priority.

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While making the minimum payments on all your debts, he said, put extra money toward one of them until you’ve paid it off. Focus on paying off the loans with the highest interest rates first and those with the lowest interest rates last.

“Although you should make sure to contribute enough to your retirement plans to maximize your employer match, you shouldn’t contribute extra to your retirement plan until you’ve paid off all debts with a 10% interest rate or higher,” he said. “There are very few investments that guarantee a 10% or greater rate of return after taxes, but you are guaranteed to lose 10% or more by maintaining this high-interest debt.”

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About the Author

Jenny Rose Spaudo is content strategist and copywriter specializing in personal and business finance, investing, real estate, and PropTech. Her clients include Edward Jones, Flyhomes, PropStream, and Real Estate Accounting Co. As a journalist, her work has appeared in Business Insider, GOBankingRatesMovieguide®, and various smaller publications. She’s also ghostwritten a book and hundreds of articles for CEOs and thought leaders. Before going freelance, Jenny Rose was the online news director for Charisma Media, where she oversaw three online magazines, hosted a daily news podcast, and managed the editorial content for the company’s robust podcast network. In 2014, she graduated summa cum laude from Stetson University with bachelor’s degrees in Communication & Media Studies and Spanish. During her college career, she won two awards for her research and was named “Top Senior” in both her majors. Find her at jennyrosespaudo.com and connect with her on LinkedIn.
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