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Emotional Impact of Debt

Everyone knows that debt isn’t good for your finances. Debts that perpetually accrue interest force you to repay more than you originally spent. Large student loans or consumer debts eat away at your monthly cash flow, making it difficult to save and spend according to your values. Debt also lowers your total net worth, which can be problematic as you work toward big-picture goals, like purchasing a new house or car.

The impact that debt has on your finances is huge. But something we rarely consider is the negative impact that debt has on your mental health.

Psychology of Debt

Debt has a significant impact on your psychological well being. According to a recent study, approximately 72% of Americans say that they feel stressed or overwhelmed when it comes to their personal finances. Debt can be incredibly emotionally challenging, causing depression, anxiety, anger, and panic or fear. The guilt you associate with debt can weigh heavily on your mind throughout your repayment journey – and you’re forced to live with negative emotions not just about your money, but about the decisions you made that led to debt in the first place.

This negativity is grating, and can leave you feeling as though you’re buried under the weight of your debt. As you continue to work toward repaying debt, you might feel feelings of hopelessness. Other people, specifically millennials who are coping with a larger than life student debt load, say they feel physically ill or in pain just thinking about their debt, how they’ll pay it off, or wondering how it will impact their financial future.

Yes, Even Good Debt is “Bad”

We often get caught up in a discussion about good debt v. bad debt. Typically, people view student loans and a mortgage as “good” debt. However, this so-called “good” debt still has takes a toll on your mental health. Many medical students, or recently-graduated medical professionals, feel overwhelmed and fearful about their massive student loan debt. It may weigh on their mind, and drain their emotional wellbeing. Your first step is to embrace your loans for what they are. When you were in school, they were facilitating your ability to enter the medical field. They provided you with the education and experiences that have shaped you and brought you to where you are today.

Once you work to make peace with your student debt, you can begin to work on a repayment plan that prioritizes becoming debt free. Although the degree you’ve achieved with your student loans may be well worth it in the long run, that doesn’t mean you shouldn’t still work to pay off your student debt – especially if it’s causing anxiety or depression. A debt repayment plan can help you to feel more comfortable with your debt because you know you’re on a path to financial success, and you see the light at the end of the debt-repayment tunnel.

Prioritizing Debt Repayment

If you’re experiencing negative emotions related to the debt you carry, it’s going to be even more important that you work to pay it off quickly as part of your comprehensive financial plan. Typically, creating a budget where approximately 30% of your after-tax income goes toward debt repayment is in your best interest. This isn’t to say that you should limit your spending to the point of deprivation, because that may mean you push back against your budget and overspend, making it harder to repay your debt. It also isn’t to say that you shouldn’t prioritize other financial goals – like saving. Debt repayment, although it may have one of the largest psychological impacts on your emotional health, is only one piece of your financial puzzle.

If you aren’t sure how to begin paying down your debt, you have several options. First and foremost, you should be incorporating monthly debt repayment into your budget. When you can, use a snowball method to pay down high-interest debts first, and “snowball” that monthly payment into your next debt once each is paid off. You can also use windfalls such as bonuses from work or unexpected cash gifts to pay extra and knock out your debt even more quickly. You might even consider taking on freelance work or launching a side hustle to throw more money at your debt to pay down the principal and the interest.

Still stumped? A financial advisor can help. When you’re a medical professional dealing with hefty student loans, you have more options for repayment than many other college grads might. Depending on where you work, you may qualify for Public Service Loan Forgiveness (PSLF). You may also benefit from debt consolidation or refinancing. A financial advisor can help you to determine the best path for you. At Wealth Habits, we offer a FREE student loan repayment analysis. It’s the perfect way to launch your financial planning journey. Ready to dive in? Learn more here.