There is needed debt (called good debt by some), bad debt, and really bad debt. Stay away from the bad stuff and be very careful with what you think you need.

The needed debt (home loan, college loan, business loan and maybe a car loan) must be handled wisely in order for it to help you down the road. The bad debt (debt on depreciating assets like cars and trucks for example) should be avoided or reduced as best you can. The really bad debt (credit card debt, payday loans, retirement plan loans) is a big mistake and should be avoided in almost all situations.

There is one debt you should never have, that is credit card debt. 

Pay it off every month in full or get rid of the card, it’s that simple. Credit card debt can devastate you financially and psychologically if you allow it to hang around in your life. This type of debt allows you to steal from your future to live high in the present.

Take the time to really learn about debt and how much you want in your life.

Do not buy into the idea that everyone has to have debt, so you should too. That mindset will take you down the same rat hole of monthly payments and stress that makes up many peoples lives. You can do better! Work hard at reducing the amount of debt you have taken on and avoid it whenever possible. Your future self will be grateful you did.

Avoid the monthly payment mentality.

Do not think in monthly payment terms. The new car does not cost $325 a month. It cost $34,000! When considering a purchase, ask yourself, how much debt would you be assuming, what is the interest rate, and do I really want to burden myself with it. P.S. Every situation should be evaluated case by case. There are times when debt may be the right option. Always consider opportunity cost when looking at your debt, the interest rate you are paying, and the alternative of paying down debt or investing in retirement funds like a 401(k) or a Roth IRA.

 Identify your weak spot and budget for it.

The weak spot(s) is the one thing in your life that you overspend on. Why? Something about that thing you love gets you spending far beyond what you can afford. Don’t beat yourself up about it, just identify it, and budget a limited amount for it each month and every year. Control that urge to overspend by first acknowledging it. Here is a little trick when dealing with it. Pay cash when spending on your weak spot. It will usually help reduce the problem.

If you have college debt (or you are considering it), be wise in how much you take on and how you pay it off over time. 

Avoid taking on any school loan debt beyond the federal subsidized and unsubsidized loans. If you need more loans beyond those, it might be time to reconsider your plan and college. When paying off school loan debt, consider the size of your salary. If you end up making a decent salary out of college, consider paying off the loans as quick as possible. If your salary after college will be low, consider the Public Service Loan Forgiveness Program. Learn more here: https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service.

Watch out when you get that first big paycheck.

Many people go hog wild when they get their first big check out of high school or college. They rack up the monthly payments to equal their income. They will look rich, but they aren’t. Go a different direction. Take that extra income and pay down your debt, increase your savings, and invest in your future self as you live below your means for a period of time to improve your future financial situation. They will look rich, but you will be the one with the wealth one day based on your ability to do what is challenging today.

Write down each loan you have (see spreadsheet for example).

Divide into four columns. The four columns would contain the type of debt, the total debt, the interest rate, and the monthly payment. Once you have your debts down on paper, develop a plan to get rid of them. Make it a high priority and don’t let life or other people sidetrack you. This video may help: http://www.youtube.com/watch?v=E8N_Dq9cKXM.

Use the debt snowball or the debt avalanche to get rid of your debt.

The debt snowball (pay off the smallest bill first as fast as you can, while making minimum payments on the others) tends to work for many. The Total Money Makeover by Dave Ramsey can help you with this. The debt avalanche (pay off the highest interest rate loan first as fast as you can, while paying minimum payments on the others) can also work and financially, it is the wisest move if you stick with it. Pick the option that you believe will work best for you and then do it!

Your Life is what you make it, don’t ever forget that.

You can let the environment change you (let stuff define who you are as a person for example) or you can change your environment (detach yourself from stuff and the debt and stress that in many cases comes with it). Reducing and/or eliminating debt will bring more freedom into your life. That will in turn provide you the opportunities to chase your passions and ultimately your dreams. Financial freedom to follow.

Identify your debt. Write your debt down in a spreadsheet.

Debt snowball. Start with your lowest debt and pay that off!

Debt avalanche. Start with your highest interest rate debt and pay that off!

Strive to live debt free, but always consider opportunity cost along the way

Smart ways to deal with student loans

• Take on the least amount of debt possible. Just because someone offers you a loan, doesn’t mean you take it.
• If you need debt beyond the subsidized and unsubsidized federal loans, it might be time to rethink what you are doing.
• Mom and dad may be there to help and they may not. Promises are not always kept for many different reasons.
• When looking to pay off your debt, consider opportunity cost and the interest rate per each loan.
• If you have a decent job, pay off the loans quickly using the debt avalanche or the debt snowball.
• Consider not paying off low interest rate loans early as you invest in no-load index mutual funds within a Roth IRA.
• If you end up with a low paying job, consider the 10 year and your done Public Service Loan Forgiveness Program.
• If the Public Service Loan Forgiveness Program does not work for you, consider the 20 year Federal Loan Program.
• Consider the military and receive up to $50,000 in loan forgiveness (reserves) or bonus money (active duty).
• Carefully consider your particular situation when taking on debt and paying it off. There is no one size fits all.