How to End Generational Debt
At my last Wine About Money event, a woman presented me with a very interesting and important question. “How do you recommend ending generational debt?”, she wanted to know. I asked her to explain to me and go deeper. “My parents were always in crippling debt growing up and still are. My mom occasionally asks me for money because she doesn’t want my dad to know she’s out of cash. I see my husband and I are also adding to our debt, not communicating, and I’m afraid. I don’t want my kids to get into debt. What do you advise me to do?” I loved that she brought this problem to the group and told her my next blog piece would be focused on her issue. It is somewhat unique to certain backgrounds and generations, so I want to help those of you who may have the same questions and problems to address. The tone of this piece may come across as preachy and possibly make you uncomfortable. If so, this message is for you.
There has been much recent focus, research, and discussion around generational poverty and how that permeates certain cultures, ethnicities, races, backgrounds and education levels in our country. Generational poverty is clear. You can see it. It cannot be hidden. People in poverty suffer right in front of us and it is a public/societal issue that needs desperately to be addressed. Generational debt is a little different, as you may not know your neighbor is in crippling debt. They have a nice home, a nice car, wear nice clothes and appear to be thriving. What’s hidden inside those walls can be numerous loans and debt piled to the ceiling. We don’t talk as much about this, because it is seen as a middle-class or even upper-middle-class problem, and frankly what fuels a lot of our economy. What generational debt and generational poverty have in common is that both could be vastly improved through education about personal finance. As I write today, there are only eight states in the nation that require personal financial education for high school graduation.
With all of that background in mind, here are my five tips on how to end generational debt. This is straight-forward instruction and medicine to cure your debt illness:
If you don’t have 3-6 months emergency funds, you are living beyond your means. This is priority #1. Yes, before you pay off debt, I want you to fund an emergency savings account. Calculate how much you need for at least 3-months of mandatory expenses. This is your baseline. If you have more than 6 months socked away, you have too much money sitting in cash not working for you. Having an emergency savings account is step #1.
You need to get a grip on the expenses that pop up out of nowhere and add to your personal debt. You have to expect the unexpected. Start with your credit card statements. What expenses are on there? Car repair? Home repair? Christmas/Holidays? Vacation? Total a year’s worth of these expenses and divide it by 12. That’s the amount you need to sock away each month in your savings account so you don’t add to your credit card balances and start to pay them off. If you cannot do this, again, you are living beyond your means and headed for debt disaster.
You need to understand the difference between good and bad debt. Good debt helps you fund assets that increase in value over time. This includes your home, real estate, businesses that actually make money, and POSSIBLY education. Bad debt is used to buy things that decrease in value over time or are immediately consumed. Bad debt includes putting cars, vacations, fancy dinners, clothes, etc. on credit. Don’t have bad debt. Period. If you don’t have the cash on-hand, you can’t afford it. Yes, you may need a car loan. You don’t need an expensive car loan. Cars depreciate in value over time.
You must be transparent with your partner about all things money AND you must set joint financial goals. I struggled with placing this at #1, as it’s crucially important. If you are in a relationship, you both need to know 100% what each other makes and what you are spending. You need to be clear and communicative. If one person is riddled in debt and the other has no clue, or they spend/stash cash in secret, this is financial infidelity and it’s one of the top reasons for divorce in our country. Yes, you can each have your own fun money that the other person doesn’t need to scrutinize. This fun money comes after expenses are paid and savings are funded. I know from firsthand experience that couples who set annual financial goals usually meet them and have cause for celebration. When couples reach financial goals together, it brings the relationship closer and bonds grow deeper. Those who don’t talk about money for fear of fighting are putting themselves on a path to financial failure.
Keeping up appearances is foolish and a sure-fire way to attract financial problems. Having the best, newest, most-designer item when you can’t afford it is demonstrating your lack of education and discipline. It makes the rich richer and the indebted more in debt. Enough said. If things make you who you are as a person, that is incredibly sad and it’s time for self-reflection.
One final thing to contemplate: You may die, but your debt lives on. My generation, the Gen X’ers, have an average household debt over $140,000. If you don’t have the assets to cover this debt when you die, you leave nothing to your heirs, and they could possibly inherit some debt. Thankfully, life insurance policies cannot be taken from beneficiaries to clear a deceased’s debt. But, with shared or common property, like a house for example, the spouse will have to cover the debt to stay in the home. This is a problem for many women and they need to understand their exposure to their spouse’s/partner’s debt.
If you follow the five steps outlined above, you are well on your way to ending generational debt. It will increase your happiness and your assets. As I say to my teenager, “if you aren’t part of the solution, you are part of the problem”. Same applies here. You can make these shifts and change habits you learned from your parents. We also have a responsibility to our children to lead by example and teach them about smart money management. Break the debt chain now and be the solution.
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