Roughly 2 in 5 American adults give themselves a grade of C, D or F on their knowledge of personal finance, according to a financial literacy survey by the National Foundation for Credit Counseling and NerdWallet. When it comes to debt, not understanding what you’re getting yourself into can not only cost you in dollars, but also make you miss out on what you really want to do with your money.
NerdWallet spoke with four people who have shared the lessons they learned from their debt, including how they realized the errors of their ways and changed their money habits to work toward becoming debt-free.
Consider the consequences
Holly Johnson, a 35-year-old business owner from central Indiana, and her husband, Greg, racked up debt several times before realizing their mistakes. “The kind of debt we went into just changed as we got older,” Johnson says. “In our early 20s, it was credit card debt and huge car loans. As we got older, it was loans for home upgrades and more car loans.”
Johnson points to a $25,000 car loan she took out in her early 20s as her worst debt decision.
Because she earned only $8 an hour at the time, the loan payment was around half of her take-home pay. “That car loan haunted me for years,” she says. She had to move back in with her parents, “missing out on a ton of opportunities because I couldn’t afford to live life the way I really wanted. The worst part, I think, is that I eventually sold the car for $2,500.”
While the Johnsons don’t know exactly how much debt they incurred, they’ve now been debt-free beyond a small mortgage for several years. The couple now write about financial literacy and travel on their blog, Club Thrifty. One thing Johnson wishes she knew 15 years ago was that when you have high debt, you have to plan your life around it. “It means not doing the things you really want to do because you have to service your debts above all else,” she says.
» MORE: How to pay off debt
Understand what you value
Miranda Marquit began acquiring debt while in college, taking out loans despite having a full-tuition scholarship and a part-time job. “For the most part, I realized pretty quickly I was making mistakes,” says the 35-year-old freelance writer from Idaho Falls, Idaho. “But I sort of stopped caring. … I didn’t need the money to pay for school. However, I liked traveling and going on trips, so even though I knew it probably wasn’t the best idea, I kept right on taking loans.”
Marquit confesses that she has always understood the consequences of debt, thanks to her parents. “What I wish I knew,” she says, “is what I really valued so that I could make more informed decisions about trade-offs and avoid some of the debt.” While she doesn’t regret any of the trips she took, she wishes she and her ex-husband hadn’t used debt to “buy things like a bigger TV, pay for cable each month and a stereo. I wish we had practiced more self-control.” She adds: “Many of the things we bought didn’t have a lot of importance or meaning, and I just ended up with a pile of stuff I didn’t care about and a lot of buyer’s remorse.”
In all, they incurred around $15,000 in credit card debt, which is paid off. Marquit still has $30,000 in student loans and owes around $7,000 on her car. She doesn’t see all debt as bad, though. “A low interest rate can be worth it if it helps you reach your goals,” she says. “I prefer to use cheap money for large purchases, and then invest for higher annualized returns overall.”
Although this strategy may not work for everyone, Marquit has found that it fits her goals and priorities. She now writes her thoughts on personal finance at Planting Money Seeds.
Use debt wisely
When Emily White was growing up, the only thing she learned about debt was that there are very few acceptable reasons to go into debt, including a house, an education and maybe a car. She also learned that she should avoid credit cards at all costs. For the most part, the 30-year-old mother of three from Mapleton, Utah, and her husband, Phillip, have tried to follow that counsel. But aside from their mortgage, they still took on $63,000 in debt for student loans, a car and a much-needed home improvement.
“The tricky part … is that while our debt is financially very difficult, it doesn’t feel like a mistake,” White says. “We needed more space after our third baby, but could own a home for the cost of a rental.” The couple owns only one car, but they had to upgrade to fit their whole family. “The student loans are probably the most crushing debt payment right now,” she says. “But investing that money into my husband’s career has already paid off in such a big way that it is hard to see it as a mistake.”
White and her husband also carry a few credit cards to improve their credit and collect rewards and store discounts. “I set rules for myself to help maintain discipline and avoid interest,” she says. “My main rule is that I only get cards at stores that allow me to pay off the balance right there at the register.”
While the Whites believe they’ve used debt wisely, that doesn’t mean they aren’t trying to get rid of it as quickly as possible. They’re putting more than $1,000 a month toward debt payoff, including any bonuses, income tax refunds and some of the income from Emily’s side business. “I think the biggest lesson I’ve learned is that paying off debt takes a really long time unless you are willing to sacrifice something.”
Teach your children
“I used and viewed credit cards as a way to finance the kind of lifestyle I wanted or thought I deserved,” says John Schmoll, a 41-year-old Omaha, Nebraska resident who runs an advertising agency with his wife, Nicole. “The student loan debt was relatively similar. I saw that I would receive extra money and happily took it.” The result was $25,000 in credit card debt and $20,000 in student loans. “I had very little to show for it when all was said and done,” he says.
Schmoll now recognizes that he didn’t learn much about debt when he was younger. “My parents really didn’t take the time to teach me about money, and looking back, they had their own debt issues,” he says. He adds that money was a taboo subject at home when he was growing up. Now that the Schmolls are debt-free aside from their mortgage, they plan to teach their children about the dangers of debt.
“I wish I would’ve known that you sign over your freedom when you willingly incur consumer debt,” he says. “We’re wanting to teach our children how to handle and respect money and view it as a tool to have the kind of life they want. This means teaching them how debt will only restrict them from where they want to get.” Schmoll also spends much of his free time educating others about gaining financial freedom through his blog Frugal Rules.
White family photo by Michael Lloyd Photography; other images courtesy of Holly Johnson, Miranda Marquit and John Schmoll.