LaTisha is the Editor-in-Chief of YoungFinances.com, a simple, personal finance resource for millennials. LaTisha originally founded the website as a way to share her personal struggles with money, while helping others to avoid making the same money mistakes. LaTisha's persistence allowed her to pay off over 30,000 dollars in consumer debt. In my interview with LaTisha, we talk about why millennials may be tempted to fall into the debt trap, and how to avoid accumulating overwhelming debt.
The Art of Borrowing Money
LaTisha’s experience with borrowing money began by accumulating $22,000 in credit card debt, in addition to $10,000 in an outstanding car loan. When she recognized the issue, and told herself this had to stop, her spending habits changed. In three years, she paid off $32,000 in consumer debt. With student loans on her plate, too, LaTisha shows that debt can be overcome, and that responsible borrowing is critical.
Millennials are in a tough spot. We’re young, and already, we’ve built up an impressive amount of debt. Almost one-third of millennials between 18 and 30 have student loans. More common in the late twenties and early thirties are other forms of debt too, like credit cards, and borrowed money for cars, homes, etc. “As a millennial, it’s easy to get sort of down because the economy is bad. The first go-to is [often] to take out a loan to [be able to finance a purchase],” LaTisha explains. Actually, purchasing with cash is usually a safer bet. “[When making purchases], use cash over borrowing money almost all of the time. Financing is going to cost you much more [in the long run because of interest]. By paying cash, you’ll have fewer strings attached.”
For many millennials, choosing to borrow money means getting deeper into debt, so making purchases with cash is a good way to avoid that (if you have the cash to do so). However, without enough cash on hand, making large purchases may not be affordable. In some situations, borrowing money may be the most viable option. For instance, a major purchase like a couch or a car, may be easier to pay off in smaller monthly payments rather than paying in full.
LaTisha explains that “a lot of times the decision [to borrow] is based on the money you need - a student loan, a car loan - but the end goal is to pay the loan back.” Thus, the first consideration should always be, do you have the capacity to repay the loan? For example, many young people take on student loans. The rule here is to borrow no more than you predict you will make in your first year of work. LaTisha also suggests borrowing only what you absolutely need. The full “college experience” may not be worth the few extra thousand dollars you’ll pay down the road.
“Usually, when you borrow money it feels like a pay day,” says LaTisha. This is a common mistake with loans. “You have to make a mental shift, it’s borrowed money, you took it out for a specific purpose, and you have to create a plan for it.” Emotions also play a big role in spending, and LaTisha states that this can lead to unnecessary borrowing or spending. Emotions, and how we feel about new things, contribute to our spending habits. That’s why LaTisha advises becoming “detached [in the buying process]. Make purchasing an objective process. Keep it simple and avoid impulse buying, if it wasn’t on the list, take time to think about it. Is this truly a need or a want?”
How Loans Can Help You
Loans, however detrimental they may seem, have benefits. First, they allow you to finance purchases that may have otherwise been unaffordable. For years, people have been purchasing homes by borrowing money. They likely wouldn’t be affordable if loans weren’t an option. Loans can help to establish and build credit. “Installment loans are an easy way to build your credit,” LaTisha explains. Making monthly payments, on time, until the loan is paid off looks good on your payment history. In the future, having a good history will increase your chances of being approved for borrowing again.
Before making any major decision with borrowing, make sure to shop around. Take time to think about the decision. “Pay attention to the terms and the interest rate. Ask [your lender] about things like payment penalties, or any fees associated with the loan. Look for perks you might get. If you take out a personal loan, the credit union or bank may offer a reward or better deal on a checking or savings account.”
What’s your take on loans? Are they a good thing? Bad thing? Do you feel you should avoid them at all costs? Share your thoughts and something you’ve learned from a borrowing experience to help us all stay on top of loans!