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Forbes
4 days ago
- Business
- Forbes
How To Protect Your Retirement Savings From Inflation
A recent Money and Mental Health Survey found that 43% of U.S. adults admit to money negatively impacting their mental health at least occasionally. Among them, 69% cite inflation, or rising prices, as the primary stressor. This is up from 65% in 2024 and 68% in 2023, marking the highest level in three years. Though a cause for concern, inflation does not necessarily spell disaster for folks attempting to save for a happy retirement. It is a persistent feature of modern economies by design, and attempts to eradicate it within that paradigm would be misguided. Indeed, a modest level of inflation is actually considered healthy for the U.S. economy. Inflation Can Work In Your Favor—Here's How One reason a small level of inflation can be considered nearly essential is that it nudges individuals to spend and invest today rather than waiting for prices to increase tomorrow. Secondly, because cutting nominal wages often triggers backlash, inflation makes it easier for a company's real wages to adjust without doing so. Finally, inflation can help borrowers repay loans with dollars that are 'cheaper,' or less valuable, than when they originally borrowed. As such, the Federal Reserve aims to achieve an annual inflation rate of 2%. The Overlooked Threat To Your Retirement What does inflation mean for your retirement? It means every dollar not invested is typically losing at least 2% of purchasing power annually. While the idea of stagnant dollar bills 'wilting' would be an exaggeration, that image effectively illustrates how money flow can affect the economy's dynamics. A helpful thought experiment is to consider pricing out a potential car purchase: In 2020, a used car is selected with a sticker price of $30,000. However, due to unforeseen delays, the transaction is postponed. By 2023, inflation may have increased the price to $40,000. The original $30,000 set aside is no longer sufficient to buy the same vehicle. Over a 20-year retirement, even modest inflation can erode purchasing power, limiting individuals from life experiences they could've otherwise afforded and, more importantly, cherished. Beating Inflation Starts With Stocks While inflationary trends can feel overwhelming, the good news is that investors do have tools to help manage the impact. While no investment is guaranteed, stocks have historically outpaced inflation over the long term, making them a commonly used tool to seek growth. When inflation increases, companies have the option to raise prices on goods to match their increased expenditures, which tends to keep profits steadier and dividend flows more consistent. In other words, companies can inflate along with inflation, and consequently, those who own shares in these companies may benefit. One eye-opening example emerges from analyzing how dividend growth has outpaced inflation over time—offering a powerful hedge for preserving purchasing power. The data below encapsulates roughly 150 years, demonstrating dividend growth's historical tendency to consistently eclipse inflation. Bonds: Your Portfolio's Unsung Risk Manager Though typically attracting less attention than equities, bonds have often shown the ability to keep investors in front of inflation with lower volatility risk. The 2‑year Treasury yield recently stood at around 3.72%—above its long‑term average of roughly 3.2%. That yield may not spark lively cocktail party conversation, but when inflation's running around 2.7%, it allows future retirees to maintain or slightly increase their spending strength. Real Estate: A Concrete Counterbalance Real estate can be a valuable inflation buffer. For many, their primary home appreciates at or above the rate of inflation, particularly during periods when building costs increase. According to the U.S. Treasury, inflation‑adjusted U.S. single‑family home prices were roughly 65% higher in June of 2024 than in 2000. Individuals who have paid off their mortgage can lock in housing costs, while others are forced to deal with rising rents and taxes. For those seeking similar benefits without the hassle of tenants' late-night plumbing emergencies, real estate investment trusts (REITs) may be a practical option. Bottom Line: Align Investments With Inflation's Trajectory Many view financial freedom as a crucial element of a happy retirement. Inflation isn't going away—it's built into our economy's framework. Future and current happy retirees take the time to learn what tools can be used to keep their money growing at a positive real rate—one that exceeds inflation. Rather than lamenting the increases and fearing price escalation, a more constructive attitude may be to harness inflation itself. A portfolio that seeks to invest in companies with pricing flexibility, dividend-paying stocks, risk-stabilizing bonds, and the protective benefits of real estate has the potential not only to stay ahead of inflation but also to leverage its trajectory for momentum.
Yahoo
13-06-2025
- Business
- Yahoo
I paused investing to pay off student loans — and still retired at 40
Yes, I stopped contributing to my 401(k) and paused all other types of investing to pay off my student loans. And no, I don't regret it. Going against the grain not only helped me become debt-free, but after I paid off my loans, I was able to invest enough to retire at the age of 40. The general wisdom from personal finance experts is that you should never stop investing. But that advice doesn't take into account that 42.7 million Americans grappled with federal student loan debt last year, with an average balance of $38,000. It also doesn't consider the mental toll that student loans take on borrowers. Bankrate insights on the weight of debt 43% of U.S. adults reported that money negatively impacts their mental health, at least occasionally, causing feelings of anxiety, stress, worrisome thoughts, loss of sleep, depression and other effects, according to Bankrate's Money and Mental Health Survey. In 2023, Bankrate's Financial Milestone Survey found that 59% of U.S. adults who have held student loan debt delayed financial milestones due to their student debt. 21% of Americans cited paying down debt as their main financial goal for 2025, according to Bankrate's Financial Outlook Survey. Freeing yourself from the weight of debt before focusing on other financial priorities can relieve some of that burden. Financial advisors will insist that you're missing out on the wonders of compounding interest on a retirement account, but don't forget that your student loan interest is compounding, too. Depending on your loan balance and interest rate, you may even come out ahead by throwing money at debt payments instead of your investing goals. By pausing all investing while I focused on student loans, I also shifted my perspective on money: Debt is a short-term issue, and investing is a lifelong skill. If you've been feeling overwhelmed by trying to juggle paying off debt and saving for retirement, here are three reasons to prioritize eliminating your student loan debt first. Bankrate's take: Before deciding to pause your retirement savings, be sure to check with a financial advisor or tax professional to understand the best option for your financial situation. Your unique tax liability, employer match benefit and student debt details may impact your decision. When I decided to pause my retirement contributions, I expected to feel guilt or fear. And truthfully, I did briefly. But then I ran the numbers and gained clarity. Use a student loan calculator to understand the true costs of your student loan debt, both monthly and in the long run. For example, let's say you have an average amount of student loan debt ($38,000) and the lowest federal student loan rate of 6.53 percent. Over the life of your student loan, you'd pay nearly $14,000 in interest alone. Repayment term 10 years Number of payments 120 Monthly payments $432.06 Total interest paid $13,847.51 For me, the thought of paying thousands of dollars in interest toward a debt that already felt draining wasn't appealing. Prioritizing debt payoff was something I could control. Plus, watching my balance drop and my payoff debt move closer by years, not just months, kept me motivated. Running the numbers on the interest helped me feel like I wasn't being pulled in five financial directions at once — I decided to laser-focus on one goal: freedom from student loan debt. Shifting to one priority for a finite period felt more achievable than trying to tackle multiple financial goals simultaneously. Let's be honest: There were months when just paying my bills felt like a stretch. Many of my coaching clients report similar struggles in making ends meet. Bankrate's Living Paycheck to Paycheck Survey found that 34 percent of Americans are living paycheck to paycheck, which means they have little to no money left over for savings after covering essential expenses. To make matters worse, 59 percent of U.S. adults are uncomfortable with the amount of money they have in emergency savings, and 13 percent have no emergency savings at all, according to Bankrate's Emergency Savings Report. With student loan payments consuming hundreds of dollars each month, pausing retirement contributions helped me make ends meet after graduation. It doesn't make sense to stash away money in a 401(k) that you can't touch for decades if you're building credit card debt to cover everyday expenses. Temporarily pausing my 401(k) contributions while I paid down my student loans gave me the breathing room I needed to cover my living expenses, build a starter emergency fund and avoid falling deeper into credit card debt. Successful financial planning isn't just about the long-term view — it's about paying for the right now too. Once I was out of debt (and stayed out of debt), I redirected the money I'd been putting toward student loan payments and shifted it back to retirement investing. I was shocked to discover how much more I could contribute to my monthly savings, more than when I was simply matching my employer's contribution. I've been able to max out my 401(k) and individual retirement accounts every year since I became debt-free. For 2025, that's $23,500 for my 401(k) and $7,000 for my IRA. This renewed focus has accelerated my retirement savings growth beyond what it would've been if I'd tried to pay off my student loans and save for retirement simultaneously. This pause gave me room to think beyond dollar amounts and dive into why I wanted to invest in the first place. A financial advisor might argue that you may earn more interest on investments than you'd save by paying down debt, but neglects to remind you that paying down your debt is a guaranteed return. You'll undoubtedly save the money that would have gone toward interest, and once you're done, you're done. The market for investments is more fickle — some years it's up, and others it's down. A sizable return on your investment isn't guaranteed. When I speak to clients with hefty student loan balances, they tend to be more skittish about stock market volatility. The burden of their debt leaves them feeling that they can't afford to 'lose money' the same way I can, both financially and emotionally. That clarity stayed with me after I resumed investing. Without student loans looming over me, I can research investments with confidence, knowing I have the flexibility to weather the market's volatility. Instead of blindly selecting a target-date fund or following my employer's recommended option, I took the time to educate myself. I learned about different types of accounts and asset classes, and even became an angel investor. Paying off debt didn't just free up my bank account — it freed up my brain to invest like an owner, not just a participant. Related: Should you pay off student loans or invest? For most student loan borrowers, higher education was an investment decision. We borrowed that money with the expectation of earning a greater return than what we invested, just as we would with any other investment. No one discusses what we gained in the process of completing what we started when we took out those loans in the first place. While I focused on student loans, I developed several other money habits that I'll carry with me for the rest of my life: using debt as a last resort instead of a first option, budgeting with intention and saying no to lifestyle creep. Keep reading: A money habit to get you out of living paycheck to paycheck I even found that intense focus on paying off student loans can improve your relationships. My husband and I learned how to budget together. The friends I shared my financial goals with rooted for me and understood when I turned down expensive gatherings. After seeing me pay off my student loans, my family members decided to pay off theirs, too. Now, my nieces and nephews may not have to borrow student loans the way my generation did. I even gained the confidence to share my story broadly, eventually turning my debt payoff journey into a financial education company that now serves thousands, with a focus on helping my clients become debt-free and head towards quality and timely retirement. If you pause investing in retirement, know that it's a short-term choice. You can develop the skills and support systems to make investing sustainable over the long term, and potentially even retire earlier than expected. 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Yahoo
31-05-2025
- Business
- Yahoo
Survey: More than two-thirds of Americans aren't reviewing their budgets. Here's why you should and how you can save more
Budgeting is the financial equivalent of eating your vegetables. It may seem unpleasant, even grueling, but it's ultimately good for your financial health. Budgeting is also unpopular. Bankrate's latest Money and Mental Health Survey shows that less than one-third (29 percent) of Americans reviewed their budget during a 30-day period between mid-February and mid-March. 'Few people like tracking their spending, and itemizing every dollar spent can be tedious and (time-consuming),' says Stephen Kates, CFP, financial analyst at Bankrate. When it comes to using a system to budget, Kates suggests that the simpler, the better. Here's why making a simple budget, and reviewing it, is worth your time. And here's how to develop one that will work for your financial needs. Bankrate's Money and Mental Health Survey found that Americans with higher levels of education were more likely to have reviewed their budgets. Nearly four in 10 post-graduates (38 percent) and people with a four-year college degree (38 percent) said they reviewed their budget in the 30 days prior to Bankrate's survey, which was conducted in mid-March. This percentage was lower for those with some college or a two-year degree (30 percent). Respondents who have, at best, a high school degree (23 percent), was the group that budgeted the least. Although budgeting is the act of tracking how much money you have, there's also the unpopular task of tracking your spending. According to Bankrate's survey, about one-third of survey respondents (34 percent) tracked their spending between mid-February and mid-March. Saving money doesn't just happen, says Lauren Zangardi Haynes, CFP, CIMA at Spark Financial Advisors. 'Most people do better managing their spending if they don't see a lot of money in their bank account. In other words, if your plan is to transfer what's left in your checking account at the end of the month to savings, you're setting yourself up for failure,' Zangardi Haynes says. Budgeting helps you determine precisely how much you should be saving each month so you can save more. Knowing what you're spending your money on, and how you're spending it, can help you determine how much you need to save to achieve your financial goals. The lesson here: Pay yourself first and pocket it in your savings account. Budgeting need not be a daunting task. It comes down to three things: Directing your direct deposits into different accounts Identify spending limits Being aware of your spending and savings habits Budgeting helps you plan where you want your money to go ahead of time. This helps you to spend your money intentionally, whether it's for helping you get closer to achieving your financial goals or putting your money towards purchasing future goods and services that you value. Zangardi Haynes says one of the underrated benefits of budgeting is the way it can help you shift the way you view yourself. She says frequently when people are focused on budgeting they focus on what they're doing wrong. 'When you build savings into your budget or spending plan, you can start to shift the way you think of yourself from a spender, or someone who doesn't manage money well, to someone who is responsible with money and capable of creating financial security for themselves,' Zangardi Haynes says. On the other hand, not budgeting is akin to getting in your car and just driving to a new place without directions, with the hope of getting to your destination in a new place. Bankrate insight Three great reasons to budget: It can show you where your money will be spent. It can help you change your spending habits. An efficient budget will help you pay yourself first so that you're saving before spending money. Budgeting is a financial activity more people should be doing, Kates says. 'Structure your income and spending in such a way where you understand where the money's going, which is essential, but you don't have to do every little dollar and cents transaction on what you bought for coffee this morning,' Kates says. Creating a simple budget takes just three steps: Determine your income. Make a list of your expenses. Don't forget those recurring monthly debits in your expenses. Set your goal to have cash remaining after subtracting your expenses from your income. This way, you know how much money can be saved and how much money should be applied to other financial goals. Once you determine your budget, consider automating your savings to help you save more – because, for many, it's easy to forget to save. Also, using a budgeting app can automatically aggregate your spending all in one place so you can see where your money is going when the expenses post to your credit card or bank account. Reviewing and following your budget is likely to increase your chances of achieving your financial goals. The unemployment rate in the U.S. held at a relatively low 4.2 percent in May, according to the Bureau of Labor Statistics. Those who are employed should have, or be adding to, an emergency fund that contains three to six months' worth of expenses. You need to start somewhere, so start by budgeting for a small amount from your paycheck to automatically go into a high-yield savings account and the rest into your checking account. This is called split-direct deposit – and it's a great way to start or add to an emergency fund, automatically. Sticking with this plan, and not withdrawing that money, will enable your emergency savings to grow. And in the current interest rate environment, it's easy to find a competitive online-only bank offering a yield that's outpacing inflation. Just make sure the bank is a Federal Deposit Insurance Corp. (FDIC) bank, so you know your money is protected in case of a bank failure, as long as your deposits are within FDIC limits and guidelines. But an emergency fund isn't only meant to replace income due to being unemployed. It also helps you when something you own inevitably breaks or needs to be repaired, such as an automobile or home appliance. Bankrate tip In addition to depositing your emergency savings in a high-yield savings account, consider a federally insured money market account, which combines the features of savings and checking accounts, offering competitive interest rates with greater flexibility than traditional savings accounts. You can't go back in time to your youth to build a big retirement nest egg, but that shouldn't discourage you from starting one now, even if you're a few years away from retirement. Every little bit helps. Budgeting can also help you to stretch your retirement savings, even if you're already retired. While younger people have time on their side for their money to grow, eligible workers ages 50 or older have some perks that their younger counterparts don't. One such perk is how much they can contribute to their retirement plans. This year, those ages 50 and older are able to contribute up to $31,000 to a 401(k), 403(b), 457 or a salary reduction simplified employee pension, or SARSEP, plan. (Eligible people under 50 are limited to $23,500.) And those between the ages of 60-63 are able to contribute an additional $11,250 to the $31,000 cap. Younger workers might have more competing priorities and financial goals, especially if they're earning less. At the very least, try to contribute up to your employer's retirement plan contribution match, especially if you're fortunate enough to work for an employer that does this. Splitting your direct deposit into different savings accounts can help you save for different goals, provided that your employer allows this. For instance, some people might want to have a high-yield savings account for an emergency fund and then another high-yield savings account to save for a new car. Bankrate tools When it comes to your savings goals, don't get stuck doing the math. Use Bankrate's Savings Goal Calculator to help you determine how much you need to help you get closer to achieving your money goals. Reviewing your budget is an important part of maintaining your financial health. Automating your savings and knowing where your money's going can help you get closer to achieving your financial goals. The alternative can prevent you from making improvements to your financial health. All figures, unless otherwise stated, are from YouGov Plc. The total sample size was 2,363 U.S. adults, of whom 1,046 have money concerns that impact their mental health while 1,317 do not. Fieldwork was undertaken between March 19th-21st, 2025. The survey was carried out online and meets rigorous quality standards. It gathered a non-probability-based sample and employed demographic quotas and weights to better align the survey sample with the broader U.S. population.
Yahoo
23-05-2025
- Business
- Yahoo
We're facing a student loan default crisis. This academic research might help
How information is presented can have an outsize impact on your actions. Behavioral scientists at the University of Pennsylvania's Wharton School recently tested a similar theory. They wondered if the right messaging — in the form of a 'nudge,' or reminder — could help struggling student loan borrowers. 'There have been large studies that have shown nudges can work in vaccinations or helping to reduce failure to appear in court,' says Robert Kuan, a third-year PhD student at Wharton who co-authored a January study in partnership with the Biden Administration's Education Department. 'But we didn't really know if it would work for student loan repayment.' It did. Performed in the fall of 2023 (after the COVID-19-caused pause on monthly payments), the study sent various types of emails to federal loan borrowers about their repayment options. Those nudges reduced credit-harming delinquencies by 0.42 percent. That might not seem like a lot, but if the research team had scaled the best-performing nudge to all of the nearly 13 million federal loan borrowers included in the study, they could have helped about 80,000 borrowers nationwide avoid delinquency. The Department of Education resumed debt collection on May 5 for five million federal student loan borrowers who are in default (or more than 360 days delinquent). By their own accounting, the number could grow to 10 million by the summer. Put another way: The $1.6 trillion student loan crisis, which has no apparent end in sight, is looking more and more bleak by the day, particularly for those far behind in repayment. But the Wharton study — 'Behavioral Nudges Prevent Loan Delinquencies at Scale' — may be a glimmer of light. It shows how an Education Department that's well-intentioned and well-equipped to help borrowers along in repayment could make a small but significant dent in the country's overwhelming education debt. After all, nudges appear to work even for borrowers who might be most desperate to put their debt in a drawer, close it shut and not think about it. Money and mental health According to Bankrate's Money and Mental Health Survey, 43 percent of U.S. adults say money negatively impacts their mental health, at least occasionally, causing feelings of anxiety, stress, worrisome thoughts, loss of sleep, depression and other effects. 'This is what makes this experiment pretty surprising because we're sending emails to people who have missed a loan payment,' says Kuan. 'So, this is a difficult-to-move population.' And yet, the study showed a positive effect of emailed nudges: reduced delinquency and a higher rate of applying for income-driven repayment (IDR) plans that cap a borrower's monthly dues at a percentage of their discretionary income. (Though a Wharton school professor, Sylvain Catherine, co-authored separate research on whether IDR plans benefit borrowers in the long run.) They held an average of $34,655 in outstanding loans and owed an average of $340 per month. 63% had missed a payment by 60 days or more in the past. 21% had defaulted on a loan. 39% had graduated from college. Some borrowers received the Education Department's standard message after missing a payment. Other borrowers received a behavioral science-designed message encouraging them to apply for an IDR plan — while highlighting their potential savings — and/or to enroll in automatic payments. Some borrowers in the latter group also received a follow-up message (or second nudge). Kuan recognizes that we are in a different position than when the study was performed. Many of the Education Department officials he and his colleagues collaborated with are no longer employed there. Related reading: Biden Administration's top higher ed official: Dismantling the Education Department won't fix how Americans pay for college Plus, borrowers might have been paying more attention to a Biden Administration hell-bent on targeted loan forgiveness and generous repayment options, like the since-scuttled SAVE repayment plan. 'But it still is very promising that by sending people emails, they didn't just ignore them,' says Kuan. 'And we actually got people to take action and put themselves in a better financial position because of that.' In other cases, perhaps where borrowers aren't in or on the verge of delinquency or default, a helpful reminder to be actively engaged in repayment can't hurt. Worst-case scenario: It winds up in the borrower's spam folder. Best case: They save time, money and stress. For example, the Wharton study found that, just by sending a follow-up email, rates of applying to IDR plans rose by 10 percent, says Kuan. 'Not to say that nudges by themselves will change the world, because there's still, with student loans, structural solutions that we can think through, like loan forgiveness and making student loan debt easier to discharge under hardship circumstances,' says Kuan. 'Nudges aren't a replacement for those. But to the extent that we might be politically divided and structural solutions aren't viable, then nudges are a great complement. They're cost-effective, they leverage psychological insights, and they can be implemented at scale.' Kuan's "surprising" study results Percentages beat dollars. Borrowers who received messages of their potential IDR-related savings in percentage form were more likely to take action than peers who received messages about equal-sized savings presented in dollars and cents. Simpler isn't always better. Borrowers who received messages recommending two actions (say, applying for IDR and enrolling in autopay) were more likely to act than borrowers who received a simpler, one-action recommendation. Kuan received Pell Grant funds and borrowed student loans for his undergraduate degree. He credited his first post-college job with helping to aggressively repay education debt. So, he has a 'personal' tie to America's education debt problem, even if he can't directly relate to the most distressed borrowers. 'In our dataset of 13 million borrowers, there are some people with hundreds of thousands of dollars in student loans,' says Kuan. 'And I can only imagine how a person thinks about paying something that they think they can never [fully] repay. So, that is something that I think must be so demoralizing for an individual.' The Wharton study is a low-cost solution for the Education Department to help some of these borrowers. But, as Kuan acknowledged, it's not a universal problem-solver. If you're feeling demoralized, consider that, as bleak as it may seem, there's always a best next choice for your repayment. You might investigate options like those highlighted in the study: IDR can be a way to temporarily or permanently lower your monthly dues to fit within your budget. Autopay is a simple hack for avoiding late payments (and earning an interest-rate reduction in some cases). Other repayment strategies to consider include: Federal loan forgiveness: There are various ways to discharge student loan debt, including Public Service Loan Forgiveness for government and nonprofit workers at eligible employers. Loan repayment assistance: For federal or private loans, seek out aid programs from states, private organizations and even companies that pay off student loans. Repayment pauses: Postponing your payments temporarily via deferment or forbearance for federal loans and via some private lenders can be useful if you need time to rebuild your income or fix your budget — but interest usually accrues during such pauses. Make extra payments: This can cut down the accrual and compounding of student loan interest. One popular method is repaying your student loans biweekly. Student loan refinancing: Creditworthy applicants can seek a lower interest rate by refinancing with a private lender — at the risk of permanently forfeiting federal loan protections. If you're in dire need of help, don't hesitate to ask. You might consider contacting your federal loan servicer, the Education Department's Default Resolution group or working with a certified student loan counselor or lawyer. Consider this a nudge. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
06-05-2025
- Business
- Yahoo
The psychological benefits of paying off debt
Relief is more than a feeling. Dr. Pearl Chiu, a psychology professor at Virginia Tech, notes that while we often think of reward or loss as behavioral drivers, relief can shape our decisions in profound ways. Debt-related stress often creates a 'constant pull on our attention,' making it difficult to focus on other aspects of life, such as work, relationships or personal goals. Becoming debt-free can lift that psychological burden, freeing up cognitive space and emotional energy. Dr. Mark Aoyagi, a professor at the University of Denver's Graduate School of Professional Psychology, explains that while short-term stress can sharpen our focus, chronic stress does the opposite — it drains mental energy and narrows our ability to think clearly. In Bankrate's latest Money and Mental Health Survey , 42 percent of U.S. adults reported that money negatively impacts their mental health. Among those aged 35 to 54, that number jumps to 52 percent. It's no surprise that debt causes stress — but few realize just how deeply it affects mental health. According to experts, paying off debt comes with perks beyond making space in your budget. Since 1976, Bankrate has been the go-to source for personal finance data, publishing average rates on the most popular financial products and tracking the experience of consumers nationwide. Making a plan to pay what you owe — whether that be through debt consolidation or another repayment strategy — can improve your well-being and help reduce your mental and emotional stress. Americans across the nation feel the impact of rising prices and increasing financial strain. Bankrate's Credit Card Debt Survey found roughly one-third of U.S. adults (34 percent) have at least one credit card that carries a balance month-to-month. But the burden of debt extends beyond the numbers. Debt carries a psychological weight that affects mental, emotional and even physical health. The pressure to repay debt can lead to chronic stress, strained relationships and harmful coping behaviors. Once debt is paid off, maintain your emotional well-being by following a budget and paying bills on time and in full each month. Creating a plan to pay down debt can improve your emotional outlook. It gives you a sense of control, shifts you from panic to action and helps reduce harassing creditor calls. High debt levels can lead to increased stress and anxiety, pessimism about the future and a diminished social life. Story Continues 'Being debt-free is really relieving in some ways and can have positive impacts on behavior,' she says. Feeling relief not only signals emotional safety but also encourages more confident, future-oriented choices. By eliminating the immediate threat of debt, individuals can shift from survival mode to strategic planning — researching for the best loan rates, setting savings goals and making empowered financial decisions. Improved relationships Debt doesn't just affect your internal world — it can impact your relationships as well. According to Bankrate's 2025 Financial Infidelity Survey, 40 percent of Americans in a committed relationship have kept a money-related secret from their partner. Nearly a third (33 percent) reported spending more than their partner would like, and 23 percent secretly racked up debt. Financial strain is a common source of tension in relationships, often leading to conflict, secrecy and emotional distance. Paying off debt together — or individually — can reduce that strain and foster healthier communication. Psychological challenges of paying off debt Becoming debt-free has significant mental health benefits, but the path isn't always easy. Many individuals face internal barriers that make debt repayment psychologically difficult. Shame Shame is one of the most overlooked obstacles to financial recovery. People in debt often feel embarrassed, believing their situation reflects personal failure. According to Aoyagi, this is basic biology. In their evolutionary past, humans became apex predators not with claws and teeth but by cooperating, which made maintaining their status in the 'tribe' vital. 'How others perceive us and how we see ourselves in the tribe, is our biggest strength,' he says. 'People who have a lot of financial stress — they're seen less favorably.' Fear of being seen as a social failure 'prevents us from using our most effective resource' — other people, Aoyagi says. Overcoming shame by seeking support — whether from credit counselors or financial advisors — can be a major psychological breakthrough. Scarcity mindset and risky behavior Debt can also trap individuals in a 'scarcity mindset.' Dr. Elliot Berkman, a psychology professor at the University of Oregon, explains that financial stress can impair long-term thinking. 'When you're low on resources, it's the same as being cognitively distracted,' says Berkman. 'Scarcity makes it hard for us to focus and engage in high-level thinking.' In this state, individuals often take riskier financial actions — not because they're reckless, but because they're desperate to escape the pressure. Paying off debt can break this cycle, helping people shift from reactive decisions to strategic, long-term planning. With greater mental clarity, people can focus on building financial stability. Strategies for paying down debt To unlock the psychological benefits of becoming debt-free, it's essential to create a plan that feels manageable and empowering. Here are some debt payoff strategies that can also support your mental well-being: Debt management plan (DMP): Through a DMP, you work with a credit counseling agency to consolidate debts into an affordable monthly payment. Your creditors may agree to waive fees or reduce your interest rates. Credit counseling : Credit counseling involves working with a reputable agency that examines your finances and helps you develop a budget and debt payoff strategy, such as a DMP. Negotiating with creditors: You could contact creditors and discuss credit card hardship programs or more favorable repayment terms (such as reduced interest rates or lump-sum payments). Or, you might work with one of the best debt relief companies. For a more in-depth guide to approaching your debt, check out Bankrate's expert advice on getting out of debt. Try this tool: Bankrate's debt payoff calculator How to avoid future debt That final debt payment is a great reason to celebrate. But the celebration shouldn't involve taking on more debt or spending more money. Resist the temptation to get that extra credit card unless it's part of a carefully considered plan to rebuild your credit score — secured credit cards can be valuable credit-building tools. Instead, put your newfound motivation into sticking to a budget and keeping track of your bills. Money you free up when your monthly debt payments end can go into an emergency fund to prevent debt from unexpected expenses. If you already have a healthy emergency fund, consider investing in a high-yield savings account or retirement account so your money can grow. Other ways to avoid getting back into high levels of debt include: Borrowing only what you need Being cautious with Buy Now, Pay Later (BNPL) programs Paying credit card bills in full each month Bottom line Paying off debt isn't just a financial achievement — it's a psychological liberation. From reduced stress and improved focus to better relationships and clearer thinking, becoming debt-free transforms more than just your bank account. By making a plan and taking consistent action, you can shift from survival mode to thriving.
