“It’s very tempting to spend more than you earn, it’s very understandable, but it’s not a good idea.”
Warren Buffet
When thinking about Debt, we are often presented with the term “Good Debt vs Bad Debt”, Good debt being for income producing assets and Bad debt for discretionary spending, and while this might be a general guiding principal it is important to be aware that debt that you do not have the means to pay back will in time cause financial problems.
Let us explore some of the reasons we may take on debt that effects our personal stress levels:
– No clear delineation between Wants VS Needs
– No other way to cover financial emergencies
– Social acceptance
– Marketing and Media
– Economic Bubbles
– Relationship problems
– Depression and Mental Illness
Going into debt to buy a house may be viewed as ‘Good Debt’ that falls within the ‘Needs’ equation. However, it is not that simple as we can get ourselves into elevated levels of debt that we struggle to repay because we purchased a house that is beyond our means. The house falls into the ‘Wants’ category, we want to live in the same expensive neighborhood as our friends, but do we need too? Another less expensive neighborhood 20 minutes away will provide everything we need.
As stock markets and property markets rise, we may experience an increased economic confidence that lures us into to taking on more debt. However, these markets are subject to fluctuations and the adage “what goes up must come down” has shown to ring true over the years. This is clear now with rising interest rates, and those of us who borrowed to the limit in a low interest rate environment, not factoring in future fluctuations may now be experiencing financial stress.
Depression can lead to financial hardship and financial hardship can lead to depression. In listening to a recent podcast on reducing debt, a young woman recounted how she found herself in debt due a marriage breakdown that left her adrift and trying to find herself. She invested a lot of money on self help workshops and getting rich quick schemes all, of which left her bankrupt. She now is aware that her mental health was such that her financial decision making was impaired. If she had recognized this earlier and had sought both financial and psychological help, she may have avoided bankruptcy.
Being aware of the dangers of taking on debt to appear more socially acceptable can assist us in making good financial choices. An example of this is recounting a young woman’s story who described how she had many friends and ‘cheerleaders’ who encouraged her to live a lifestyle of traveling around to music festivals, while they were telling her what a great life she was leading, she was piling up credit card debt, using four different cards, until she was eventually hospitalized with stress and anxiety.
We may not have a group of people being our cheerleaders when we:
– Spend less than we earn
– Borrow only what we can comfortably payback
– Operate within a budget
– Mindfully spend money according to what we value
– Save for our retirement and financial emergencies
– Invest our money
– Limit credit card debt
However, we can be our own cheerleader, which is a much better foundation on which to operate. Who needs a cheer squad when we are free from financial stress and feel in control of our finances?
At Income Solutions we are our clients financial ‘cheer squad,’ informing, guiding, and encouraging our clients to achieve their long-term goals and financial milestones.
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