The Dangers of Excessive Debt and Mindful Wealth Management
Debt can be a double-edged sword. For a borrower, it brings risk; for an investor, it represents a less risky investment compared to equities. To an engineer, debt is a series of numbers with conditional statements. However, when it comes to personal finance, having too much debt can lead to significant money troubles and financial stress. In this article, we will explore the dangers of excessive debt and its impact on your life.
Understanding What Constitutes "Too Much" Debt
Having a modest amount of debt can be acceptable, but the line between manageable and excessive debt is often blurred. It's a cycle that many find themselves in: initiating with a small purchase on a credit card, only to find themselves thousands of dollars in debt before they know it. The question then arises: what is wrong with having a little or a lot of debt? The answer lies in the significant problems that debt can cause in your life.
Problems Caused by Excessive Debt
1. Debt Encourages You to Spend More Than You Can Afford
When you have debt, you may be tempted to spend more than you can afford. This can lead to a vicious cycle of overspending, accumulating more debt, and struggling to pay off what you owe. Such behavior not only exacerbates financial strain but also prevents you from building a healthy savings buffer.
2. Debt Borrows from Your Future Income
Borrowing now means that you are using your future income to pay off current expenses. This can strain your financial resources and create long-term financial pressure. The more debt you have, the more your future income is tied up in debt repayments, leaving you with less money to save, invest, or enjoy your life.
3. High-Interest Debt Causes You to Pay More Than the Item Cost
High-interest debt, such as credit card debt, can lead to paying significantly more than the actual cost of the item you purchased. The interest accumulates over time, making it increasingly difficult to repay the original amount, let alone the added cost of interest.
4. Debt Can Lead to Stress and Serious Medical Problems
The constant pressure of debt can lead to significant stress, which can manifest in various ways, including physical and mental health issues. Financial stress is a real and significant health concern, and excessive debt can contribute to chronic stress, anxiety, and, in severe cases, serious medical problems.
5. Debt Can Hurt Your Marriage (and Other Relationships)
Debt can put a strain on personal relationships, particularly marriages. Financial stress can lead to arguments, resentment, and even the breakdown of relationships. It's important to communicate openly with your partner about your financial situation and work together to manage debt responsibly.
6. Debt Hurts Your Credit Score
Your credit score reflects your financial health and responsibility. Having excessive debt can lower your credit score, making it harder to secure loans, mortgages, and even leading to higher interest rates on new credit. A low credit score can limit your financial opportunities and increase your overall cost of borrowing, making it even more challenging to emerge from debt.
My Personal Experience with Debt
I, myself, have been in the workforce for a considerable amount of time, and during that time, I have accumulated substantial debt. The more money I make, the more debt I build. I have come to accept that I will always be in debt, but I also understand the importance of being disciplined with my finances.
Managing Debt Mindfully
Financial stress can be overwhelming, but by being mindful of your debt and making conscious choices, you can mitigate its effects. For example, I have paid off college tuition, room, and board for my three children, which was financially exhausting. However, I do not blame this for my perpetual state of debt, as I took on these debts with the goal of providing for my children's education.
I have also made efforts to convert as much of my debt from "bad debt" to "good debt." For instance, I no longer have credit card debt above six figures, and I pay off all credit card balances monthly. While my real estate debt, considered good debt, has also accumulated, the continuous rate hikes by the Federal Reserve pose a challenge. In the event that my properties become unnecessary, I may face difficulties in selling them.
As long as I have mortgages to pay, I prioritize avoiding non-mortgage related debts that could hinder my ability to pay these monthly mortgage payments. Additionally, I have loans against the cash value of my infinite whole life insurance policy, which, despite being optional to pay back, I consider a form of good debt. Over time, I aim to pay these loans back.
Conclusion
Excessive debt can have severe consequences on your financial health and overall well-being. It is crucial to be mindful of your debt and make informed decisions to manage it responsibly. By understanding the dangers of excessive debt, you can take steps to avoid the negative impacts and create a more stable financial future for yourself and your loved ones.