Knowing the good and bad sides of debt can help you manage it better

There’s a funny thing about debt: You would think the definition is black and white, but the truth is that everyone draws the line in a different place.

So defining debt is the first step toward understanding it.

Debt is money that you owe to someone else. Furthermore, if you don’t pay toward that debt, you may lose the material item it represents or receive an ugly jolt to your credit rating.

A car payment is definitely debt. Money you borrowed for that high-end chiropractic table is a debt. A mortgage is a debt—even if you make your payments every month. And an apartment lease represents a potential debt: Move out early, and you’ll owe the remaining amount on the lease to finish the year.

Your credit card bill with more than a $0 balance is debt. That outstanding $30 bill from a dentist appointment four years ago that pops up on your credit report—a debt. Student loans from chiropractic school are debts. “Liability” is a fancier word for debt, but it’s all the same thing.

Most people know, reflexively, that debt is bad, especially when it comes to credit card debt, with its jumbo interest rates and the way the industry (and our society at large) encourages only paying the minimum as a way to “get ahead.” The following will examine the troubling side of debt first. Then it will explore the good side of having liabilities as part of your financial life. Debt, when used in a savvy way, can be helpful. It’s all about having the financial knowhow and commitment to manage that debt and stay on top of it.

Avoiding debt

The burden of debt can affect more than just your finances. It carries a significant emotional and physical toll and can erode your confidence. Given these repercussions, the wisdom of avoiding debt entirely seems obvious.

Of course, sometimes debt can be a necessary burden (think school loans and mortgages), but there are ways to avoid making the easy mistakes that so often trip people up. Here are five sensible habits that can help you avoid becoming mired in debt.

Track what you spend.

If you are in a relationship, hold each other accountable by discussing large purchases before they are made. It is wise to set a dollar amount at which the proposed purchase must be discussed. For some people this could be $100, for others much more. The key is to set the terms and stick with that agreement.

Decide ahead of time how much you want to spend on a certain item before going to the store or shopping online. Or, determine for the year how much you want to spend on large-ticket items such as vacations and home improvement.

Don’t put anything on credit if you can avoid it.

Do not make spontaneous large purchases. Sleep on it first and then decide if you really want to spend the money—even if you have the money to available.

In too deep

Here are some scary facts: As of March 2014, American consumers owed $11.5 trillion in debt. The two largest sources of this massive number are mortgage and student loan debt, with credit card debt coming in third with $856 billion owed. If these numbers are hard to fathom, consider this breakdown: the average U.S. household owes $7,115 on their credit cards.¹

Some, rather than relying on credit cards, are dipping into their home equity lines of credit as another source of income. The numbers prove the story: During the first nine months of 2013, new home-equity loan activity rose almost 31 percent compared to that same period in 2012.2 As a society, Americans are living in denial. Carrying significant personal debt—to the detriment of one’s financial, emotional and physical health—has come to seem an almost normal way of life.

Unfortunately, finding yourself mired in the quicksand of debt is an all-too-common experience these days—even for successful chiropractors.

Should you find yourself in this situation, the key is to take small steps. First, go ahead and tear up those credit cards. No more purchasing items unless you have the actual cash to do so. Then, prioritize which debts you’d like to pay off; begin by tackling the card with the highest interest rate and work your way down from there.

You may be thinking this all seems impossible, given today’s mammoth interest rates. If so, it’s time to look at your cash flow and figure out how you can either cut your spending or make extra money.

While none of these solutions is fun, living a debt-free life can mean massive benefits for your long-term wealth outlook. Think about it this way: Every dollar that goes toward your interest payments could instead be bolstering your retirement account. And wouldn’t you rather invest in your future rather than handing your money over to a credit card company?

The good side of debt

There is such a thing as having debt for the right reasons— making your money work for you, rather than you working for your money. This can mean making sound choices (even if there is risk involved) about investing in a home, a business, or your education. Or it can mean putting your money to profitable use rather than paying off low-interest bearing debt (a general rule, depending on the current interest rate environment, is to keep any debt incurring less than 3 percent interest).

Buying a home or investing in real estate will likely necessitate a hefty bank loan. Smart research about what and where you are buying, depending on current interest rates, can make borrowing this money a no-brainer; you’re building equity while avoiding paying rent.

Getting a loan to start or grow your practice can be a good strategy for nurturing your chiropractic career as well. But you’ll want to know the alternatives for paying back the debt if your practice fails. Indeed, this debt could become your personal burden. If you keep this in mind, you may make more prudent choices when it comes to the amount of money you borrow in the first place.

A thorough business plan and an understanding of your market will be essential to minimizing risk in this situation. Remember: It’s easy to get carried away and buy equipment and gadgets you don’t absolutely need. Spend as little as you can to get started and build gradually.

Borrowing money can bolster your ability to excel at your career, build your home equity, and grow your investment portfolio. With a little bit of luck and plenty of hard work, hopefully the good debts you acquire (and pay off) will help you to achieve the ultimate goal: a liability-free retirement.

Of course, real estate bubbles can burst and businesses fail. Life is full of uncertainties. One way to mitigate these risks is to live life thoughtfully, ask for support when you need it and remain conscious of every decision you make.

Debt is not a good place to let your heart lead the way. This philosophy can help you navigate the choppy waters of good and bad debt.

 

Todd Calamita, CFP, is a fee-only certified financial planner and author. He focuses on providing wealth management solutions to chiropractors and their families by helping them preserve their wealth, mitigate taxes, take care of their heirs and protect their assets. He can be contacted at 704-276-7325, todd@chirowealthmanagement.com, or through chirowealthmanagement.com

 

References

1  Chen T. “American Household Credit Card Debt Statistics: 2014.” Nerdwallet. http://www.nerdwallet.com/blog/credit-card-data/averagecredit-card-debt-household. Updated March 2018. Accessed March 2018.

2  Hoak A. “Home-equity loans are back, pitfalls included.” Marketwatch.com. https://www.marketwatch.com/story/home-equityloans-are-back-pitfalls-included-2014-01-21. Published Jan. 2014. Accessed March 2018.