There’s a funny thing about debt: You would think the definition of the term is black and white, but the truth is that everyone draws the line in a different place.
So before studying the concept, be clear on how you define debt.
Fundamentally, debt is money that you owe. 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 payment in full 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 zero balance is a debt. That outstanding $30 bill from a dentist appointment four years ago that pops up on your credit report is 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 (if not our society at large) encourages only paying the minimum as a way to “get ahead.” There are troubling sides of debt, but there are good sides of having liabilities as part of your financial life, too. Debt can be helpful when used in a savvy way. It’s all about having the financial knowhow and commitment to manage debt and stay on top of it.
The burden of debt can affect more than your finances; it takes a significant emotional and physical toll and can erode your confidence. Given these repercussions, the wisdom of avoiding debt entirely seems obvious.
Then again, 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 realistic habits to 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.
- Do not make spontaneous large purchases. Sleep on the decision first and then decide if you really want to spend the money—even if you have the money to spend.
When you’re 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 at $856.5 billion owed. If these numbers are hard to fathom, consider this breakdown: the average U.S. household owes $7,115 on credit cards.1
For some, rather than relying on credit cards, they are dipping into their home equity lines of credit as a source of income. The numbers prove the story: During the first nine months of 2013, new home-equity loan activity rose 31 percent compared to the 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 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 baby steps. First, go ahead and tear up those credit cards. No more purchasing items unless you have the actual cash in hand. Then prioritize the 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 have massive benefits for your long-term wealth. 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 than simply handing your money over to the credit card company?
The good side of debt
On the other hand, you can have debt for the right reasons, such as 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 a low-interest-bearing debt (a general rule, depending on the current interest-rate environment: keep anything under 3 percent).
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.
In a similar way, getting a loan to start or grow your practice can be a good strategy. Just be sure to keep in mind the alternatives for paying back the debt if the practice fails. Indeed, this debt could become your personal burden. If you keep this fact in the back of your mind, you might make more prudent choices when it comes to the amount of money you borrow in the first place.
A thorough business plan and understanding of your market are key to minimizing risk in this situation. It’s easy to get carried away and buy equipment and gadgets you don’t necessarily need. Spend as little as you can to get started and build step by step.
Borrowing money can bolster your ability to excel at your career, build 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.
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, firstname.lastname@example.org, or through chirowealthmanagement.com.
1 Chen T. “American Household Credit Card Debt Statistics: 2014.” http://www.nerdwallet. com/blog/credit-card-data/average-credit-card-debt-household. Updated Nov. 2017. Accessed July 2018.
2 Hoak, Amy. “Home-equity loans are back, pitfalls included.” Marketwatch. https:// www.marketwatch.com/story/home-equityloans-are-back-pitfalls-included-2014-01-21. Published Jan. 2014. Accessed Aug. 2018.