How Debt Affects Your Financial Health

“The rich rule over the poor, and the borrower is slave to the lender” – Proverbs 22:7.

That statement dates back thousands of years, but I think it is still crucial to understand and live by today. Debt can limit your financial freedom, narrow your choices, and make tomorrow’s income serve yesterday’s decisions. In this article, I’ll walk through how debt affects financial freedom, ways to avoid unnecessary borrowing, strategies to pay down current debt, and a unsuspecting debt pitfall that Les and I often see from folks heading into retirement.

Impact on Financial Freedom

Consider this analogy that puts a trillion dollars into perspective. A million seconds is approximately 11 days; a billion seconds is approximately 32 years; a trillion seconds is approximately 31,700 years. Now multiply that by roughly 40, and you begin to see the size of the current U.S. debt. Numbers that large are hard to grasp, but the point is simple: debt becomes overwhelming when borrowing becomes normal and repayment gets pushed further down the road.

Over time, our society has grown accustomed to borrowing money to get what we want immediately. We are more of a microwave country than a crock pot country; we want something quickly and (too often, in my opinion) are willing to borrow the money to get it instead of working, saving, and delaying the purchase until we can pay for it outright. Banks and lending institutions love this mindset because they make millions of dollars in interest from people who focus only on the monthly payment without considering the long-term cost.

So many Americans use credit cards, run up big balances, and pay 20% interest on those balances for years just to have something they probably didn’t need in the first place. Whether you love his stances or not, Dave Ramsey teaches principles that I believe are fundamental to managing your finances: avoid debt, invest money, live below your means, and build a financial life of your dreams. Imagine if instead of paying 20% credit card interest, you chose to save—investing the money and allowing it to grow over the years to support the life you want to live. While I am a huge proponent of responsibly enjoying the fruits of your labor, I don’t think you should go into debt to do it.

Avoiding Unnecessary Borrowing

While not all debt is avoidable in the expensive world we live in, planning for your purchases is the best way to start. If you want to purchase a big-ticket item, look over your budget, open a separate account, and start putting money in that account each month. Get a realistic time frame together and say, “I need to save X amount per month over the next X months, and then I can buy it.” This will allow you to make good financial decisions with the money you work hard for and really make you consider whether that purchase is worth it. It could be that the item was more of an impulse buy and, after working toward that goal for a few months, you realize you don’t even want it anymore. Warren Buffett talks about the time value of money, encouraging people to not only looking at what something costs today, but what that money could be worth in 10, 20, or 30 years with compounding interest. For example, a $5,000 purchase today could represent approximately $28,717.45 over 30 years if that money earned a 6% return per year. So next time you’re planning a purchase, think about the time value of money and how that one purchase affects you and your family down the road.

Below is a table with general guidance for your monthly budget.

Strategies to Pay Down Debt

We typically recommend tackling your debt in this order: (1) paying off all consumer debt, (2) building an emergency fund with six months worth of expenses, and then (3) increasing retirement savings or accelerating mortgage payoff. This order can change based on your personal situation, but it provides an easy framework to help you evaluate whether your spending reflects your priorities.

Looking spefically at the first step of paying off consumer debt, we encourage you to start by listing what you owe and recognizing how much it is pulling from your financial future. One practical approach is to identify the smallest debts first and use your income to pay them off as quickly as possible. If taking on extra work for a season helps you speed that up, it may be worth considering. The quicker you pay it off, the quicker that money starts working for you instead of letting banks or credit card companies collect 5%, 10%, or 15% interest because you borrowed it.

One of the Most Common Debt Pitfalls Later in Life

Let’s discuss one of the most common, yet least talked about, debt traps that Les and I see: a large mortgage payment in retirement. It happens all too often and sometimes we must tell people, "I’m sorry, but you may not be able to retire when you want to because your mortgage is putting too much pressure on your monthly expenses."

If your mortgage causes you to draw down too much of your portfolio, there is a real risk of running out of money. Getting a plan in place and having that mortgage paid off before retirement is key in my eyes. Yes, some people plan on using retirement assets to pay it off when they’re no longer working, but that can create other problems, such as higher taxes, IRMAA surcharges, and fewer retirement assets to live on for the next 20+ years.

Summary

To summarize: live below your means, save money for your future, and buy things you can afford. Don’t let debt from temporary wants be the reason you have to work longer. I personally drive a truck that is 10 years old and has 125,000 miles on it, but it is paid off. As a financial advisor, I want you to live your life enjoying all that you’ve worked for but do so responsibly, avoiding unnecessary problems that could have been prevented with a little planning and guidance.

If you have questions about your current plan, or if you’re getting ready to retire and want to discuss your current debt payoff strategies, give us a call at 931-674-2082 and let us guide you on your journey. We're here to help.

I hope this brought value to you and gave you at least one practical idea to think about. In my next article, we will look at cash flow—how money comes in, where it goes, and how a clear monthly plan can help you stay out of debt and build long-term financial confidence. Thanks for your time, and as always GO VOLS.