How is debt affecting your life? Have you reached a point where your debt is emotionally and physically draining? Prior to getting into that heap of debt, did you ever think of debt as negative or debilitating?
Debt is more than a mathematical problem that needs solving. If you’re mired in debt, you’re likely missing out on the freedom and creative opportunities that kicking that debt to the curb can bring you.
Unfortunately, we live in a world that is based on debt. Heck, just look at the current national debt. Actually, don’t look. It’s head spinning! We’re immersed in a culture that pushes us to go into debt for everything. It’s the message of instant gratification we are constantly bombarded with – spend yourself into happiness.
In this article we’re going to push back on that line of thought and give the real reasons we should all be striving to avoid debt. Hopefully, these words will provide some motivation to spur you on towards getting after that debt payoff plan this year.
Top Reasons to Avoid Debt:
Saving money on interest is huge and we don’t want to diminish that. But there’s more to the story of what having less debt actually means in your life. We’ve found through personal experience and what we hear every day from folks like yourself that the mental/emotional side of not owing anyone anything – or at least being in complete control of your debt obligations, is incredibly freeing.
Aside from the math/numbers, here are a plethora of fantastic reasons to avoid debt at all costs:
1. Debt is expensive (interest)
Mortgages, car loans, student loans, personal loans, credit cards, and medical bills are just a few of the most common ways we all get into debt. And you may have heard some people say that whenever you swipe your credit card, you end up paying TWICE for that item. How is that possible? It’s because of the power of interest rates – with credit cards now charging the highest rates of all time, with many in the 20% to 30% range. That means if you aren’t paying off your full balance each month, that interest will start accruing.
REAL-LIFE STORY: When my friends Tim and LeAnn got married they had a combined debt balance of over $400,000 – and that was not because they bought a house. Most of that was student loans. To give you an idea of how much damage interest can do, when Tim and LeAnn began paying off their debt, they realized the first $1,000 a month they were paying was to interest alone! Miraculously they paid off that entire debt and wrote a book about it.
Compound interest works BOTH ways. For wealth builders, it is a tremendous help. For people with bad debt, it hurts you way more than you think.
2. Debt can hurt your credit score (making everything else more expensive)
Carrying a lot of debt has a negative impact on your credit rating. In fact, approximately one-third of your credit score is based on the amount of debt you have. The closer your credit cards and loans are to being maxed out, the lower your credit score will be.
A low credit score can cost you thousands of dollars every year in increased interest rates, making it more difficult to get out of debt.
“But I’m not interested in opening a credit card account or getting a loan, so none of this should affect me, right?” Wrong! Even if you’re not shopping for a credit card or loan, your credit score affects your life and the cost of other products and services, such as auto insurance.
On a positive note, as you pay off your debt, your credit score will improve. As a result, this has the potential to provide a wide range of benefits such as obtaining lower interest rates on future loans, etc.
3. It can hurt your marriage/partnership
It’s no secret that “financial troubles” are routinely cited as a main cause of divorce. Worrying about paying bills can make you irritable and more likely to lash out at your spouse/partner. Debt can put an undue strain on the household budget and produce a lack of financial security for your spouse/partner and children.
When you’re both feeling stressed, it can lead to disagreements regarding spending patterns, who is incurring more debt, and how much debt is excessive. These disagreements might grow and lead to a breakup.
On the flip side, when you work through these issues together, your marriage/partnership will be stronger in the end. Couples can survive amazing money challenges as long as they are on the same page financially. The process of debt repayment will drive you to communicate more effectively, and the experience of surviving a crisis together will strengthen your bond.
Related: How to merge finances with your partner
4. Debt lowers your self-esteem & confidence
You probably don’t need a psychologist to tell you that debt can cause severe emotional damage. It can trash your self-confidence and self-esteem – or how you value yourself.
If you’re like me and observe how others live their lives, you may notice that folks with debt often go out of their way to create a life that looks picture-perfect on the outside. Their social media accounts might be plastered with posts about their houses, cars, clothes, vacations, etc. However, this may be a mask to cover up insecurities about their real financial situations.
The good news is you might find that paying off debt can boost your self-confidence and self-esteem significantly. And it’s never too late to make a debt payoff plan and take control of your finances.
5. Debt is stressful
When you have debt, it’s difficult to not worry about how/when you’re going to make your next payment or how you’ll keep from taking on more debt to make ends meet.
In fact, a recent study found that 77% of Americans feel anxious about their financial situation. And this stress hurts our ability to save money, budget, and pay off debt. This type of stress can take a toll in a variety of ways like causing fatigue, having difficulty concentrating at work, encountering sleep problems, along with negatively impacting relationships.
Stress can make you feel like you’re losing control. It erodes our ability to make informed and rational financial decisions, which leads to more impulsive money moves. Debt stress can cause mild to severe health problems such as ulcers, migraines, depression, and even heart attacks. If that isn’t one of the most alarming reasons to avoid debt, I don’t know what is!
Related: Best Ways to Battle Money Anxiety
6. Debt makes us dumber (lowers your IQ by 13 points)
You may have heard a famous money expert routinely scream – “DEBT IS DUMB!” Well, debt can also make YOU dumb by impairing your cognitive function and your ability to think and reason. Being in debt and struggling to pay your bills has been shown to lower your IQ by 13 points!
Having a debt cloud over your head can also affect your attention span, working memory, and self-control. It makes you less reasonable, less rational, less generous, and more subject to bad ideas and bad impulses. Living in excess debt can damage your psyche in a meaningful way.
Additionally, having a weaker cognitive function can make you worse at making financial decisions, resulting in even more debt problems. It’s a vicious cycle!
7. Debt quells creativity
Using bad debt to solve financial problems minimizes the spirit of creativity. Basically, swiping your credit card is the easy way out. When you renounce debt, you are forced to be more innovative and view problems in a different light. It promotes the development of frugality and do-it-yourself abilities, both of which have long-term benefits.
REAL-LIFE STORY – A while back the front bumper on my car needed replacing. My insurance didn’t cover the damages since I was being frugal and had dropped full coverage. Instead of going into debt and paying over $2,500 to a body shop, I found a replacement bumper at a local junk yard, painted it myself, and hired an independent technician to replace the bumper. Instead of paying thousands, I spent around $300.
Related: Tips for More Mindful Spending
8. Debt limits future options
When you take out a loan or use your credit card, you are borrowing from the money you anticipate earning down the road. But mortgaging your future like this is risky because you never know what changes in your income may bring.
I can assure you from personal experience that debt can seriously limit your options. It feels like you’re handcuffed. If you are in debt and have no savings, you will become a slave to your job and your paycheck. And if you hate your job, you might feel trapped. You might want to quit but not be able to because of your overwhelming debt payments.
On the flip side, getting out of debt can unleash something inside of you that you didn’t know was there. Your life suddenly becomes full of opportunities that weren’t available to you before.
This is one of those sneaky reasons to avoid debt, hidden from plain sight.
9. Debt limits self control
When debt is always an option in our lives, it doesn’t foster our ability to say no. Like we mentioned before, debt can become the “easy button.” But taking the easy route will force hard decisions upon us later on.
Drowning in debt can make you feel like you’re spiraling out of control. This then limits self-control, which manifests into several negative emotions such as feeling trapped, stressed, anxious, and depressed. And it may come as no surprise that there is a correlation between the level of one’s debt and the amount of alcohol they consume. High levels of debt often lead to other unhealthy habits.
Related: Should I buy it? Here’s a checklist of questions to help!
10. Restricts helping others
Simply put: you can help more people when you’re debt free.
If debt causes you to have fewer options, eliminating debt would therefore open the door to MORE options. Think about all the good you could do without having to pay down debt all the time! How could you help others? Are you passionate about a cause, an organization/nonprofit, or involved in a local church? These are just a few things that you could potentially donate to and start making a difference in the lives of others.
Related: How to Give Money (and Why It’s Awesome)
11. Sets a bad example for kids
If you have children in your life, modeling debt-free behavior will have a tremendous impact on how they view money.
Kids have young, impressionable minds and are easily influenced by what their peers are doing. They are bombarded with thousands of ads per day, persuading them to spend money (or beg their parents to spend money). If your kids don’t see you making frivolous purchases and racking up credit card debt for spur of the moment purchases, that will increase their ability to do the same. Avoiding bad debt won’t guarantee that your kids will do the same, but it helps.
Related posts:
- Teaching Kids about Money at a Young Age
- Best ways to give kids a financial head start (without giving them money)
Good debt vs. Bad debt
It’s the age-old debate among the money nerds – is there such a thing as “good debt” and “bad debt”? Or is all debt bad? In most cases, good debt is an investment in yourself—such as loans for higher education or to start a business. Of course, borrowing money for assets that appreciate in value, like a house, could also be considered good debt.
Consequently, money borrowed for possessions that decrease in value is widely referred to as “bad debt.” Unfortunately, that describes many of life’s basic necessities, like clothes, cars, and other living expenses. Bad debt can include car loans, personal loans, payday loans, and high-interest credit cards.
Before making any decision to take out a loan, ask yourself this question…Will this debt pay me back more than what I put in?
If you’re still confused about whether a specific debt is helping or hurting you, check out our full breakdown of good debt vs. bad debt examples.
The Bottom Line
Being crushed by debt restricts your ability to do everything you want with your money. However, the biggest reasons to avoid debt go far beyond just money. The persistent strain of debt can harm your career, health, and relationships over time.
Building frugal habits and paying off your debts can improve your life in almost every aspect and bring out something within you that you were unaware of. When you don’t owe anyone anything, you realize that you have more opportunities to launch a new initiative or establish your own business. At least one thing is true, and that is that you are no longer burdened by debt!
Knowing the benefits of debt-free living is one thing; figuring out how to do it is another. Fortunately, there are numerous services available to assist. Begin by using a debt payoff calculator like Credit Karma’s, and check out our article on creating a debt payoff plan to help total your bills and determine a repayment schedule. Numerous programs and services, such as credit counseling and debt reduction, can help you manage your debt. Before signing up for debt relief or counseling, do your homework because some of these businesses demand expensive fees that could be better spent paying off your debt. The best ones to work with are nonprofit entities like your local Money Management International affiliate.
Beer During This Episode:
While discussing the biggest reasons to avoid debt we enjoyed a EMO-J by Heist Brewery in Charlotte NC. And as we’ve kicked things off with a bang this year, we could really use your help to spread the word- let friends and family know about How to Money! Hit the share button, subscribe if you’re not already a regular. Or give us a quick review in Apple Podcasts or wherever you get your podcasts. Help us to spread the word to get more people doing smart things with their money in these difficult times!
Best friends out!
Hello Matt,
I’ve not been really good at regular cleanings and have avoided the dentist because of costs for almost a decade. I heard your plight and have a suggestion. It could also be a topic to bring up later as well. Check out opencare to gain $50 for going to the dental office.
My experience is getting a gift card on my first visit (free with insurance) and then scheduling a later visit for less urgent oral maintenance (way lots more with HSA). My wife needed 3 appointments to qualify for the gift card so it would have been a discount, less than mine.