Debt: A burden worth avoiding

Tyler Kert
Tamarack Wealth Management

Most people don’t plan to go into debt. Unfortunately, many people don’t have a plan to stay out of debt either. As a result, debt often sneaks in through the allure of instant gratification in a buy now, pay later scheme, or it jumps onto the scene through an emergency. In a world filled with instant gratification, staying out of debt can feel like a serious challenge. After all, why should you only drive a car that you can afford when it seems like all your friends are driving financed cars? Is it really worth it to live below your means and save, when you could go on that vacation by using your credit card and paying it off later? In this article, I’ll touch on some of the risks of living in debt and offer a few tips to get back in the black if you find yourself off track.

The first reason that you should avoid debt is that you are ultimately making someone else wealthy. If it’s an auto loan, you’re helping out the dealership. If you’re charging up a credit card, you’re adding to the bottom line of the credit card company. When you go into debt, you must pay interest and interest is just another way of saying that you’re paying extra. The wiser choice is to resist the temptation of instant gratification and take the time to save up for what you want to buy. Then you can pay cash, avoid the interest payments, and ultimately have more money left over at the end of the month to put towards your own bottom line.

The second reason that you should avoid debt is found in an old Proverb. “The borrower is a servant to the lender.” Debt promises freedom. It promises the freedom to get what you want now and not wait to actually be able to afford it. Eventually, though, debt results in bondage. Left unchecked, debt will grow and take your freedom with it. Debt can take away the freedom to be able to retire early or even save for retirement in the first place. Debt can also take away the freedom to change what kind of car you drive because you owe money on your current car. Without the discipline to avoid debt now, you will serve your creditors later and sacrifice the freedom that you might have had.

Before I continue, I’d like to give one caveat that many may be thinking of when it comes to debt. There are situations when debt is virtually unavoidable and other situations when debt is not always bad. The rule of thumb that I’ve found most helpful when deciphering between good and bad debt is the following: only take out debt on appreciating assets. This allows for debt to be appropriately used with home mortgages, purchases of property, and other wise investments. Using leverage to control an appreciating asset is often a wise financial move and doesn’t fall into the category of bad debt.

If you’re reading this and you have debt that you would like to get out of, there are several steps you can take to start getting on the right track. Building and sticking to a budget is a crucial first step. In many ways, budgeting is the cornerstone of financial stability. In creating a budget that tracks your income and expenses, you can grasp a clear understanding of where your money goes each month. Use your income for essential expenses like housing, utilities, food, and transportation first. Then, prioritize savings and investments before discretionary spending. This disciplined approach ensures that you live within your means and avoid overspending, which is a common precursor to debt.

Second, establishing an emergency fund is crucial to prevent falling into debt during unexpected financial setbacks such as medical emergencies or job loss. A recent Bankrate survey found that less than half (44%) of Americans say they can afford to pay a $1,000 emergency expense from their savings. Without an emergency fund, individuals without savings will be forced into debt as soon as catastrophe hits. Aim to save enough to cover at least three to six months worth of living expenses. This cushion will allow you to handle unforeseen expenses without resorting to borrowing money and going into debt.

In conclusion, steering clear of debt isn't just about money—it's about shaping a lifestyle where you call the shots. By developing the discipline to budget and distinguish between needs and wants, you're not just managing your finances; you're building a foundation of stability and peace of mind. Focusing on saving and investing rather than leaning on credit will set yourself up for financial freedom in the face of life's uncertainties.

Tyler Kert, a licensed financial advisor and CPA, provides financial planning and tax consulting services at Tamarack Wealth Management in Cashmere, WA.