A lot of us make too much money, and too little money, to be in debt.
Socially, debt is acceptable. As a financial coach, many of the people I work with are initially comfortable living in debt. Debt allows people to have the things they want in the moment (for a little while at least). However, using tomorrow to finance today is like teetering on the edge of a cliff.
Debt inherently invites risk.
If you miss a payment on your debt, odds are someone else has a right to take whatever it is that you were making the payment for. If you miss your car payments, the creditor can repossess your car (and you will still owe the balance!). If you miss your house payments, the lender can take your home. If you miss your student loan payments, the government can take your wages (i.e. garnish).
The average household income in the United States, as of 2018, was $87,864 and the median was $61,937. In a lot of places in the US, this is enough to live on.
Having debt not only creates risk for you, but it also takes away from that precious earned income that you work so hard for. Take this example:
M&D are a married couple and they combine their income and their debt (the proper way!). See the post on combining income.
They bring home, after all payroll deductions, $6,000 per month. They have a mortgage, two car payments, student loans, and credit card debt. This is a snapshot of their debt payments in their monthly budget:
Mortgage (taxes & insurance) = $1200
Student Loan payment = $ 600
Car Payment 1 = $ 500
Car Payment 2 = $ 500
Credit Card payment = $ 125
MONTHLY DEBT TOTAL $2,925
Without paying for anything for their day-to-day life, they have to pay $2,925 in DEBT. That’s almost half of their take home pay.
Let’s factor in the rest of the things they spend money on: Food; Clothing; Insurance – Home and Auto; Subscriptions; Utilities – electricity, gas, internet, water/trash, cell phones; Car gas; memberships; gifts. This adds up to another $2,175.00.
The day-to-day expenses coupled with the debt payments total $5,100. That might seem pretty good, right? M&D bring home $6,000 and their expenses are only $5,100. They have $900 per month left over.
So, M&D decide they want to go on a vacation. They can afford it – they have $900 a month left over! They save up for four months and pay for their vacation in cash.
Now, they’re getting ready for their vacation. M is out shopping for new clothes for their trip. M has spent $200 on new clothes so they can look fly on the beach. M also bought sunscreen, snacks, mini toiletries, a travel neck pillow, magazines, sun hats, and books. M spends another $100. M is feeling good. They still have $600 leftover for the month. Driving home, M hits a curb. The little curb bump busts the tire and M has to get a new tire. When M gets to the tire store, they tell her that she actually needs four new tires and they will cost $600. Phew – it’s okay. It’s the end of the month and they had just enough!
They go on their vacation and spend the $900 excess money while they are there. When they come home, there are 3 weeks left in the month. They are relaxed though, because they “needed that vacation.” A day into being home, D notices that the dog is seeming off. He is obviously not feeling well. They decide the dog needs to get to the vet. Turns out the dog has an infected tooth and needs to have his teeth pulled. The bill? $700. The feeling from the relaxing vacation – it’s over! Fortunately, the vet offers a special credit card to pay for vet care. M&D apply for this card. 0% interest for the first six months and the payment will only be $50 a month. M&D will pay $116 a month and pay it off before the interest starts accruing.
The dog gets the teeth pulled. It’s a new month. But, now, M&D only have $800 a month left over because they have the $100 payment for the new special vet credit card. And guess what happens?...
This story continues on and on. That $800 excess becomes less every time more payments are added on to the monthly expenses. While M&D make a great income, they’ve allocated so much of it to debt that they can’t tolerate much risk. It will seem okay for a while but at some point it catches up. M&D aren’t able to save, invest, or really live the life they envisioned because they are just bopping along making payments. The payments hold them stagnant.
Imagine that M&D took their initial $900 a month excess money and with a lot of intention and dedication, started paying off their debts. In the first three months, they could pay off their credit card. Six months later, they could pay off a car. Now really think about that! They would have $1,525 leftover per month! Think about how different things like a vet bill or new tires would feel.
Unless you are making A LOT of money, you can’t tolerate much risk. And even if you make A LOT of money, it’s still easy to spend it all if you finance everything and aren’t mindful of where you are spending it.
The Bottom Line Budget philosophy is a commitment to live debt free. The idea is to make your expenses as low as possible and reduce your risk as much as possible. The less you owe other people, the more you get to make choices for you. You get to take advantage of the opportunities in front of you, whatever they are.