If you’re like many people, your parents probably taught you that debt is a good thing. Responsibly handling debt makes you a good credit risk, and a lender would be eager to loan to you. However, without judicious use of debt, it can quickly spiral into something much more sinister. Debt has a way of wrecking life plans from a variety of angles.
Student Debt
Student loan debt has been a contentious issue as of late. Recent generations are questioning the value of taking on up to hundreds of thousands of dollars in debt even before they graduate from college. According to a study by the National Student Loan Data System, the average student loan debt in the United States exceeds $30,000. This burden can delay graduates' ability to purchase homes, start families or save for retirement. What was perceived as almost a rite of passage into responsible adulthood is now being viewed through a different lens.
Entrepreneurial Ventures and Business Debts
Many entrepreneurs rely on debt to start or grow their businesses. While this can lead to successful ventures, it also carries significant risks. Business debt can become overwhelming, especially for small businesses facing market fluctuations or unexpected expenses. A failed business venture not only affects the entrepreneur but also employees and their families. The failure rate of small businesses, often attributed to cash flow issues, underscores the precarious nature of relying on debt for business operations.
Delayed Retirement and Absence of Long-Term Security
Debt can also have long-term consequences on retirement planning. Individuals saddled with high levels of debt often find it challenging to contribute to retirement accounts, leading to inadequate savings. This lack of preparation can extend working years far beyond what was planned, diminishing the quality of life in later years. The rising trend of retirees carrying mortgage and consumer debt into retirement is a worrying indicator of future financial insecurity for an aging population.
Relationship Strains and Breakdowns
Money problems are a leading cause of stress and strain in relationships. Debt, in particular, can create significant stress between partners, often leading to arguments and, in extreme cases, divorce. When one partner brings debt into a new marriage, resentment can build up. The situation also causes power inequalities, where one person may feel beholden, or the other may feel like they’re carrying the indebted spouse. The pressure to manage debt can overshadow other aspects of the relationship, eroding trust and communication. This dynamic not only affects the couple but can also have a ripple effect on the well-being of their children and extended family.
Lack of Access to Credit
Debt's impact extends beyond immediate financial instability, creating long-term barriers through its influence on credit scores. A poor credit score, frequently a result of mismanaged debt, poses significant challenges in accessing vital financial services. Individuals with low credit scores struggle to obtain new credit, as lenders often deem them high-risk borrowers. This situation typically leads to either outright rejection of credit applications or approvals with exorbitant interest rates, which digs a person even deeper into debt they struggle to repay. It’s a vicious cycle.
The dream of homeownership also becomes complicated, with a poor credit score significantly hindering the ability to secure a mortgage. Even if approved, such mortgages typically come with less favorable terms, escalating financial burdens through higher monthly payments. A bad credit score can even inflate insurance premiums, as insurers might view individuals with poor credit as higher risks. Not only that, but renting becomes a big challenge, as more and more landlords do credit checks, leading those with poor credit scores to face difficulties in securing rental housing, often compromising on living situations. This perpetuating cycle of restricted access aggravates the financial burden of indebted individuals, making it increasingly challenging for them to pursue life goals.
Missed Investment Opportunities
When you're buried in debt, it's not just about struggling to make ends meet today; it also means missing out on chances to grow your money for the future. Think about it: if most of your cash is going towards paying off debts, how can you save for retirement? This means when it's time to retire, you might not have enough saved up, forcing you to either work longer or cut back on your lifestyle. Also, if all your money is tied up in debt, you can't invest in things like stocks or real estate that could potentially make you more money in the long run. It's like watching a train full of opportunities pass you by. And it's not just about investing money. Being in a lot of debt can stop you from investing in yourself too. Want to go back to school or start a business? That can be tough if your finances are stretched thin. Plus, let's not forget about emergency funds – everyone should have some cash set aside for unexpected stuff, but that's hard to do when you're drowning in debt. So, being stuck in a cycle of debt doesn't just affect your life now; it can also hold you back from building a better, more secure future for yourself and your family. It's like being stuck in quicksand; the more you struggle without a plan, the deeper you sink.
If you find yourself in debt over your head, one of the best steps you can take is to hire a CPA. CPAs help manage your tax burden, your cash flow and many other aspects of your financial profile. It’s never too late to get a handle on debt, but the sooner you act, the sooner you can stop the downward spiral.
by Kate Supino