The term ‘debt’ generally has a negative connotation. While being in too much debt or the wrong kind of debt can be risky, sometimes debt makes sense. If you are considering taking on more debt, sit down and answer the questions below first to make sure the new debt won’t get in the way of your long-term goals.
How much debt do I currently have?
When thinking about debt, it’s important to first analyze your current financial landscape. Be sure to review everything: credit cards, lines of credit, mortgages, loans and possibly IOU’s to family or friends. Once you have totaled all monthly recurring debt payments, divide that number by your gross monthly income to find your debt to income ratio (DTI). The lower the number, the better. Talk with your financial planner about your ratio and ask for his/her recommendation on whether you should consider taking on more debt.
Am I counting on the economy?
Sometimes people look at the state of the U.S. economy and think, “Hey, a little more debt won’t hurt. The economy is so good right now.” The key piece in that thinking is, “right now.” Yes, the economy is doing well as Larry Howes talks about in our series, Inside the Economy with SH&J, but it may not continue to do well throughout the term of the loan. Relying on a good economy when making decisions about taking on more debt can be detrimental.
What type of debt is it?
Take a look at the big picture by asking yourself “How will this debt affect my personal balance sheet?” Typically “healthy debt” creates leverage to increase your net worth (example: mortgage). However, “unhealthy debt” decreases your net worth (example: credit card debt) and should often be avoided. Don’t rush into new debt. Do your research before borrowing to make sure the lender you select is offering the best rates and terms.
How close am I to retirement?
As you edge closer to retirement, you should become more wary of taking on unnecessary debt. Trading your financial freedom for debt may not be your best option and sometimes doesn’t pay off. For example, do you really need to get a new home with a larger mortgage payment when you are within a few years of retirement? Weigh your options and visit with your financial planner about big purchases, loans or mortgages before pulling the trigger.
Can I afford to keep saving for retirement while paying off this debt?
If the answer is, “No,” then you probably should not take on any additional debt. Saving for retirement is typically an important goal. Putting off retirement savings to purchase something now means reaching your goals could take longer and be more challenging. Don’t let the desires of today cloud the vision you have for your future.
Not all debt is unhealthy debt. Taking a look at your complete financial picture and your long-term goals will help you decide what debt makes sense for you. If you need someone to help you plan financially for your future, reach out to us today. We delight in helping our clients enjoy today while planning for their future.