Drag is to Thrust as Debt is to…
Recently we learned that the Biden Administration plans to forgive millions of borrowers of their student loan debts. Up to 10k in forgiveness of federal student loans and up to 20k for borrowers who had a Pell Grant while attending school. To qualify the borrower must demonstrate income below 125k for a borrower filing single or 250k for borrowers filing married filing jointly in tax years 2020 or 2021.
We’re not examining the fairness of the student loan forgiveness program. I grew up repeatedly hearing “life isn’t fair” among my siblings. Indeed, it’s true. What’s also true is the estimated 43 million Americans who will benefit from this plan will experience a little less drag on their finances.
Drag is to Thrust as Debt is to Financial Independence. I’m not about to go Dave Ramsey on you however here’s the truth: unsecured and revolving consumer debt will often frustrate your progress towards your financial goals.
Not all debt arrangements are bad. In fact, a strategic use of debt can make excellent financial sense. For example, before the recent rate hikes, if you had the cash to purchase a home outright or take on a mortgage with a very low interest rate and invest the cash over the same duration, you’d probably be wise to take the mortgage and invest the cash for a similar duration of the mortgage.
Where debt becomes an issue and a danger to your financial progress is when it’s used to extend your financial reach beyond what you can afford. Here I’m speaking about revolving debt (credit cards, lines of credit, HELOCs) used primarily to fund lifestyle and depreciating assets.
3 Questions to help you determine if your debt is a drag on your financial progress
- Are your primary financial goals on track and being funded adequately?
If your answer to #1 is no, then STOP and determine what’s most important to you. How important to you are the long-term goals that you’ve set? Have you spent the time to articulate your long-term goals to yourself? How important are the items or experiences that you’re borrowing to fund. Perhaps you’re operating on faith that it’ll all work out. Perhaps you’ll be right, perhaps you’ll wrong.
Whatever you come up with, your primary goals ought not be sacrificed on the altar of the present via an overextension of consumer debt.
- Are you stressed about making your monthly debt payments?
If your answer is yes, you should next determine if the stress is caused by having the debt itself or is it caused by your ability to service it. If your stress is caused by your ability to service the debt, maybe you’re cutting it too close every month. If your stress is caused by the debt itself perhaps you just have a low tolerance for debt. Everyone has a different tolerance for debt.
Take time to figure out what you would be comfortable with and create a plan to get there. You may have a mortgage balance and would love to knock it out. But instead of selling the investments in your brokerage account and triggering taxable gains and loosing out on the potential growth, you decide to allocate additional principal payments from your current cash flow.
- Are you “robbing Peter to pay Paul”
If you’re often “robbing Peter to pay Paul” then oops, you’re overextended. I’m not passing judgement on how you’ve become overextended; it happens. A better use of time is determining what it’s going to take for you to get back on course. What strategies can you put in place to help you pay down the debt, regain control of your cashflow and start making progress on your primary goals.
I agree that all work and no play make Jack a dull boy. So, buy the Cirrus, buy the Diamond, close on the second home. Ensure you take the proper steps to ensure that you’re not overextended when you do so.
Back to the student loan forgiveness plan. If there’s no change in society’s perception of higher education, our acceptance of sky-high, unsustainable tuition cost and lack of basic financial literacy at the middle and high school levels we’re going to be back in the same position before we know it.
Talk to your children, your nieces and nephews, the neighbor’s kid who is about to embark upon their journey to figure out what they want to do for the rest of their lives. Whatever that is, help them see that doing it with little or no debt will be infinitely better than starting their adult lives with an incredible amount of financial drag.