Debt Is The Great Equalizer

[Today’s post is from Dads, Dollars, Debts, a cardiologist blogger who lives and works in California. Debt, unfortunately, can equalize people’s lifestyles. By taking on debt, a person with a middle-class income can buy things individuals who earn twice their income can afford. In this post, DDD notes that financial stress is highly correlated with debt level, so even individuals with high incomes (i.e. doctors) who choose to take on significant debt can feel the same stresses about money as those with lower incomes. This post previously ran on DDD’s blog in March 2017. -WSP]

Imagine we are on a desert trip. Every 2 weeks we come across an oasis with a spring full of fresh water. We replenish our water supply. We feel good, revitalized, and ready to go. So off to the next oasis. Over the course of those 2 weeks, we drink and drink and drink. We drink all the water so as the end of week two approaches we get nervous. What if the water is not there? If we can’t access the water? If we need more water? All of this leads to stress, sleepless nights, and a more difficult journey. And it sucks! No one wants to live this way.

Debt desert

In the modern era, at least in most developed countries, water is abundant and instead we thirst for money. We imagine that those with lots of money are doing great. They are living in big homes and driving fancy cars. It is true, they may be living the high life, but if they are in debt, they are still stressed.

Debt is the great equalizer. It doesn’t matter if make $50,000 or $500,000; debt is the great equalizer. Debt is waiting to take it all away. Debt doesn’t care how much we make. It just wants to take what we have.

I may be a doctor and make more money than the average American. We may eat at more expensive restaurants and vacation at fancier hotels (well maybe not fancier hotels, but I do like to travel), but at the end of the day if I am taking on debt to finance my lifestyle, then I am stressed and unable to focus fully on other aspects of my life.

Make more money

If most people had the option, they would choose to make more money. Money makes life easier. It doesn’t fix all of our problems or make us happy, but it does make things easier. The problem is that money does not equal smart decisions.

I have plenty of colleagues who make a ton of money, while also sitting on a lot of debt. Instead of focusing on debt pay down, they buy $100,000 cars and spend $10,000 on trips. Then they sit home and stress about where their money has gone. Despite large paychecks, they are running high credit card balances. They are living paycheck to paycheck. It’s okay to buy things if they will make us happy, but to buy toys while worrying about debt doesn’t make any sense.

Many of us in the US live paycheck to paycheck, and it is stressful. Debt can ruin sleep, lead to ulcers, and upset the natural order of home life. I have been there and it sucks. In fact, while I am better off now (less debt), I am still not out of the woods and depend on a regular income to keep me afloat. I am not financially independent. It doesn’t matter that I make a lot of money, if everything that comes in goes out then I am not relaxed.

So what can we do to improve our lives?

It depends on how much we are (or are not) saving.

We need to figure out how much we make and how much we spend. By tracking the amount in and the amount out (a spending report), we can get an idea of what, if any, money is left over to pay debt. If we are spending everything we earn, then we are breaking even. This is not ideal, but is better than taking out more debt. In this situation, we should pay attention to spending and determine a few places we can stop spending and save money to pay down debt.

Are we saving the equivalent of half our income?

This is respectable, particularly if we are thinking of early retirement, as saving half of our income means we can typically retire in 10 years. I would be cautious of such extreme saving, however, as there are no guarantees we will be here in 10 years and such saving may leave life a bit dull, a bit mundane, and a bit monk-like (though Mr. Money Mustache would disagree).

Are we spending more then we make?

This is the case for most Americans that are in debt. We buy a car with a 60-month loan so we can afford the monthly payments. We cannot necessarily afford the $40K sticker price. This is a bad scenario. We should not be buying everything on debt. Some items are okay and arguably necessary. Our family’s security or education is worth it. Even an automobile, if it is needed for transportation to and from work, can be worth it (albeit we can all likely buy cheaper and equally reliable cars). Taking on more and more debt, without first paying those we owe will lead to more stress down the line.

What is the best scenario?

Ideally, we spend most of our money (70-80%) and save the rest. This requires some discipline but allows us to enjoy life now, while planning for the future. We have provided for our family while protecting them. We pay down debt and prevent it from stressing us out. Once the debt is paid down, we start saving.

Once we figured out which scenario we are playing out in our lives, we can move forward and make the changes necessary. It may not be easy at first to stop borrowing and pay down debts. As our net worth approaches 0, we can all sleep easier at night. Our financial stress (and likely familial stress) will begin to fade away. As our net worth grows positive, we will feel more relaxed. Remember Debt is the great equalizer. I may take home a bigger paycheck, but I am currently just as broke as most of the dads out there.