“I’m comfortable with my level of debt,” said a long-time friend of mine not too long ago. He was explaining why he isn’t making an effort to aggressively pay down his credit card debt.
He makes a decent living, and most of his credit card debt is the result of youthful financial indiscretions. Since he can afford it, and he likes his current lifestyle, he sees no reason to sacrifice to pay it down faster. In other words, he’s comfortable.
In fact, in every other area of his financial life, he’s doing what we think would be the “right” thing. He’s contributing to an employer-sponsored retirement plan (complete with match!). He has an emergency fund with four months’ worth of expenses, and he usually spends within his means.
He even pays substantially more than the minimum payment on all of his credit cards. He’s just not interested in turbo-charging his debt pay down because he likes to indulge in traveling and eating out.
So he’s content with his level of debt (which doesn’t threaten to overwhelm his finances), and he’s cool with taking four or five years to pay it off. How do you feel about your debt? Are you comfortable with how your finances look? Here’s how to understand your acceptable level of debt.
What Are Your Priorities?
I can see where my friend is coming from in many ways. After all, I’m in no rush to pay off my student loan debt. I consolidated in 2005, have a rate that’s below 2%, and the small amount of interest I do pay is tax-deductible. In other words, my payments are at a comfortable level.
My priorities revolve more around investing for retirement, and enjoying the present than hurrying to pay of low-rate, tax-deductible student loan debt — even if I will have that debt for another 15 years or so. For my situation, I don’t mind continuing to pay towards my debt, because the impact the interest rate and debt payments have on my finances, is small and easily manageable.
Can You Build Wealth Faster?
My car payment is another area where I tend to be just fine with my level of debt. If I can get a car loan for less than 3%, I’m not usually interested in fussing about paying with cash. Rather than saving 3% a year for three years on my loan, I can take that $15,000 and invest it, and probably end up with a much better return.
If I’m going to buy a car, I might as well do so with a low-rate loan, and then put money to work on my behalf. I can spend more time focusing on the building wealth side of things, versus the time and effort it will take to save money on interest payments.
However, if you can build wealth faster by paying off your debts first and then investing, that’s the better solution for you. It just depends on the type of debt you have, how long it will take to pay off, and if you can afford to sacrifice saving for the future in order to be debt free.
Are You Being Honest with Yourself?
Not everyone’s priorities are the same. I know people for whom there is no acceptable level of debt. They would rather have the freedom and peace of mind that comes from being debt free, than have that hanging over their heads, and that’s fine. That’s what they are comfortable with, and what works for them.
You just have to be honest with yourself and your financial comfort level. I wouldn’t be comfortable riding it out with high-interest credit card debt the way my friend is, but he’s OK with paying a lot in interest payments. He figures he’s doing everything else to shore up his finances, and it’s worth the price he pays so he can avoid making hard sacrifices.
It’s an interesting approach to his finances, and one that I wouldn’t be entirely comfortable with for myself. But that’s the meaning of personal finances — they are indeed a personal choice for each of us.
Are you OK with your debt? Or do you prefer to be debt free and before building wealth? At what point do you become uncomfortable with your level of debt?