by Scott Hannah
Q: My partner and I have struggled to get our student loans paid off and our careers stable. Our goal was to be debt free and we did it. We’re now at the point where we have good incomes, we’re steadily adding to our savings and we are watching interest rates carefully to see if we can afford to buy our first home. However, we want to live a bit again, start a family, enjoy vacations; now we aren’t sure that living without debt is possible for us. With all the concern about the economy and how much debt Canadian households owe, is living debt free actually realistic? ~ Joyce
A: First of all, congratulations for setting a goal to pay off your student loan debt and working hard to achieve it. That’s something to be really proud of and the money management skills you learned along the way will serve you well as you enter this next phase of your lives.
Living Without Expensive Debt is Possible
There’s a difference between living without any debt to your name and living without expensive, or what many people call bad debt. Living without any debt whatsoever is less realistic for many younger people. However, living without bad debt or debt that you have a hard time repaying is completely doable.
What is Bad Debt or Expensive Debt?
Bad debt is debt that doesn’t help you move forward with your goals and life. Credit card debt, buy-now-pay-never plans, debt consolidation loans and personal loans of all kinds are typically considered bad debts. Even car loans can fit into the bad debt category because of how quickly cars lose their value and need to be replaced. These types of debts finance life and the life-style you’re living at the time, without contributing positively to your future.
What is Good Debt?
Good debt on the other hand, helps you move forward. A reasonable amount of student loans is an investment in your education, mortgages help you own your own home, home improvement loans that increase the value of your real estate asset – these are some examples of good debt.
Can Good Debt Go Bad?
However, good debt can turn bad if you overextend yourself or take on too many or bigger payments than you can comfortably afford, remembering that your financial situation can change unexpectedly at any time due to factors beyond your control. One way this can happen quite easily is in a hot housing market.
You might be tempted to borrow the maximum mortgage amount that your lender prequalified you for, however, when your mortgage comes up for renewal in 5 years, for instance, and if rates are higher than they are now, your payment would increase accordingly. The debt itself doesn’t become bad, but the situation could.
How to Avoid a Bad Debt Situation
To avoid a bad debt situation and live a rich life without unaffordable debt, here are some things to consider:
- Adopt a minimalist perspective for at least part of your life-style. There’s really only so much stuff anyone needs, so reduce and drastically cut back in less important areas of your life. For example, simplify your work wardrobe with key mix and match pieces or splurge on sports, travel or electronics, but not on all three.
- Buy less house than you can afford or consider renting and investing the difference that you save
- Stick with quality used vehicles, become a one-car household, or use transit most of the time
- Continue actively saving and allocating money from each pay cheque towards short, medium and long-term goals and expenses. A budget calculator spreadsheet that is tailored to your situation can help.
- Understand when it’s best to be cheap or frugal and when to go all out. Make your spending choices accordingly and not to keep up with the Joneses.
- Plan your timeline to enter retirement totally debt free. This will help preserve the life-style you enjoy when your income decreases.
- Choose to be meaningful – with your time, money and resources, and surround yourself with like-minded people.
The Bottom Line on Living a Rich Life without Bad Debt
Memorable experiences trump mountains of bills, but only for those who make this distinction a conscious choice. It’s easy to lose sight of what’s important in life, especially if you’re stuck in a cycle of pay cheques and payments. Evaluate what’s important to you, and let your values and your budget be your guide as you plan for your affordable and financially stable future.
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