How Nuanced is Your View of Debt?


19 January,2015

It’s a brand new year, and the world is full of people who have made it a financial goal to pay down their debt.

While making debt paydown a priority can be good for your finances and your life, it also makes sense to take a step back and consider the way you are looking at your debt. My husband has a Ph.D. in psychology, and he constantly warns against the dangers of “black and white thinking”, since it┬áreduces our options to either/or and can result in missing out on viable solutions to problems we are having.

Sometimes we get caught up in this either/or thinking with debt, and fail to see the middle ground that can help us move forward with our finances, or make decisions that work better for us. We think that we are either in debt, or debt free, and that if we don’t reach debt free as soon as possible, our finances are doomed. While getting out of debt isn’t a bad thing, it is worth it to take a step back and think about the situation, and re-evaluate whether or not there are some in-between solutions to debt.

Do You Really Need to Pay It Off Quickly?

First of all, there doesn’t need to be an assumption that all debt needs to be paid off immediately — especially to the detriment of long-term savings or emergency savings. In fact, your family situation or other factors might make it very difficult for you to tackle $15,000 in debt and have it paid off in six months. Or, it might not be feasible for you to pay off $50,000 in student loan debt in three years, due to your income situation, health reasons, or other circumstances.

Rather than feeling hopeless because you can’t pay off your debt as quickly as you would like, it makes sense to explore other options. The debt siege is one strategy that can work for those who may not be able to make an immediate move. We have this idea that if we’re not debt free in one year or three years, we’re doing something wrong. Rushing to pay down debt so quickly that other financial areas are neglected can sometimes result in other problems, such as not having enough money to take care of an unexpected financial emergency. When this happens, you just wind up in debt again anyway.

What About Preparing for the Future?

In some cases, it makes sense to look to the future. Even though my husband and I were paying down debt, we opened an IRA and began putting money away for retirement. It wasn’t a lot, and more money went toward debt reduction, but we felt it was important to be thinking about the future as well as taking care of our debt, so we invested, even though we had debt.

Another thing to think about is the kind of debt you have. I don’t worry overmuch about rapidly paying down my student loan debt. The interest rate is 1.9%, and tax deductible. While I guess it would be nice to be tax-free, the best annualized “return” I could get for the “investment” of making an extra payment of $300 a month on my student loans would be 1.9% (and it’s actually less, once you consider the tax deduction). Rather than paying off my student loans when the high interest credit card debt was taken care of, I turned my efforts toward boosting my retirement contributions. Once the high interest, non-deductible debt was out of the picture, I didn’t want to tackle ALL my debt in the same way. Instead, I put the money into investments that, even during the aftermath of the financial crisis, still offered annualized returns of at least 5%. To me, that’s a better idea than frantically paying down debt with my money.

A similar consideration should be made when thinking about other debt, and debt purchases. Yes, we financed our car. We pay 1.9% on that, too. Rather than paying for the car at once with a chunk of money, we use that money to invest, and get a better return than saving 1.9% per year in financing. We may use debt to purchase our cars, but as long as interest rates are lower than reasonable investment returns, I’d rather put my money to work, rather than sink it into a depreciating car.

While this type of approach doesn’t work for everyone, you might be surprised once you stop thinking in terms of debt vs. no debt, and take a more nuanced view.