Money and You: Course Notes

In Week 4, I gave you a rule: Never fall into debt! I also broke this by saying that some debt is okay. A better rule may be “Never take on bad debt.” However, this doesn’t have the same staying power as “never fall into debt!”

“Good debt’’ is debt you take out to better your financial position or adds value (even non-monetary) to your life. For example, a mortgage is used to buy a home. That loan allows you to live in a place that is your own, and your home will hopefully grow in value. A student loan allows you to get an education that will give you life satisfaction and access to higher-paying work. A home-equity loan can allow you to borrow cash you don’t have to make improvements to your home that can increase its value.

“Bad debt’’ is debt that you don’t use as a tool to better yourself. For example, borrowing money to buy a Playstation 5 would be considered bad debt. Taking a pay-day loan would be considered bad debt.

Some debt is tricky to classify. What about a car loan? A car is useful, but it loses money over time relatively quickly. It depends on a number of factors like where you live and work, family structure, what kind of car, how well you care for it, etc. What about taking out a loan to buy a pure-bred goldendoodle? For a pet, that would be bad debt. However, if that is to help start your own goldendoodle-breeding business, it may be good debt.

This section will look at some common reasons people fall into (too much) debt.

-Medical bills. Health is taken for granted by many people in the US until they don’t have it. Tens of millions of people are very under-insured or uninsured, meaning that if they have a large medical issue, they will be stuck paying the full medical bill or a high deductible. Medical debt is one of the biggest reasons people fall into debt. Fortunately, there are some laws in place that help lessen the pressure of medical debt, such as the one-year grace period before medical debt can be reported to credit agencies.

-Overspending. Simplifying spending too much money for their budget is one of the most common reasons someone falls into debt. In particular, over-using credit cards makes it very simple for someone to become buried in high-interest debt.

-Falling into a predatory loan. Predatory loans are generally advertised as a quick-way-out or a get-now-pay-later mechanism, but come with fairly-hidden high interest rates and hefty fees. Once starting on one of the loans, it can be difficult to get free.

-Student loans. Many colleges promise high returns on investments for education. While often true, starting salaries right out of college are often not high enough to fund a large amount of student loans. Many post-graduates find themselves struggling to keep up with their student loan payments.

-Gambling. Gambling is addictive. The high of small wins can sometimes numb the pain of big losses. Millions of American’s throw their money away to gambling and lotteries.

-Unemployment. In the event of losing a job, without a sufficient emergency fund, someone may need to turn to debt to keep up with living expenses.

-Divorce and separation. Legal fees, loss of secondary income, and child-support payments can make separation a costly process.

The first step in solving a problem you have is simply admitting (and recognizing) that you have a problem. Many people in unmanageable debt don’t realize or can’t accept that they are in dire straits. Here are common signs that you may have a debt problem.

-Missing payments. If you start missing payments on your bills, that is a huge sign that you are too burdened with debt.

-Ignoring bills or calls from debtors. If you find yourself throwing away bills without looking at them or ignoring calls from numbers you know are from your lenders, you may have a debt problem.

-Making minimum payments. If you find yourself only making minimum payments on your bills, it may be a sign that your finances are stretched too thin.

-Borrowing money to pay other debts. If you have to borrow money from one source to pay back a loan from another, you may have a debt problem.

-Regularly asking family and friends to lend you money. If you find yourself needing to ask someone else for money, you may have too much debt.

-Using credit cards as a means to borrow and not just for convenience. If you use a credit card to purchase everyday necessities like groceries or paying rent (and you’re doing it out of necessity, not just as a means of convenience), that is a sign you have a debt problem.

–Being worried about bills. If you find yourself stressing over how you will pay a bill, that is a sign that your debt is overburdening you.

Keep in mind that no one chooses to be overburdened by debt. It is not something that you should feel shame over. Most Americans have some debt throughout much of their adult lives. Everyone makes some financial mistakes at times. Don’t pretend you’re in a more stable position than you are; the sooner you identify any problems, the easier it is to correct.

Below are some sentences or thoughts that someone might say. For each, indicate why they are showing signs of having a problem with debt.