Debt is a hotly debated topic among people of all ages and financial circumstances. The financial planning community is full of different opinions as well. Some financial planners eschew debt in any and all circumstances, often implying that taking on debt is a sign of a moral failing.
At Guiding Wealth, however, we have a different view of debt. We know that in most circumstances, debt is simply a tool. It’s not a sign of laziness or poor money management. When used properly, debt can free up cash flow, give you the means to invest in your retirement, and create new financial opportunities.
How Debt Affects Net Worth
Figuring out your net worth is an excellent way to get a big-picture view of your finances. Simply put, your net worth is the value of your assets minus the value of your liabilities, like debt. If you are still paying off your mortgage, student loans, or other debt, your net worth might even be a negative number. If so, that doesn’t mean you’ve failed; it just means you’ve utilized debt as part of your financial plan.
It’s important to remember that each time you make a debt payment, you are increasing your net worth. You’re turning a small portion of those liabilities into assets. If you ever feel overwhelmed by looking at the value of your debts or your net worth, remember that building wealth is often a slow process. What matters is that you’re moving in the right direction.
Balancing Debt Reduction With Wealth Building
If you’ve spent years hearing about the horrors of debt and how it’s proof of financial incompetence, you might think that paying off debt should be your top financial priority. This is a common message, but it’s not necessarily a correct one.
If you’re like most people, you’ve spent years allocating your money toward your goals: saving for kids, buying a house, retiring, etc. That doesn’t necessarily need to stop because you want to pay off your debt — which is counter to what other financial “experts’ in this space will tell you.
Sometimes it makes sense to save for future goals while working steadily to pay off your debt. If you’re nearing retirement, for example, it might make sense to carry your mortgage into retirement. If you’re a new homeowner, you might want to pay off your home over time, rather than go all-in on paying it off.
When you are thinking about debt repayment and other goals, it’s important to find a balance. Working with a financial planner is a great way to get a different perspective on your finances and figure out a plan that balances short-term gains and long-term goals.
What Can Debt Help You Accomplish?
Debt is simply a tool. When used properly, it can help you accomplish things that wouldn’t be possible otherwise. For example, a mortgage may be what allows you and your partner to buy a home in which to raise your children. A business loan may give you the resources you need to turn your passion into a source of income. Student loans help millions of people get the education they need to start their careers.
If you’re considering a new loan, think about what that money will help you accomplish. Will the potential gains outweigh the initial negative value of the debt? When you reframe debt as a financial tool instead of a moral failing, you can figure out how to use it to your advantage and overcome the feelings of guilt that are so often tied to borrowing money.
A New Way To Think of Debt
Debt doesn’t have to be a stain on your financial record. At Guiding Wealth, we want to reframe the conversation around debt and see it for what it really is: a financial tool. If you’re like most people, properly managed debt has allowed you and your partner to do a lot: buy a house, build up your investments, send your children to college, and save for retirement.
Instead of feeling frustrated when you look at your debt, try to see it as part of your overall net worth. Every time you make a payment on your mortgage or business loan, you’re increasing your net worth. And take a minute to consider the goals you’ve reached with the help of a carefully considered loan. Maybe you launched a business or raised your family in your dream home.
It sometimes makes sense to consider debt in your retirement planning as well. You may decide to take your mortgage or other debts into retirement so you can make higher investment returns and keep more cash on hand. At Guiding Wealth, we help every client build a customized financial plan for retirement. Our Certified Financial Planners™ can help you develop the best plan for your money, whether that includes debt or not. Call (214) 810-3836 or use our online calendar to book a consultation.