Understanding Debt, the Financial Life Planning Way
We all have a basic understanding of debt. Whether it’s credit cards, auto loans, student loans or mortgages, debt is a loan that you agree to pay back plus interest for having access to those funds. Some argue there are good types of debt because they’re used to acquire an appreciating asset (mortgages and student loans) and bad types that allow you to overspend (credit cards and auto loans). That’s the financial planning 1.0 of viewing debt.
Financial life planning (financial planning 2.0) takes a little different approach, adding the “time” and “values” components to our analysis. For those willing to lead more mindful and meaningful lives, we try to look at our circumstances in such a way of doing things intentionally where our use of time aligns to our values. Reading, exercising, volunteering, traveling, taking walks around the neighborhood with the kids—these are examples of some things where we might feel our time is well spent.
When it comes to debt, financial life planning asks us to pause a bit and actually weigh the tradeoffs associated with adding debt to your life. “What tradeoffs?” you ask. The ability to have that thing or experience now versus a (big?) slice of freedom taken from our future. Because if you intend to repay the loan back, which I assume you do, then you’re not really borrowing from the lender (they’re just making money off you). You’re borrowing from your future self.
Try this: Stand in front of a mirror. Really do it—don’t just picture yourself doing it. Are you in front of the mirror? OK. Think about yourself 25 years from now. What do you see and feel? More gray hair and wrinkles? Sure. But also hopefully your kids growing up and living fulfilling lives? And maybe wiser and less worried about what others think? Would you agree that your future self is just trying to live a peaceful and happy life? If so, have you asked that future self if it’s OK to take from their financial freedom so you get what you want right now? Has the future self given you permission to take from their income and time in order to pay for your current wants?
I’m not saying that all debt is inherently bad. What I’m saying is that there are things worth going into debt for and many things that are not. And knowing which ones are “worth it” can only be answered if we know what’s important to our current AND future selves. Those things important to both selves are called values. Trip with the family to far off lands 👍 22 inch premium wheels versus the standard 19 inch 👎
So what type of debt is “good debt” according to financial life planning? It’s the type that will fund the things (not so much) and experiences (more likely) that our future self will say, “I can’t thank you enough for that!” even if it means giving up some freedom now and not “I’m wasting my precious time to pay for that?! WTF were you thinking?” Many times, we make decisions without considering our future selves. Financial life planning leverages tools and strategies to understand this very important person in our lives involved in the decision-making process.
Want to put your future self in a better position to live happily and without a bunch of debt? Click below to get in touch to find out how financial life planning can help you start living intentionally, now and for the future.
