How Debt Holds Families Back from Financial Confidence

How Debt Holds Families Back from Financial Confidence

Debt can hinder financial confidence when you spend more than you make and borrow using credit. Other financial problems may occur, such as inadequate emergency or retirement savings. Another problem debt may create is what’s referred to as a debt trap, where an individual borrows money and cannot pay it back, leading to a cycle of more borrowing to pay off old debt and so on.

There are numerous ways that debt holds a family back from financial confidence:

Decreases their ability to save- For many, saving requires having money to save after paying monthly living expenses and debt-related expenses. Emergency and retirement savings are two significant things that may be impacted when debt takes over. When the ability to save decreases, assets may face premature liquidation, or other needs may go unmet.

Missed investment opportunities- When debt takes significant cash away that could be invested, families miss out on home ownership, retirement savings strategies, and other investments that accumulate in value over time.  

Inability to obtain credit– Many families purchase larger ticket items such as cars with credit. If a family can’t get a loan due to a high debt-to-income ratio, they may be unable to purchase specific items. Auto insurance, cell phone companies, and other providers rely on credit reporting to approve or deny services. For example, cell phone companies often finance new phones as part of the monthly plan. If a family member needs a new cell phone, they may be unable to finance it.

Higher interest rates- Credit card companies can raise your interest rate for late payments, Fed rate increases, revolving balances, and just because they want to. If you have credit card debt and carry a balance month over month, you will pay higher interest rates than your peers without revolving credit. Higher interest rates mean you will pay more over time.

Health issues- People with outstanding debt may face mental health issues due to stress, depression, and anxiety that come with living paycheck to paycheck, significantly if a financial crisis impacts them. Physical health may be affected if one can’t sleep at night, are tired and unable to perform their work or fatigued, and have a job that requires physical labor. Debt may lead to health issues and the additional cost that often comes with it.

Debt can occur for numerous reasons, some of which are beyond our control. But ignoring debt and continuing to accumulate more debt can hinder the financial confidence of an entire family. You must seek help if you have more debt than you can handle. Your financial professional can help or seek help from a reputable non-profit organization specializing in debt reduction, management, and counseling.


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