Debt: Should you pay it off before saving or giving?

Debt is so pervasive and ‘normal’ in this country that most people view it as an extension or an amplification of their ability to consume. In fact, the use of credit or financing is more often the first impulse in an effort to preserve cash and monthly income for other more frequent forms of spending. There is a huge and growing industry to help people raise their credit scores so they can borrow more and at lower rates. American households now owe over $17.5 trillion for their TVs, refrigerators, cars, boats, student loans, furniture and houses. Almost a trillion of that is on credit cards, often rates so high, balances are perpetual if only minimums are paid.

Borrowing money can be a good thing. It is often a necessary tool for starting and running businesses. It enables people to buy houses and raise their children in them before they grow up and move on. It helps to bridge gaps for unexpected events when savings are not available or better held for other purposes. And in extreme cases, like uninsured health events or natural disasters, debt becomes a necessity to simply carry on.

But borrowing is a bad practice when future dollars are spent to satisfy wants or urges that do not remain satisfied. We allow our lifestyle to consume not only our income, but our credit limits as well. And as income and borrowing ability rises, so does our spending to maintain our growing lifestyle. The phenomenon is known as lifestyle creep. The ‘creepy’ part is hidden in the fact that as debt rises to fund our ‘improving’ lifestyle it eventually grows sufficiently large to cause stress and worry, thereby eroding our lifestyle.

At its best, debt legally obligates the borrower to repay the lender according to strict terms. At its worst debt can enslave the borrower. It presumes on the future – but futures may not always work out as we hoped when we signed on that dotted line. If our income and savings fall short of meeting our obligated expenditures for any reason, like it or not, we relinquish some degree of control of our lifestyle and spending to our creditors. So how do we avoid more debt and eliminate any existing debt that now drains our lifestyle?

The key to controlling and eliminating debt is really quite simple in explanation and profoundly liberating in practice. The secret to controlling lifestyle creep and the debt that comes from it is contentment. Without a thorough and deeply personal understanding of what it means to be content, no amount of budgeting or planning will help to assuage the urges and temptations to spend more than we should or need.

If debt is a problem for you, the first question to ask is, what caused and causes it? Be very specific. Name your enemy and he is yours. Identify the behaviors that led to the indebtedness. Write them down and refer to them often. You are embarking on a process that must be disciplined and continually reinforced to withstand the near-constant urges from within as well as the powerful peer and media assaults from without.

Contentment is learned. It is possible regardless of finances, environment, health or any other state of being. St. Paul says “I know how to get along with humble means, and I also know how to live in prosperity; in any and every circumstance I have learned the secret of being filled and going hungry, both of having abundance and suffering need.” Phil 4:12.

Once you begin to understand what contentment means for you and your family, you can begin re-defining and re-sizing your lifestyle to comfortably support your spending/saving/giving plan or budget and eliminate your targeted debt more quickly. A practical idea is to write all of the things you like to do, big and small, on a bunch of sticky notes. Then place them in descending order of importance on the table or floor before you. It’s OK to have some on the same horizontal line. Now step back and study your totem pole. Starting from the bottom, pick up the notes that you feel you could do without on a regular basis in order to accomplish more important goals of reducing debt or saving and giving more.

You might even do some re-defining. For instance, if a date night or two each week are important, would substituting a movie, a walk downtown, or relaxing at a cozy coffee shop or pub serve the same purpose as a more expensive dinner at a fine restaurant? If you only watch three or four channels on television, can you dump the cable and stream those channels or get them over the air for free? Given that the ‘new car’ smell and feelings don’t last too long, could you forgo the shine and buy a two or three-year old car to save hundreds or thousands of dollars that could go to debt or be saved? The bottom line is we must let go of the idea of non-discretionary items on our budget. Everything should be on the table – including the house, or the second home, or any other sacred cows that might not be that sacred if you bring them out in the light of day and analyze their importance relative to other things you value. Throw off the chains of every single item in your budget. Don’t be ruled by them anymore.

So now the title question: Should you stop saving and giving in order to replay your debt? The answer I’m afraid is as nuanced as are the the circumstances that surround the debt. But there are some general guidelines that I think are helpful.

  • Debt is negative savings, both emotionally and financially. The aggressiveness with which you need to eliminate it might well be measured by the degree to which it rules or diminishes your lifestyle.
  • Savings is a habit. The sooner it is learned and practiced the better, because time is more powerful than rate or amount in the compounding process. And it is the lack of savings or investment that caused the need for debt (which compounds against you) in the first place. Even a small amount of regular savings can serve to maintain the habit and the positive long-term rewards while you are paying down debt. For instance, 401K matches are a sure way to double the return on your money. Do them if you can. Find the debt payments elsewhere if possible.
  • Giving carries its own reward. While it offers no direct financial benefit in debt reduction or wealth accumulation, it makes us happy, studies show it makes us healthier, it keeps us socially connected, evokes gratitude. In short we get more than we give – it improves contentment which drives all of the above.

We live in a noisy, frenzied, ever-on consumption-focused society. Contentment couldn’t be more isolated from the minds of the advertisers, manufacturers and financiers of the goods, services, and information we consume. If you truly want to reduce your debt, save more, give more, or do all three, you will not find the answers in today’s world. The battle and the strategy for winning it are inside us.