There is a strong movement by many people to become debt free. I personally think this is a great choice. Learning to live within one’s means is one of the keys to financial success.
Too many people spend everything they earn each month and in some cases spend more. By not saving anything, they have zero shot at improving their financial situations. They are stuck financially in life, never getting ahead.
For those of you that are still living beyond your means, I suggest you make an effort to get out of debt. I say this for one simple reason. Debt is bad.
Why is debt bad you might ask? In this post, I am going to show you how debt limits you in life in more ways than you might think.
Simple Reasons Why Debt Is Bad
#1. Debt Ties You Up In Bad Times
The first reason why debt is bad is because debt is a burden. But you won’t feel the true consequences of debt until times get tough. I think so many people are getting out of debt now because they had this wake-up call during the recession. Here is what I am talking about.
Let’s say you have $10,000 in debt that you are taking your time paying off. I won’t get into the whole argument of how much interest you’ll be paying, but rather I want to simply focus on your monthly payment. Let’s say that the monthly payment for that $10,000 of debt you have is $200.
While this $200 seems inconsequential now, what happens if you lose your job or become disabled and cannot work for a few months? You might be thinking that the $200 is still small, but over time, it adds up.
If you are unemployed, that $200 is money you could be using to buy groceries for your family. Or, it could simply mean $200 extra dollars a month which will help to cover your basic living expenses for a few months until you find a job.
Look at the chart below. It assumes that you have $7,000 in an emergency fund and that after cutting out all non-essentials, your monthly expenses are $800. This includes $200 for debt repayment. After 8 short months, you have run your emergency fund dry.
Now look at the same chart, but you don’t have your monthly debt payment. After 8 months, you are still in decent shape.