By Danny Clark, CFP®, Certified Private Wealth Advisor®
Many people hear the word “debt” and assume it’s something to be avoided. However, debt isn’t inherently good or bad. It can help you meet your needs and advance your goals in the right situation (like when you need to buy a home or a car), but it can have a major negative impact on your finances as a whole.
To help support and preserve your financial health, it’s a good idea to ask yourself these thoughtful questions before you take on any more debt.
1. Is This an Emotional Decision or an Intentional One?
Unfortunately, many people make major financial decisions based on social pressure or their own impulses. If you’re pondering going into debt for a big purchase, pause and ask yourself:
- Am I trying to upgrade something that’s already working?
- If I waited a few months, would I still want this?
The bottom line here is that your decisions should be intentional, not impulsive.
2. Can My Day-to-Day Cash Flow Accommodate the Payment?
The fact that a lender approves you for a loan doesn’t necessarily mean the loan can comfortably fit into your financial life. Before deciding to take on new debt, consider the monthly payment, any associated taxes and insurance, and whether the payment could impact your ability to save.
3. What’s the True Cost of the Debt?
When deciding whether to take on debt, many borrowers focus on the monthly payment and nothing else. Look closely at the interest rate, the loan term, and the total you’ll pay over time as well.
4. What Happens if My Income Changes?
If you take on this extra debt, what happens if you lose your job, experience a decrease in income, or encounter unexpected expenses? If the debt is only doable when your finances are optimal, you might want to reconsider.
5. Do I Have an Emergency Fund?
When you don’t have savings, taking on debt can be especially risky. Ideally, you should have a financial buffer in place before you borrow. Having at least three to six months of expenses saved up is ideal. An emergency fund is an essential part of managing debt and managing your money in general.
6. Can This Debt Move Me Financially Forward?
When making a decision about new debt, determine whether the potential debt is productive or consumptive. Productive debt, like debt taken on for education, home improvements, or business investment, can sometimes help you move closer to your goals.
Consumptive debt (like luxury upgrades and lifestyle spending) typically takes you in the wrong direction.
7. Does it Fit Into My Long-Term Financial Plan?
Lastly, you should connect the debt to your larger goals and consider how it may impact the following:
- Your retirement savings
- Your business plans
- Your education funding
- Your future home purchases
Every financial decision you make should support your life’s broader direction.
Every Financial Decision Is Part of a Larger Picture
Debt is just one piece of a much bigger conversation. The seven questions above aren’t really about debt—they’re about making deliberate, well-considered decisions that support where you’re headed financially. That is the kind of thinking we bring to every area of our clients’ financial lives, from investment strategy and tax planning to estate planning and long-term wealth building.
If you’re working through a significant financial decision and want a second set of eyes, we’d be glad to talk. Reach out at info@solidaritywealth.com or call 385-374-1665 to schedule a discovery call.
Frequently Asked Questions About Taking on Debt
Is debt always a bad thing?
Debt isn’t inherently good or bad; it depends on how and why it’s used. In some cases (e.g., buying a home or investing in education), debt can support long-term financial goals. However, taking on debt for short-term or impulsive spending can create lasting financial strain. If you’re looking for help evaluating whether a specific debt aligns with your overall financial plan, Solidarity Wealth is here to support you.
How do I know if I can afford to take on new debt?
Before taking on debt, it’s important to assess your cash flow, existing obligations, and ability to handle unexpected changes in income or expenses. Just because a lender approves you doesn’t mean the debt fits comfortably within your financial life. Solidarity Wealth can help you analyze your cash flow and determine what level of debt is sustainable for you.
What should I consider before taking on debt?
Key considerations include the total cost of the loan, interest rates, how the payment fits into your budget, and whether the debt supports your long-term goals. You should also evaluate whether you have an emergency fund in place and if the decision is intentional rather than emotional. The Solidarity Wealth team can help you think through these factors and make more confident financial decisions.
About Danny
Danny Clark has a passion for serving successful families and making a positive impact in their lives. With over a decade of experience in the financial services and banking industry, he creates personalized retirement and financial plans for families to help them pursue their financial and family goals throughout their life. Danny’s experience in serving some of Park City’s most established families along with the deep experience, skill, and services of the Solidarity Wealth team allow Danny the opportunity to serve a growing number of successful families.
Prior to joining Solidarity Wealth, Danny served as a Wealth Advisor at another firm, and before that spent 12 years at Wells Fargo in Park City as a regional private banker. At Wells Fargo, Danny was responsible for developing lifelong relationships with families, while developing tailored banking, credit, and retirement solutions to help his clients be successful in their financial journey.
Danny has his bachelor’s degree in business management and holds the Certified Private Wealth Advisor® designation. He and his wife, Lindsay, are Park City natives and raising their own family. In his free time, Danny is an avid golfer and skier, and enjoys spending time with his family.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.
