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How Borrowing Today Hurts Lifestyle Tomorrow

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Credit Sesame on how borrowing today may hurt your lifestyle tomorrow.

Telling people they should make sacrifices by spending less and building savings doesn’t always work. Consumers appear to have a huge appetite for debt. According to the Federal Reserve’s consumer credit data, Americans have increased their outstanding debt in 115 out of 120 months in the past ten years.

The temptation to spend rather than make financial sacrifices is understandable. People want to have nice things and go to nice places. Making financial sacrifices is no fun and takes discipline. Maybe try thinking about it like this; borrowing to sustain your regular spending may end in a poorer lifestyle. Sooner rather than later, the burden of repaying borrowed funds reduces the money you have to spend on your lifestyle.

Thinking about the longer-term implications and choosing to work towards healthier financial habits is really no sacrifice. Done right, it leads to financial stability and a more comfortable lifestyle.

Debt payments are not as much fun as spending

After spending borrowed money, your lifestyle may start slipping backward. You have to pay back the money you borrowed. Every dollar you borrow and spend now becomes one dollar fewer you have in the future. Instead of enjoying that dollar of future income, you have to use it to make debt payments.

Interest payments take money out of your pocket

Paying back debt is not an even trade-off between current and future spending. Interest means you end up paying more than you borrow. Future principal and interest payments reduce future spending.

This problem can be magnified if borrowing too much lowers your credit score. A lower credit score typically means having to pay higher interest rates, which reduces your future spending even more.

Another factor is that interest rates tend to rise when inflation is high. As many people found out in 2022, having their interest payments rise just as everything gets more expensive puts a squeeze on the household budget.

One way or another, interest payments represent another hit your lifestyle has to suffer after you borrow money.

Your credit limit may decide when the party ends

Some people try to keep the party going by continuing to borrow. Eventually, there’s a limit to how much you can borrow. This may be when all the credit limits on all your credit cards are maxed out. It may be when potential lenders look at your debt-to-income ratio and decide you can’t afford to take on any more debt.

Reaching your credit limits represents another hit your lifestyle has to take. You have to pay back the principal and interest on your previous borrowing and there is no more credit to use.

This all gets worse when you retire

The longer you depend on debt, the worse the drop-off in your lifestyle is likely to be. When people retire, they generally see their incomes decline.

According to the Federal Reserve’s Survey of Consumer Finances, income typically peaks when a person is in the 45 to 54 age range. Then it drops off steadily as they age.

On average, people aged 75 or older have 44% less income than those in the 45 to 54 age group. Needless to say, that kind of drop-off in income necessitates quite a change in lifestyle.

You can cushion that if you build up assets to live off in retirement. On the other hand, if you are still paying off debt in those later years, you are probably making those payments with less income than you had when you ran up the debt.

Saving now lets you spend more over the long run

As noted earlier, paying off debts isn’t an even trade-off. Interest charges mean you end up paying back more than you spent on yourself. On top of that, seeing your ability to borrow and your income decline over time will likely force further reductions in your lifestyle.

Now contrast that with how saving now can lead to a more luxurious lifestyle in the long run. Saving money can reward you in three ways:

  • Building up savings gives you extra money to live off in your later years. You may be able to retire earlier, and or enjoy a richer retirement lifestyle.
  • Instead of having to pay interest on debt, investing in savings gives you the opportunity to earn interest and capital gains. This lets you build wealth beyond what you earn by working.
  • Saving involves living a more modest lifestyle at first so that you can benefit later on. You are more likely to enjoy your lifestyle if you see it improve over time than if it steadily declines as you deal with debt.

There are times when it makes sense to borrow money. For large purchases like a house or a car, it’s worth the trade-off because borrowing allows you to benefit from the asset you’re getting many years earlier.

However, when borrowing escalates to sustain a lifestyle you cannot afford to repay comfortably, you may regret the decision in future.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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