The Hidden Debt

It seems that we cannot turn on the TV, pick up a newspaper, or click an Internet link without being bombarded with discussions of debt. In addition to our personal battles with debt, we hear of corporations and governments facing financial ruin due to mounting debt. Our personal debt alone accounts for nearly $2.4 trillion, according to the latest statistics from the Federal Reserve. That’s $7,800 for every man, woman, and child living in the United States!

What are the consequences? Wasted hard-earned money on interest payments, burying your budget in monthly payments, and at worst, bankruptcy. It is not surprising that books, workshops, TV, and radio programs have become popular by touting the latest strategies for becoming “DEBT FREE”. Unfortunately, becoming debt free may ignore the biggest debt of all, the hidden debt.

Connie and her husband Rick both had excellent careers that supported their family of three children. While they had accumulated some debt on credit cards and car loans, they also contributed to their 401(k) plans at work and had rollover Individual Retirement Accounts (IRAs) from their previous employers. While they sometimes talked about getting rid of the debt, they always came to the conclusion that the payments were not a burden and they would be careful not to add to their balances.

After the downturn in the economy, Rick’s company started to lay off employees; about six months ago Rick got word that he would be let go. It soon became clear that Connie’s income would not be enough to support the ongoing family bills. They turned to credit cards to help them through what they hoped would be a brief rough patch. 

Rick worked hard to find new employment and finally it paid off. Recently, he got a new job with a growing health care company. He will start out with a lower salary, but is excited about the future.  Now that the future seemed to be secure, Connie and Rick could focus on the additional debt that they had accumulated.

Connie called their financial professional, Justin, to schedule a meeting to discuss getting their financial plan back on the right track. At the meeting, Connie and Rick told Justin that they wanted to be debt free. They thought that they should cash out their retirement savings to pay off the debt. “These accounts aren’t that big anyway, we will make it up in the future.” Justin listened carefully to their concerns then explained the taxes and penalties associated with these decisions. “That’s OK,” Rick said. “I am tired of these statements and bills.” 

“What about the biggest bill of all?” Justin said. “What about your obligation to the future Connie and Rick to save and invest for their retirement? They are not sending you a bill, but it exists. If they did send you a bill, the payment would keep going up dramatically whenever you ignored it.” Justin suggested that they develop a retirement plan that would determine what is needed in retirement and how much would be required to achieve it. Also, he showed them how much higher the payments would be if they chose to cash out their current savings. Connie and Rick agreed.

After reviewing the retirement plan, Connie and Rick decided that they would take several important steps. First, they would establish a budget for their spending. Second, they would start a three year plan to retire the accumulated debt. Third, while they are going to temporarily lower their contributions to their retirement plans, they are not going to cash out their existing savings. The process of understanding and quantifying their retirement needs as current debt obligations was helpful for Connie and Rick in their decision. As Connie said, “Future Connie and Rick would have been really ticked off at us.”

The best financial decisions are made as part of a long-term plan that looks at multiple financial goals. Since we are more familiar with spending and dealing with monthly bills, we often forget about the hidden debts of our long-term goals. Working with a financial planner will help you put a price tag on those future obligations such as college education and retirement. You can then use that knowledge to help you with your day to day decisions.

FPA member A. Christopher Engle, LUTCF, CFP^®, ChFC^®, is a partner with Argus Financial Consultants in Grand Rapids, Mich. Securities offered through LPL Financial, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.