Coming Clean With Your Advisor: Part Four, Debt

It can be hard to admit a mistake or a problem to others, especially if you feel bad about your choice or believe you will face judgment. Embarrassment, regret, and a host of other emotions can spur decisions in the moment that we want to forget about in the future. Debt is one such monster. This is the last installment of a four-part series discussing things you shouldn’t hide from your financial advisors. Don’t make another bad choice today by hiding a condition that would impact proper guidance for your future.

Not all debt is evil, and some debt is justified.  Debt is often known as leverage in the financial world.  You are using future income to finance something today. In the business world, debt is commonly used to make investments that fund future profits. The wager is that the current deficit will be trumped by the increased growth of the business because of investment today.

That is the same concept used for student loans. Students, parents, and even the government argued that taking debt at a young age for education would be offset by future earnings. Today, sadly, in some cases, that wager isn’t always true. Student debt is staggering and could be the next consumer bubble to burst. People admit their student loan debt though because it isn’t usually considered “bad” debt by society.

Emergencies can sometimes lead to debt, and not all of us have the money saved in our emergency fund to cover the cost.  We knowingly or not, usually classify things into two primary categories: Urgent and Important. Urgent is the disconnect notice or eviction notice that has to be paid now. Important is the emergency fund to take care of surprises. The urgent usually wins over the important, and when the two collide, bad things happen, like unplanned debt.  The most notorious debt we see comes from medical emergencies and health issues.  Sometimes there just isn’t enough money to cover the cost of all the medical bills.

The most difficult situations we have to often deal with is the denial of debt or “hidden” debt. Hidden debt is just as it sounds: Debt hidden from the other spouse, examples might include gambling, shopping, other relationships, and even helping the kids against the will of their partner. Some of this debt is tied directly to credit cards.  Once you pull out the magic plastic card, for whatever reason, you are providing today by borrowing from your future. For many families, this is the beginning of a long term battle with robbing Peter to pay Paul. This type of debt can often lead to emotions of shame that make it hard to admit.

Working with a financial advisor requires honesty if you want accurate recommendations. Keep track of your credit report and be open with your partner and financial counselor. Remember the four things to share with your financial planner include other assets, your children & grandchildren, health issues, and debt. Should you have questions about your financial journey, please contact the Financial Enhancement Group.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

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