How Debt Affects Marriage

Your world operates best when certain rules are followed: you shouldn't jump off tall buildings, drink cleaning products or poke sticks in your eyes. Rules also apply to how you function in your financial world: you shouldn't spend more than you make, borrow when you know you can't repay or "rob Peter to pay Paul." Unfortunately, many Americans violate these, and other wise financial principles which can lead to "stupid debt." This type of debt can be the equivalent of financial suicide, and can be as painful as jumping off a tall building. Not only that, but it can hurt your marriage.

When you and your mate spend less time talking about bills and financial woes, the more time you can spend dreaming, laughing, enjoying each other's company and getting a good night's sleep. Why? Because you aren't worrying about how you're going to pay your electric bill.

With the right tools, you and your spouse can learn how to manage your money intelligently. Your bank account will grow and so will your love life.

Let us help. In this module, we've provided time-tested advice to help you move toward financial freedom, and get more of the love you're longing for.

Intelligent Borrowing or Stupid Debt

Not all debts are created equal, nor is every type of loan hazardous to your wealth.

The only thing worse than investing in things that depreciate is paying interest on money invested in things that depreciate.

Blaine Harris

Not all debts are created equal, nor is every type of loan hazardous to your wealth.

There is a world of difference between a home mortgage and a revolving credit card balance. Both are liabilities for which the borrower is legally responsible. The first I call intelligent borrowing, the latter is stupid debt.

Those who are living debt-free and are debt-proofing their lives would sooner poke toothpicks under their fingernails than live in the grip of stupid debt. They participate only in intelligent borrowing, if at all.

Intelligent Borrowing

Intelligent borrowing means that some level of safety and limited risk for both the lender and the borrower is built into the transaction. Here is what intelligent borrowing looks like:

1. The borrower has a safety valve — a legally and morally sound alternative to get out of the obligation.
2. The debt is secured. The lender holds something that is at least as valuable as the amount of the loan, something known as collateral. Think of collateral as a security deposit for the lender.
3. The loan is for something that has a reasonable life expectancy of more than three years as opposed to something that will be down the drain before the bill arrives.
4. The loan is for something that will increase in value, unlike a couple of movie tickets and dinner in a fancy restaurant, or a great new outfit.
5. The interest rate is reasonable.

The best example of intelligent borrowing is a real estate loan or home mortgage. Let's see how it measures up to each of the intelligent borrowing characteristics:

1. Is there a safety valve or escape route? Yes, there is a way of escape for both the borrower and the lender. If you, the borrower, find you just can't handle those high payments or you want out for any other reason at all, you can sell the house and pay the lender from the proceeds of the sale. Because the loan becomes an asset for the lender, he can sell his position.
2. Is the debt collateralized? Yes. With a mortgage, the real estate is the collateral — the lender's security. The lender has a legal lien on the property until the mortgage is paid in full, and that gives him a legal position in the transaction. If you as the borrower do not hold up your end of the bargain to which you agreed, the lender may take the property as payment for the outstanding loan.
3. Does the purchase have a reasonable life expectancy of more than three years? Yes, of course. This is true not only for the structure itself but also for the land on which it sits. Buying a home is a long-term investment.
4. Will it increase in value over time? Yes. Real estate is always considered an appreciating asset even though specific values may decline during economic cycles. As a general rule, real estate always gains in value over time.
5. Is the interest rate relatively reasonable? Yes. In nearly all situations, mortgage rates are lower than other types of consumer loans, usually by as much as two-thirds.

Semi-Intelligent or Semi-Stupid Debt

You've learned the basics of intelligent borrowing, but that is only half the road to debt-proofing your life.

There are times when debt cannot be so easily delineated between intelligent and stupid. Sometimes it starts out intelligently and then turns stupid.

As you know, a home mortgage qualifies as intelligent borrowing because it limits risk for both the borrower and lender and is fully collateralized—at least it's supposed to be that way. The homeowner can borrow only up to a certain limit, so the lender has reasonable assurance that the property has a current market value more than the outstanding loan.

Home Equity Loans

A home equity loan, curiously known in the industry as HEL, is typically a second mortgage that positions itself in such a way to allow the homeowner access to the equity (that margin between what is owed and what the property is worth). Equity is the borrower's asset—and a precious asset at that.

A HEL opens a large line of credit for you, pledging your equity as the collateral. You can borrow against it whenever you want. Technically it is a secured debt because of the collateral feature. And the borrower's safety valve remains because the home can be sold to satisfy both of the debts. But it can be very risky—and that is when it can cross over into stupid territory. There are five ways the stupid factor can sneak into an otherwise intelligent mortgage situation:

1. If you borrow against your equity to clean up your credit card debt and then run up your credit cards all over again, that leaves you with twice the debt—the equity line and the credit cards. Not smart.
2. Some people treat a home equity loan as a permanent debt to be paid off when the house is sold. They might have felt a greater urgency to pay off the debts if they were in the form of credit card balances.
3. The convenience of having your home's equity available at your fingertips can be a formidable temptation. Knowing the money is readily available, you are more likely to fritter it away on something, like a well-deserved family vacation, instead of saving the money first as you might have if you did not have such easy access to your precious equity.
4. If you are unable to keep current on both of your mortgages, either of the lenders can foreclose.
5. Sometimes the home equity loan and first mortgage together actually exceed the current market value of the property. There are lenders these days who offer to finance not only the full value of the home, but more than the property is worth. These 125-percent loans put the borrower in a tenuous position — the monthly payments are severe, but selling the property ceases to be a way out because more is owed than it would bring at sale.

Even taking into consideration the fact that the interest on the home equity loan may be deductible from your taxable income, the risks involved with this potentially stupid debt can be weighty.

The equity in your home is an appreciating asset, for many people their only appreciating asset. If you leave it alone, it will grow as the property becomes more valuable and as you pay down the mortgage. That contributes to the intelligence factor of your home's mortgage. To muddy those waters with a HEL opens the door to stupid debt.

Automobile Loans

A car loan can contain elements of intelligent borrowing provided you make a large down payment and select a model that historically retains high resale value. An automobile loan is a secured debt; if you get into some kind of trouble, you can sell the car to repay the debt. Cars do not appreciate, however, so not all of the intelligent borrowing criteria apply.

A car loan can slide over to the stupid debt area if you put little or nothing down and stretch the payments past three years. It won't take long for you to be "upside down" in the loan, meaning you owe more than the car is worth. Borrowing a car for a long period of time, also known as leasing, is in most situations anything but intelligent. Getting caught on the leasing treadmill can be a very expensive proposition.

Student Loans

If ever there was a gray area in this matter of intelligent borrowing versus stupid debt, it has to be the troublesome student loan.

Some argue that a student loan qualifies as intelligent borrowing because the resultant education will appreciate over time and will more than pay for itself in future income. Nevertheless, that is making some bold assumptions: first, that you will actually finish school; second, that you will be well suited for the field in which you are getting your degree; and third, that the field will welcome you. I find it just short of amazing that 85 percent of college graduates do not end up working in their major field of study. (But then I recall the decisions I made at that tender age, and I understand fully.)

Whether student loans fall into the category of semi-intelligent or semi-stupid has a lot to do with one's individual circumstances.

Recognize the Sign of Debt

It is not difficult to recognize the difference between intelligent borrowing and stupid debt:

• Intelligent borrowing requires plenty of time and makes you think. You can do stupid debt in your sleep.
• You are not likely to get in over your head with intelligent borrowing. Stupid debt can dump you into the deep end of the ocean before next Tuesday.
• Intelligent borrowing requires a lot of research and thinking. The last thing stupid debt wants is for you to analyze anything-just sign here!

As a person desiring to debt-proof your life, your mission is to rid your life and your future of all stupid debt, to borrow money only when it cannot be avoided, and then to do so as intelligently as possible.

The trouble with debt can be likened to the proverbial frog in the pot of boiling water. If you try to pop him in once the water is boiling, he'll jump out. But if you start him out in cold water and slowly raise the temperature, he'll just sit there and cook to death.

People are like that frog when it comes to stupid debt. We wouldn't jump into the boiling water by purchasing something really big and expensive, like a car or boat, with a credit card, but months and years of consistent spending for smaller purchases while paying only the minimum payment each month allows the temperature to rise ever so slowly. Before we know it, we've reached the boiling point.

Stupid debt doesn't usually start out stupid. In the beginning it is simply a matter of convenience. You pay the entire balance during the grace period. Then one month the balance is a little larger than can be easily paid, so you pay half and plan to pay the balance next month. But then something comes up and it appears to make sense to lot it roll over into the next month. Soon you're hooked with a balance too large to pay in full in a single month, and you're on your way. The water started boiling and you were completely unaware.

So why is debt such a problem?

1. Debt promotes discontentment. When you're charging things with money you don't have, you are not content with your income. You cannot be patient. You cannot wait. You have to have it right now! But when you acquire things too easily without pride of ownership, it is easy to become dissatisfied quickly.
2. Debt makes arrogant presumptions about the future. By agreeing to have things now and becoming legally obligated to pay for them later, you make bold presumptions about what the future will hold in terms of money, ability and health. What makes you believe that although you don't have the money now you will have it later? But worse, you also promise that you will be willing to turn over money you don't have yet to pay for things you may not have anymore. What makes you think you will be all that thrilled about spending money you've not yet earned for stuff you probably won't even remember? That's an arrogant attitude and an irresponsible presumption on the future.
3. Debt requires you to transfer your future wealth to your creditors. If given the choice of sending monthly support checks to the wealthy credit card industry or sending those same checks to build your own future, would you really choose the former? Probably not. However, when you agree to stupid debt, that is exactly what you've done. Your choice has been made, and there is no way out but to make full repayment, no matter how difficult or unreasonable that will be.
4. Debt limits your options — and heavy loads of debt eliminate them altogether. Debt keeps people tied to jobs and careers they hate. It forces moms who would rather be home with their kids to work outside the home. It can even give Mr. Right second thoughts about taking on a prospective bride because of her heavy, debt-ridden baggage.
5. Debt steals your freedom and makes you a slave. When you are under a load of stupid debt, you are in bondage. You have no way out but to work off your sentence. King Solomon, the wisest man ever to have lived, summed it up this way: "The rich rule over the poor, and the borrower is the servant to the lender" (Prov. 22:7).

Stupid and Beyond-Stupid Debt

You've learned the basics of intelligent borrowing, but that is only half the road to debt-proofing your life.

Take every aspect of the intelligent borrowing scenario above and think just the opposite. Now you understand stupid debt.

This is the kind of debt you agree to, often impulsively, when your desire is in high gear and your brain is in neutral. It is so easy — much too easy.

While there are many ways to rack up a pile of debt, credit cards are by far the most popular. Almost anyone these days — even high school students — can get a credit card. There's no qualifying process to speak of, no long applications to fill out or references to submit. Students don't even need a job or a cosigner.

Someone with a credit card and available credit limit can in effect take out very expensive loans on a whim and at nearly every place, including cyberspace. You simply make your decision, swipe the magic plastic, sign your name, and presto!—you've made a very long commitment to stupid debt. Painless? Sure, it is in the beginning. But not for long, my friend. Not, for long.

Let's say you use your credit card to acquire the very latest computer, complete with scanner, fax modem, jumbo monitor, DVD player, turbocharged CD Rom, and — the best part — a free printer. It's on sale (which to many naive consumers is a clear sign of providential entitlement) and you want it right now. Why should your lack of cash prevent you from making this really good deal? (Remember the free printer.) You have plenty of room on your account to cover it.

As you haul that baby to the car, the last thing on your mind is how you will actually pay for it. You didn't consider for one second how this new debt will affect your current payment structure. It can't be that bad, you reason, because you got approved. And you get a free printer!

Let's see how this purchase measures up against the criteria for intelligent borrowing:

1. Does the borrower have a way out at any time? No. If you don't pay as agreed, the credit card company won't come after the computer — they'll come after you. Unless you can sell the computer for what you paid for it (fat chance), you have no way out.
2. Is the debt collateralized? No. The credit card company is holding nothing of value to fulfill this debt if you are unable to pay. But they've got a tight grip on you. They don't want that computer or anything else you buy with a credit card, for that matter. This loan is unsecured.
3. Does this purchase have a life expectancy of at least three years? No matter how you cut it, a three-year-old computer is not exactly cutting-edge technology. By its third birthday it has little monetary value even though it may still compute. In fact, that paragraph I wrote only moments ago listing the features of this machine is already out-of-date. Just think about that for a minute!
4. Will it appreciate in value? From the minute you walk out of the store, a computer is in the fast lane to obsolescence. It's depreciating with every click of the mouse.
5. Is the interest rate reasonable? No. As of this writing, the average credit card annual interest rate is 17.8 percent, while a thirty-year fixed-rate mortgage is 6.79 percent per year.

The computer purchase fails the intelligent borrowing test miserably by getting a "no" response to all five questions. Paying for a computer over time cannot qualify as intelligent borrowing, and if paid for with a credit card or other form of consumer credit, it would qualify as a stupid debt.

Anatomy of a Stupid Debt

Let's say this computer deal we're analyzing has a price tag of $2,000. The credit card terms are typical: 17.8 percent interest with minimum monthly payments of 3 percent of the outstanding balance. I just plugged those figures into my Minimum Payment Credit-Card Interest Calculator' and — hold onto your floppy disk — it will take 13 years and 9 months to pay the total price tag of $3,759, including interest. Did you get that? Thirteen years to pay nearly twice the purchase price for a computer that will be functionally obsolete in much less than half the time. There's no other way to characterize such a transaction than pretty stupid.

What will make things even worse is if, after two or three years, you decide to upgrade to a new computer even though you still have ten years to pay on the first one. Nevertheless, if the credit is available, it is quite easy to add another purchase (like a new computer) to the growing load of debt.

In no time at all, the forever revolving credit card balance is not seen for what it really is (a very high-priced loan on a lot of stuff you might not even own anymore) but rather as a normal part of life — like the rent, phone bill, and cost of food. In fact, I could show you high school personal finance curriculum that suggests keeping consumer debt at a manageable level, not to exceed 20 percent of income. I find that somewhat outrageous.

Beyond Stupid

While the computer example is remarkably illogical, other kinds of stupid debt make the computer scenario appear somewhat reasonable. Turning restaurant meals, travel, groceries, utility bills, movie tickets, vacations, gifts, gasoline and school clothes into debt and then choosing to pay for them with minimum monthly payments over many years and at rates that effectively double the original costs brings new meaning to the term stupid.

Spending money you don't have yet to pay for things you don't have anymore is anything but intelligent. Nevertheless, that is exactly what millions of people in the country are doing every day, every month, year after year after year.

Getting Out of Debt

Debt can be an exhausting trial on a marriage. It is so much easier to spend ourselves into debt than it is getting out, but the baby steps given by financial expert Ron Blue can help.

We made some poor money decisions the first few years of our marriage and now we have $12,000 in consumer debt. We realize that our excessive spending was wrong and we're determined to change our ways. How can we reduce our debt?

The following suggestions should help you pay off your debt. Choose the ones that work best for you and your spouse, then start erasing your debt today.

• Do you have any assets that can be sold? Even small things sold through a garage sale can help you pay off smaller debts. But the sale of bigger items such as cars, boats, investments and perhaps even homes should also be considered.
  
  
• Consider using savings accounts. Using a low-yielding savings account to reduce high-cost debt such as credit card debt or an installment loan is a guaranteed high-yield investment. But don't tap into the emergency fund that you have set aside to protect you and your family against unexpected bills.
  
  
• Try to double up on payments. By doubling up on credit payments and cutting expenses in other areas, it's possible to pay off debt much more quickly. There are also benefits to paying home mortgages on a bimonthly schedule, or even making just one extra payment per year. Either approach has a dramatic impact on the number of payments needed to pay off the mortgage.
  
  
• Keep constant the total amount of payments you're making each month. Pay off your smallest debt first. When that is gone, apply that payment to your next-smallest debt. For example, if you have several credit card and installment payments totaling $500 per month, instead of reducing the amount paid each month as the debts are eliminated, continue to spend a total of $500 a month on repayments.
  
  
• Review your living expense summary and decide where you can cut expenses. You might cut down on entertainment, clothing, food or your home-maintenance budget. In almost every family, as much as 40 percent of the budget could be used to repay debt, but it requires a change in lifestyle. Then, apply that amount to paying off specific debts.
  
  
• Review your income-tax withholdings. If you receive an income-tax refund, consider reducing your withholdings to the amount of your projected tax liability. Then apply the increase in your take-home pay to your debt repayment. Determine your tax liability for next year by looking at last year's income tax return to see how much you paid. Then calculate the effect of any pay raises, the birth of a child, having an older child leave home, and so on. After you have determined what you're likely to owe, fill out a new W-4 form. But don't reduce your income tax withholding below your projected tax liability. If you do, you're borrowing from the government to pay someone else. The day of reckoning is merely postponed to April 15.
  
  
• Don't decrease your charitable giving. Giving should be the first priority use of money, because it is recognition of God's ownership of everything. And in most cases, avoid debt-consolidation loans. Such loans don't solve the basic problem of overspending.
  
  
• Be careful about seeking a second full-time income. If your family can cover expenses with one income, you shouldn't seek a second income merely to increase revenues. When you consider the additional expenses of tithing, taxes, childcare, transportation and so on, the economic benefit of a fulltime homemaker getting a job is often almost nonexistent.
  
  There are exceptions, however. A family may face unexpected medical bills or desire to send their children to a private school. In such cases, a second family income may be the means of providing the extra money Another possible exception is if a wife takes a part-time or temporary job to help pay off debt.

Next Steps and Related Information

Additional resources addressing finances in marriage

Popular questions on this topic:

• We're in debt and it's straining our marriage. How do we get back on track?
• I can't agree with my spouse on discipline with spending. What can we do?
• How much should young couples put away in savings?
• Who should work and earn most of the money in a marriage?
• My spouse and I disagree on whether the stock market is a wise investment or a gamble. What's your position?
• We want to find a good mortgage on a house, but we can't agree on how to go about it. What advice do you have?

Related Resources

• Faith-Based Family Finances
• The Road to Financial Peace I-II
• Cents and Sensibility: How Couples Can Agree About Money (Paperback)