The Real Cost of Debt
When most people evaluate debt, they fixate on the interest rate. But as Morgan Housel argues in “How I Think About Debt” (Collaborative Fund, April 30, 2024), debt affects much more than your wallet—it narrows the range of life outcomes you can endure. Let’s think beyond interest rates and how paying off your debt may have unexpected benefits.
Reduced Resilience in a Volatile World
Morgan’s core idea: more debt means a tighter buffer. Without debt, you can absorb shocks like job loss, health emergencies, or market downturns. As debt rises, your margin for error shrinks; many life events that once felt survivable become existential risks.
Flexibility & Optionality
Debt is a liability that limits choices. Can you pivot careers? Do you need to move to be closer to family? What about starting a business? Heavy debt narrows these options. The freedom to navigate life’s unpredictable turns often hinges on financial flexibility, which is something debt undermines.
Psychological Burden
Debt brings emotional stress. The dread of missed payments, the constant mental tally of balances, and the guilt all weigh heavily on mental well-being. That stress isn’t trivial; it drains energy, cultivates anxiety, and limits psychological bandwidth.
Life-Event Vulnerability
Morgan highlights more than financial volatility: psychological, family, child, health, and political volatility can all hit unexpectedly.
- Health crisis? Medical debt combined with your existing obligations can create a perfect storm.
- Family emergencies or divorce? These can upend income and emotional reserves.
- Job loss or career “burnout”? Heavy debt can force you to accept bad options out of desperation.
Paying off debt creates breathing room when life throws curveballs.
Debt as a Tool
Morgan isn’t anti-debt. It can be a valuable tool if used strategically for education, your home, or a business. But debt becomes dangerous when it strips away flexibility, increases stress, or limits your ability to recover from life’s inevitable blows.
Questions to Ask Yourself
- Survival Range: “How much shock can I withstand—job loss, health issues, market dips?”
- Life Goals: “Will debt limit my ability to switch careers, relocate, or invest in family?”
- Emotional Load: “Does managing debt cost me mental energy, sleep, or peace of mind?”
- Event Preparedness: “Am I ready for unexpected events without being crushed?”
- Alternatives: “Could I have funded this in another way—saved a little longer or used a less costly option?”
Steps to Take Now
- Audit your debt. List balances, interest rates, payment terms, and the emotional impact.
- Define your risk tolerance. How much leverage feels comfortable when life gets messy?
- Set balanced goals. Prioritize high-interest debt, but don’t ignore the mental benefit of small wins.
- Build a buffer. Even a modest emergency fund can reduce pressure and buy time when needed.
- Review regularly. Life changes fast! Marriage, kids, relocation, and job changes all shift your healthy debt level.
Final Word
Interest isn’t the only cost of debt: lost flexibility, emotional strain, and reduced capacity to handle life’s shocks are often bigger. Morgan Housel reminds us that debt narrows the range of outcomes we can endure. So the true goal isn’t just paying off your debt, but rather it’s buying optionality, peace of mind, and resilience.
If you need help navigating your debt considerations, connect with us today to create a personalized debt payoff strategy.
Please consult with your financial advisor and/or tax professional to determine the suitability of these strategies. All views, expressions, and opinions in this communication are subject to change. This communication is not an offer or solicitation to buy, hold, or sell any financial instrument or investment advisory services.