The two types of debt

Today there is a common perception that people who have a lot of debt have been undisciplined in how they spend money, for many people this is true and I call this type of debt self-inflicted debt. Undisciplined self-inflicted debt is the type of debt that keeps on growing, even after you pay off the debt, it starts to accumulate again. There are other types of self-inflicted debt called disciplined self-inflicted debt and this is when a disciplined buyer approaches taking on debt by exercising self control for instance when buying a car they choose to buy one that is affordable to buy, drive and maintain, while an undisciplined buyer will take on debt demonstrating a complete lack of self control, like buying a vehicle regardless of what it cost.

Likewise many will eventually buy a house and in the process assume a mortgage, some people will carefully choose based on the type of home, the location, the price, the taxes, the expected maintenance and utility costs while another will buy the very biggest house they can qualify for, again both of these are considered self-inflicted debt one is disciplined and the other is undisciplined.

I recently had a short conversation with my niece who was soon to be married and she mentioned that she had no debt and did not intend to get into debt. I pointed out she will eventually buy a house or a car that will likely require debt. She is the type that will carefully buy a car or a house. She will likely have some self-inflicted debt one day but it will be manageable debt and paid off relatively quickly.

Most of us will take on self-inflicted debt but, only we can decide how much and at what cost. Undisciplined spending looks the same whether seen in credit card bills, the cars we drive or the house we live in.

The second type of debt is what I call stuff-happens debt, this is the kind of debt you are forced to accept and of no fault of your own, let’s say your child is in a car wreck and hospitalized for a fairly long time the costs associated with this are unexpected and can be large, in this case you will likely take on debt. Now it is not just the medical costs that need to be addressed but the need to buy another car and this too is unexpected. Even for the most disciplined spender these types of costs are difficult to handle and can wipe you out financially or at least weigh you down for a long time.

So why is this important? Because whether you are financially disciplined or not you need to be prepared to take on, manage and payoff debt.