Most of us take on some debt over the course of our lives. Our ability to borrow money presents opportunities we otherwise wouldn't have, like pursuing a college education or becoming a homeowner. Of course, there's a difference between good debt, like a mortgage, and bad debt, like a huge credit card balance.
We all know that high-interest debt can be a crushing financial burden and a major source of stress. However, you may not realize that bad debt can have a damaging psychological effect on your kids.
Researchers at the University of Wisconsin at Madison and Dartmouth studied over 9,000 children between the ages of five and 14 over a 22-year period, looking for relationships between their socioemotional well-being and their parents' debt levels. The study found that the kids whose parents had higher levels of good debt, such as mortgage and student debt, fared better from a socioemotional standpoint and displayed fewer behavioral problems than those whose parents had less mortgage and student debt. Meanwhile, the children whose parents had high levels of bad debt, such as credit card or medical debt, had lower average levels of socioemotional well-being.
Specifically, the study found that children whose parents had unsecured debt, such as credit card debt, had 0.12 standard deviations more behavior problems than those with any unsecured debt. For the purpose of this study, parents with unsecured debt owed a total of $10,000 on average. The study also found that if parents initially had $5,000 in unsecured debt, and that figure was then increased to $10,000, the ensuing result was a 0.5 standard deviation increase in behavior problems, which represents a substantial impact on child well-being.
It stands to reason that good debt correlates to a happy home. If parents take on debt to purchase a home, they can provide a comfortable, stable environment for raising a child. Similarly, if parents take on student loan debt, they may use their education to secure better jobs. On the flip side, parents who take on too much bad debt might suffer from stress and anxiety, which could affect their familial relationships and parenting ability.
One major strength of the study, hailed as the first of its kind, is that it compares the same set of families over time and explores the extent to which children's behavioral problems change as their parents' debt levels rise and fall.
Limit your good debt
While the good kind of debt may result in better socioemotional outcomes for children, that doesn't mean you should go overboard on borrowing either. If you can only comfortably afford a $1,500-a-month mortgage payment, then set that limit and stick to it. As a general rule, it's best not to spend more than 30% of your income on housing costs, which include not only your mortgage payment, but also real estate taxes and homeowners' insurance.
Similarly, if you're looking to go back to school, then be careful not to take on too much student debt. Apply to a city or state school, which is bound to come with a much lower price tag than a private institution. Also make sure the salary you'll command with your new-found credentials is high enough to repay those loans in a reasonable amount of time. If, for example, you come away with $30,000 in student debt but expect to increase your salary by $15,000 a year, then you should be able to repay those loans fairly quickly. On the other hand, if $30,000 in loans will only result in a $5,000 raise, then you may want to rethink that degree.
Only charge what you can pay off
It may be convenient to whip out your credit card when you don't have the cash on hand to buy something you want, but if you're not careful, your credit card balance could haunt you for years. Let's say you rack up $5,000 in debt at a 12% interest rate. Even if you manage to repay that amount in three years, you'll wind up shelling out over $9,000 by the time you factor in interest charges -- that's almost double your original principal. Before using your credit card to make a purchase, be certain you can pay it off at the end of the month when your bill comes due. Otherwise you can easily fall victim to the credit card trap, which, as we've learned, can increase not only your own stress level, but your children's as well.
From home improvements to groceries to utility bills, life has a way of getting expensive. Throw kids into the mix, and you have even more opportunities to spend money left and right. To avoid racking up excessive amounts of debt, take a look at your current expenses, prioritize your spending categories, and find ways to cut corners without significantly impacting your quality of life -- or that of your children. While you may not have much wiggle room as far as essentials like healthcare and basic clothing are concerned, you're likely to find small but cumulatively huge opportunities to reduce your discretionary spending. Those cello lessons your kid hates? Cut them out. At $80 a week, you'll save over $4,000 over the course of a year. That fancy summer camp with the rope course and the water slide? Your children will learn to enjoy the no-frills alternative that costs $1,000 less apiece. Even small changes, like eating out less, can add up over time.
The irony here is that many parents take on debt not to benefit themselves, but to give their children a better life. However, there's clearly a danger in crossing the line between good debt and bad debt. So the next time you're tempted to charge a dose of temporary happiness, step back and put that credit card away -- if not for your own sake, then for the sake of your children.