Are you a feeling like a frog?

There is a story of a frog in boiling water. If the frog was placed in boiling water it would jump out immediately, recognizing the danger. But if a frog is placed into cool water it is comfortable and if the water increases in temperature slowly the frog will get used to the change in temperature and it will stay in the water even if it is in danger when the water eventually starts to boil.

Sometimes the same thing can happen with debt. Even though you can start out very clear about how to manage debt over time you can become more comfortable with debt. Over time habits change from paying off your credit cards at the end of each month, to maintaining a balance, to making only minimum payments on credit cards, to move money around from one credit card to another as you try to maintain minimum payments. You are doing the same thing – paying your debt each month – and it all feels familiar, but you are now in boiling in water when you started in a safe and comfortable place.

I think this situation can happen to any of us – life is busy and it is easy to lose focus on just one aspect of your life. With building interest, the landscape of your finances is changing slightly month over month it is possible to miss that your debts have been building right in front of your eyes. Because you haven’t noticed a big change you have not perceived there is a danger of overextending yourself to a point where paying back your debt will be difficult.

Here are some tips to avoid the boiling frog phenomenon.

Only Use Debts to Increase your Net Worth

When you use a mortgage to facilitate the purchase of a house you are using debt to help build your net worth. You will pay interest which has a negative impact on your net worth however the overall net impact is positive because you are slowly building equity in your house by making a mortgage payment instead of a rent payment. Debts can help you leapfrog into a higher net worth as long as you are putting as much as possible down upfront for a down payment (we recommend a minimum of 10%) and the monthly mortgage payments are easily managed within your budget.

When you use your credit card to go out for dinner, if you do not pay off your credit card in full each month, you are using credit to decrease your net worth. The cost of that experience will be increase each month as you maintain the balance on your credit card. This has a net negative impact on your net worth each month you delay this payment.

Track Your Total Debt Balance

When you use debt, pay it down, use it, pay it down it can be really hard to see your progress over time. If you are not consistent with your credit payment you will end up with inaccurate data and be unable to effective track your progress.

Do not have your pay deposited into your line of credit, deposit it in your bank account and move money over at near the end of each month to pay down your debt. Then track the balance owing after you have made the payment and continue to track it month over month.

This information will help you keep a pulse on your debt management and make sure you are moving in the right direction. It will also tell you if you are building more debt than paying down so you can make a plan to change that. Even if things are going well with your debt management continue to track your debt load which will allow you to perceive the small changes in your debt management to avoid the big problems that could come if you don’t correct your trajectory.

Consider Becoming Uncomfortable with Debt

It is safe to say as a society we are very comfortable with the idea of having and maintaining debt. “Buy now, pay later” deals are on every street corner and if you told your friend that you were saving to buy something they might look at you like you were strange because why wait if you could buy it on credit?

As society we are very comfortable with debt. Challenge yourself to start getting uncomfortable with it. Consider how it is serving you. Does it increase your happiness or making life more stressful because you now have this big bill to pay and you don’t know how your will pay it.

As noted above debt can propel your net worth forward by facilitating the purchase of big assets like a house that would take decades to save for – this is not the debt I am talking about. We are talking about credit cards and lines of credit that facilitate spending beyond your monthly budget that then undermines all your hard work by creating drag on the momentum to build up your net worth. Consider this as well: would you be working where you work if you weren’t working to make that next debt payment? I have seen people working tirelessly in jobs they hate, that take them out of town away from their family, simply to be able to make that next bill payment. Consider getting uncomfortable with your debts and start imagining what your idea life is.