Men and women look at finance very differently, particularly when it comes to financial independence. When women describe financial independence, the most common themes are security, peace of mind, and being debt-free. In fact, 47% of women say being debt-free is the top hallmark of being financially independent![1] When it comes to wealth, women tend to focus on growing secure while men tend to focus on growing rich. In this month’s blog, we’ll examine how debt influences women’s sense of security, why that matters, and some principles for thinking more critically about borrowing.
Debt and Stress
So, are women right to focus on being debt free? The short answer is often times, yes! Debt has been clearly linked to stress, not to mention a whole host of other problems. “Debt stress” can have a negative effect on health, family, and job performance. For example, researchers using the Consumer Finance Monthly survey found that, in 2011, 26% of respondents said that their debt had a “high negative impact on family life”.[2] That’s 1 in 4 American families! Studies have also linked debt to binge drinking, weight gain, and substance abuse.[3]
Interestingly, women experience far more debt stress than men, even when adjusted for differences in debt-to-income ratios. And in case you’re thinking women are more stressed about debt because of the hardships associated with single motherhood, think again! Astonishingly, there was no significant difference in debt stress between single parent families and families with two parents.[4]
There are many reasons why debt causes so much stress, but to put it simply, debt is risk. Increased risk leads to decreased security. The data is crystal clear, women value security. If debt is causing this degree of stress for women and families, it’s probably a good idea for households to take it seriously, even if men don’t feel as strongly about it.
How Should Men and Women Think About Debt?
I write a lot about the differences in the way men and women think about financial planning. I do this because I believe both sexes value important things, and when they work together, they make better decisions. There are times when the financial benefit of taking on debt are worth the risk. There are other times, however, when the stress and the risk are not worth it. This “debt stress” is felt more acutely by women. So, women and those who care about them, should think about the economic and emotional impact of debt when adding to or reducing debt loads. Here are a handful of principles (both personal and economic) to help you evaluate the debt you have and any new debt you might take on: The math needs to work, the type of debt matters, define your “why”, and understand that decision space is life.
The Math Matters
The decision to take on new debt or reduce the debt you have can be emotional. Especially when there is more than one person’s priorities to consider. Numbers, however, are not emotional. Math is rational. That’s why simply looking at the math of the situation can be powerful when trying to make decisions concerning debt. All the data collected for the previously mentioned Consumer Finance Monthly study was adjusted for debt-to-income ratio because, the researchers knew that the higher the debt-to-income ratio, the more risk and the more stress the borrower would experience. The math is straightforward: as we take on greater levels of debt relative to our income, we have a greater likelihood of experiencing defaults, foreclosures, and bankruptcy (all really stressful scenarios). So, before taking on any new debt, think about whether your income is keeping pace with any new obligations, and how stable your future income and expenses are likely to be. Keeping a relatively low debt-to-income ratio can insulate against the negative aspects of debt both emotionally and economically.
The Type of Debt Matters
In addition to being mindful of debt-to-income, it’s important to note, some types of debt are more stress inducing than others. The following list ranks the various types of debt from the most stressful to the least, according to the Consumer Finance Monthly study:
- Payday Loans
- Credit Cards
- Student Loans
- Installment Debts (cars and other large purchases)
- Bank Loans
- Family & Friends
- Mortgage
- Home Equity Loans
For example, if Person 1 and Person 2 have the same debt-to-income ratio, but Person 1’s debt is a mortgage and Person 2’s is from credit cards, Person 1 will have lower debt stress than Person 2.
So, before taking on new debt, consider what KIND of debt it is and how much stress that type of debt will cause. It may be worth it, for your peace of mind, to save up for what you want, and pay cash.
Your “Why”
As human beings, we’re all vulnerable to irrational or impulsive decisions. This tendency can manifest in countless ways. We might wander into an auto dealership and take on a new truck payment even though we’ve prioritized catching up on retirement savings. Conversely, we might hoard cash because we’re still struggling with the painful experiences of a past job loss. One way to overcome potential irrationality is by writing down specific, measurable goals and then discussing them, and why they’re important with trustworthy people in your life; anyone who knows you well and is honest enough to point out inconsistencies such as your spouse, significant other, siblings, parents, close friends, or your financial advisor. Aligning your financial resources and your actions with your goals and your values is crucial to your overall financial wellbeing, including decisions about debt. Seeking accountability and constructive criticism from people you can trust will help you remember your goals and your “why” when impulsivity tries to take over.
Decision Space is Life
“Decision space is life” is something I heard over and over during my time as a Marine Officer. It means that nothing is going to go according to plan, so an effective leader is one who creates room to adapt. One clear example of how our decisions about debt can impact us when things go wrong is, the Great Recession. According to the Consumer Finance Monthly study, Americans experienced 55% more “debt stress” in July of 2009 than they did in January of 2006. While debt loads didn’t change much during that time period, setbacks like job losses or a loss of equity meant a lot of people had a lot less decision space when it came to meeting their financial obligations. Ultimately, decision space in the financial world boils down to having multiple assets to rely on when life surprises us. For example, people with significant cash on the sidelines were much better able to weather a job loss and the subsequent job search during the recession than those with a high debt load who were living paycheck to paycheck. It’s not a matter of IF you will experience stressful times that affect your finances, but WHEN. Minimizing debt and maximizing diversification are both great ways to create the space needed to make important decisions during those times.
Final Thoughts
Debt is a funny thing. Each person views it very differently, and it affects many facets of our lives. In particular, women seem to experience more stress from debt and consider being free from it a hallmark of financial independence. Knowing that debt causes stress, particularly for women, allows women and their partners to take a more holistic view, and think critically about the benefits and potential pitfalls of particular kinds of debt. It can also add valuable insights when crafting financial goals and taking steps to protect those goals when life inevitably surprises us. Working with a financial advisor, as well as other people you trust, to establish goals and understand “why” you are considering a particular kind of debt can help you stay focused and create the space necessary to confidently make decisions next time life throws you a big, stressful curve ball!
[1] Bank of America Corp. (2024). Women, money, confidence: A lifelong relationship. Accessed on Sept. 26, 2024 from https://business.bofa.com/en-us/content/workplace-benefits/women-money-confidence.html
[2] Dunn, L. F. & Mirzaie, I. A. (2014). Determinants of consumer debt stress: Differences by debt type and gender. Consumer Finance Monthly. Accessed on Sept. 26, 2024 from https://www.cfmonthly.org/doc/DSI-Working-Paper-07-19-12.pdf
[3] Nelson, M., Lust, K., & Ehlinger, E. (2008). Credit card debt, stress, and key health risk behaviors among college students. American Journal of Health and Promotion 22(6), 400-407. Accessed on Sept. 26, 2024 from https://doi.org/10.4278/ajhp.22.6.400
[4] Dunn, L. F. & Mirzaie, I. A. (2014). Determinants of consumer debt stress: Differences by debt type and gender. Consumer Finance Monthly. Accessed on Sept. 26, 2024 from https://www.cfmonthly.org/doc/DSI-Working-Paper-07-19-12.pdf