Inflation and Debt: The Good Gets Better, The Bad Gets Worse
We have all been reading, seeing, hearing and feeling the reality of recent worldwide inflation. Inflation is always a difficult pill for people to swallow, as everything costs more and as a result, no one’s money goes as far. That $4 gallon of milk is suddenly almost $5, and that’s only one example of the pinch we are all feeling. The vast majority of the people in the United States watch their monthly expenses closely, and tensions are rising as people try to make ends meet. In addition, a lot of people are wondering how inflation and debt are related.
I’m going to explain how below. I am the author of Secrets Your Creditors Don’t Want You To Know: Know Your Rights, Eliminate Debt, and Restore Your Good Name. My book has helped countless people dig themselves out of difficult or seemingly impossible financial situations. Most of the time, the people the book has helped did so because it introduced the readers to realities that they did not know existed. Given the current situation with inflation, questions regarding inflation and debt are exploding in number.
The Type of Debt Is Critically Important
The first thing you need to understand with regards to inflation and debt is that most financial professionals consider there to be two types of debt: good and bad. Good debt is basically debt that helps people who borrow build wealth over time. Bad debt is debt that does nothing for you but cost you money, and it either adds no wealth to your worth or detracts from it.
The most common and widely known example of good debt is a mortgage on a home, although there are exceptions in some situations. A mortgage, or a loan on something that appreciates in value, particularly if it appreciates to a value greater than the amount that was borrowed and paid, ultimately puts the borrower in a better position than when he or she took out the loan.
The most widely understood form of bad debt is credit card debt. That’s because credit card debt is generally a combination of the partial value of a depreciable item that you purchased along with the ever-growing interest amount that’s attached to that purchase. Bad debt basically leaves a person with just another bill to pay every month and nothing to show for it.
Why is this distinction important? Keep reading…
The Nexus of Inflation and Debt
Inflation and debt and how they relate matters to millions of people across the United States. That’s because almost any financial statistic will reveal that approximately 75 percent of all American households are carrying some type of debt, whether it’s good debt, bad debt or a combination of the two. When people who owe debt encounter inflation, the type of debt can almost define their overall financial situation going forward.
That’s because when inflation rises, it often happens after new money is printed and pushed onto the market. As a result, the natural reaction of those charged with managing the economy is to raise interest rates on borrowing. That not only tends to slow down new borrowing in many ways, but it’s also an artificial approach to raising the value of money to compensate for the flood of new capital.
While inflation tends to slow certain types of borrowing, it also affects millions of people who already owe debts. Those who have debts that are on variable rates suddenly see their monthly payments rise as their interest rates climb. That’s why people who are saddled with bad debt in an inflationary environment can see their financial pictures take a decided and precipitous downturn. Their money is already being stretched thinner on basic costs such as food, and now their bad debt payments are also higher.
The same is not necessarily true for those with good debt. Using the example above, a type of good debt is a mortgage. For years, mortgage interest rates have been historically low even though they are rising now. If you have a fixed mortgage rate of, say, 3.9 percent, that’s lower than the rate of inflation right now, which stands in September of 2022 at approximately 8.5 percent in the United States.
Why does that matter and how is that such a good thing? Using this example, there are a couple of reasons:
- Unlike those with debts with variable interest rates, a person’s mortgage interest rate remains at 3.9 percent. The monthly payment amount does not change.
- Those in this position are actually paying a real interest rate that’s in the negative, or less than zero percent. That’s because as inflation rises and the value of money turns downward, people with lower interest rates can pay more towards the principal of their debt if their income rises in conjunction with inflation.
In other words, inflation and debt are very much related, but whether this is good news or bad depends on whether your debts are generally good or bad.
Learn More from Wade Torkelson
This is just one of the many realities that people need to understand in order to strengthen their standing with their creditors, regardless of the type of debts owed. We encourage you to learn more about how we can help you by taking a look at the information we have to offer.
We can help someone with almost any situation, as regardless of where you stand now, one of the foundational keys towards financial stability and success is eliminating debt as quickly as possible. That frees up more money to go to work for you instead of it being the other way around.
Take a look at our website today to find ways we can help you. We look forward to doing so very soon.
