Regardless of your political leanings, we can probably agree that freedom is a value we all cherish. However, things like limits and ceilings seem to run against everything freedom suggests. It’s true: Nothing in life is completely free, and if we’re not careful, freedom can become just another word for “nothin’ left to lose.”
But what if putting limits on your spending by imposing a personal debt ceiling could be a way to set yourself and your finances free?
What Is a Debt Ceiling?
First of all, it’s important to understand what, exactly, a debt ceiling is and how the federal government uses it. A debt ceiling limits the amount of debt the treasury can issue, meaning it’s a limit on how much money it can pay, not how much it can borrow.
As frustrating as it might be when it comes to the federal government, the concept of a debt ceiling as applied to personal finances can keep your finances under control, allowing for more freedom and peace of mind when it comes to how much debt you can take on.
The first step in creating your personal debt ceiling is to set a hard limit on the amount of debt you can safely incur. But how much is a “safe” amount? Compare your current income and any projected income against your expenses. The remainder is what you could potentially pay down on all future debt. This should provide you with a number you can afford without extending you beyond your means.
What Does a Personal Debt Ceiling Do for You?
Understanding what a debt ceiling does and how it applies to your personal finances is simple enough, but why should you establish your own? For starters, personal debt ceilings prevent you from making big purchases that can get you into big trouble (e.g., a house, car, or boat) down the road.
A personal debt ceiling also takes much of the guesswork out of the financial decisions you face every day. Instead of trying to decide whether you want to purchase something and can actually take on the additional debt, you can focus purely on the value of the purchase. All of the above will help you cut down on second-guessing yourself, protect your long-term financial health, and give you the information you need to make educated financial decisions.
How Fixed Should Your Ceiling Be?
But what happens when you start reaching your personal debt ceiling? One thing to do immediately is to think about how you can cut out the things you don’t need. You might also consider increasing the payments you make on your credit cards or personal lines of credit. You won’t be changing the amount you spend, but you will be increasing the distance to your debt ceiling. If you don’t change your spending behavior as you approach your ceiling, you do run the risk of raising your debt ceiling, which could significantly damage your financial well-being.
However, this doesn’t mean you should never consider an adjustment to your debt ceiling. Just like with the federal government, it’s all up for debate.
Whenever you start inching closer to your ceiling, it’s time to sit down and reevaluate your income and expenses. If your income has increased or your expenses have decreased, it might make sense to raise your debt ceiling, especially if there’s a business opportunity that’s too good to pass up. Do so with caution and be honest with yourself when it comes to understanding the potential consequences of exceeding your debt ceiling. You wouldn’t want to have to go through a “shutdown.”
In the end, it’s about establishing a stronger personal connection with your finances. Going through the process of setting and, at times, raising or lowering your debt ceiling brings you closer to understanding your true financial situation. By committing more time to evaluating your earnings and spending on a regular basis, you’ll also gain greater freedom in what you can do financially, regardless of where you set your financial limits.
