“Technical debt” refers not to finances but to software development. In development, technical debt accrues by writing poor code and taking shortcuts in order to complete a piece of software. These issues become harder to address over time, as the software becomes more complex, accruing difficulty in the same way that financial debt accrues interest. In other words, technical debt increases as programmers solve problems the easy way for short-term expediency at the expense of long-term functionality.
The consequences of technical debt are far-reaching and can gradually cripple organizations that don’t properly adjust. The longer the debt remains, the more costly and difficult it becomes to “repay.” Some organizations might attempt to mitigate the effects of technical debt with smaller, short-term fixes that solve immediate problems, but these fixes only increase the amount of debt overall. Smart companies recognize the problem of technical debt and have plans in place to “pay back” this debt in a way that’s manageable and efficient.
How does technical debt relate to financial debt?
Technical debt and financial debt relate in the sense that both can be burdensome and expensive. More than that, however, understanding technical debt helps you to understand the long-term harmful effects of carrying financial debt.
At the core, the causes of both types of debt are similar. With technical debt, programmers are attempting to meet short-term goals (such as shipping a software product on time) by borrowing against their futures. A good programmer understands that the time saved in the moment will require repayment, with interest, through future labor-intensive fixes for technical debt.
When you take on financial debt, you’re essentially putting yourself in the same position. Whether you’re swiping your credit card, applying for a personal loan, or securing a mortgage, you’re promising to pay back your debt, with interest, using your future income so you can get what you need now.
The consequences of technical and financial debt are similar as well. Technical debt left unattended compounds quietly, becoming a bigger problem with each passing day. New features and updates add constantly to most pieces of software, and each new addition may need adjustment in order to repay the original technical debt. The longer that a programmer waits to repay technical debt, the more costly (in both time and effort) the process becomes.
With financial debt, compound interest poses the same risk. Unless there’s a robust plan in place to eliminate debt aggressively, interest will continue to compound each month at a rate that significantly reduces the effectiveness of making a minimum payment. Unless you pay the debt back effectively and strategically, it’s likely to grow or at least linger much longer than it has to.
In general, it comes down to this: both types of debt help you to achieve your short-term goals, no matter if they include shipping a piece of software, buying a car, or paying a medical bill. However, both also need to be tracked, contained, and repaid, or else they can become enormous burdens over time.
How to deal with your debt like a pro
From software programmers to Silicon Valley executives to you, everyone ends up with debt at some point. The secret to living debt-free isn’t just minimizing the amount of debt you take on, it’s figuring out how to effectively deal with the debt you already have. These rules should help you deal with your debt like a pro.
Resolve not to ignore it
The absolute worst thing you can do when you’ve taken on debt is ignore it. Unfortunately, ignoring debt is also one of the easiest and most tempting things you can do when faced with an overwhelming balance, a punishing interest rate, or an unwanted bill.
That’s understandable, as debt can be terrifying. Especially in cases such as serious credit card debt, student loans, or other large and common debts, it can be tough to resist the urge to make your minimum payment, throw out your statement, and stick your head in the sand without truly contending with your debt.
Creditors often make this kind of behavior easy. They set low monthly minimums, encourage you to automate your payments, and might not be especially forthcoming about how long it’ll take you to pay off your debts. After all, they make more money by keeping you in debt than in receiving immediate payback.
Despite all of these reasons, you need to resolve not to ignore your debt. Just like a programmer who puts off fixing a serious software bug for too long, waiting to deal with your debt just allows it to grow and become even more difficult to eliminate.
Understand the causes of your debt
“Those who cannot remember the past are condemned to repeat it.” This saying might be a cliché at this point, but in the cases of both financial and technical debt, it rings true. If you don’t bother to understand how you ended up in debt in the first place, then you’re likely to repeat the same mistakes in the future, no matter how hard you work to become debt-free in the present.
Sometimes, identifying the causes of debt is simple. In the case of technical debt, most programmers know when they’re choosing to take a shortcut or put a Band-Aid on a problem without fundamentally addressing it. Smart programmers keep track of these types of fixes so they know to fix them later when they have the time.
Similarly, some causes of financial debt are easy to point out. If you recently suffered a medical emergency, a car accident, or some other kind of sudden event and you needed to run up your credit cards in order to get your life back to normal, and then it’s simple to figure out why you ended up in so much debt.
In other cases, the causes of debt can be various and hard to pin down. Programmers might not be aware of a certain technology or technique that could have prevented them from building technical debt into their product. They might also be unaware of their own bad programming habits and might be inadvertently building redundancies and inefficiencies into their code, marginally increasing the amount of technical debt with each passing day.
The same type of logic goes for financial debt as well. You might use your credit card for everyday purchases such as groceries and neglect to pay it off in full before it compounds interest. You might only make minimum payments on your debt each month because you don’t know any better, inadvertently allowing it to stagnate or grow. Like technical debt, financial debt can stay under the radar and grow quietly until it becomes a real burden.
Whatever the cause of your debt, however, you must be able to figure it out and deal with it effectively. Otherwise, you’ll continue to go through cycles of paying off and accruing more debt for the rest of your life.
Calculate the long-term impact
If you really want to lend some urgency to your debt repayment plan, sit down and calculate the long-term impact of your debt.
For technical debt, figuring out this impact can be tough. Assessing how easily something can be coded or re-coded is no easy task, often more art than science. Still, if a programmer has a basic idea of what kinds of debts need addressing, and what it might take to address them, he or she should be able to estimate the long-term impacts of the debts.
For financial debt, it’s simple to calculate the long-term costs of debt, as debt calculators abound on the Internet. For most, all you have to enter is the amount of your debts, your interest rates, and either your minimum payment or the amount of time during which you’d like to pay off your debt. The calculator should be able to tell you how long it would take to pay off your debt making minimum payments, and what the lifetime cost of the debt would be. By experimenting with different lengths of time for repayment, you can also see how aggressive you can afford to be in paying off your debts.
The important thing to understand here is that debt is not just a payment you make each month and forget about. You need to deal with the financial burden aggressively in order to save money over time.
Make a plan to strategically deal with your debt
The best way to eliminate debt is to follow a strategy. Strategies help you make the most of every dollar spent and get out of debt faster and for less money than you would otherwise. It doesn’t matter if you’re repaying technical debts or financial debts; a strategic approach is paramount.
Two popular debt repayment strategies follow the same basic principles: the debt snowball and the debt avalanche. Both state that you should choose a particular debt to pay off aggressively while maintaining minimum payments on the rest, consolidating your repayment efforts for faster results. The snowball advocates for paying off your smallest debt, while the avalanche states that you should pay off your highest-interest debt first.
Both strategies have their places. The snowball is easier to keep up with because it offers a quicker win, but the avalanche may save you more money in the end. You should run the numbers on each before coming to a decision for yourself.
If neither of those strategies is capable of delivering significant results for you, then you might consider seeking outside debt relief. Contact National Debt Relief today to go over your options, such as debt consolidation, and figure out the best way to become debt-free.