02 October 2012

Never Get Into Debt

A message to all the young people out there just starting to be independent: debt is modern slavery. Avoid it at all costs. Don’t think that you can borrow money and then just pay it off gradually, like it’s just a normal thing that people do. It’s so rampant, which almost makes it normal, but you’re severely underestimating the impact that being in debt will have on your life. You probably can’t appreciate it because you’ve been dependent on someone else to ease the burden of financial responsibility up until now, but debt is a soul-sucking situation to be in, even when you’re on track to pay it off.

What is debt?

Let’s be clear what debt is. Student loans are debt. Hell, all loans are debt. Anything with the word “financing” is just a fancy term for a loan. A mortgage is a debt. Credit cards are debt. Any situation where you aren’t paying the full amount of money up front for something that you are acquiring is essentially debt. Just avoid it all.

Not all debt is bad...

...but, it takes a measured approach to know what you're doing. There will be times when you can’t possibly afford that thing that you need, and so going into debt seems like an inevitability. But there are exceptions to the rule. Let me make it simple: If you can't draw a straight line in your head from borrowing the money, using it to earn more money, and paying your loan back, don’t go for it. Most debt is just a black hole in the middle of your wallet.

Really, why is debt bad?

Debt holds you back. If you’re stuck in a shitty job, debt will make you afraid to quit. You can’t leave your shitty job because the bank will repossess your life if you can’t pay your bills. And there’s no way to escape the debt bill. You can cancel your cable subscription and stop going to the gym whenever you need to, but you can’t turn off your debt until you’ve paid every last penny back.

Ever thought of taking a year off or simply changing your lifestyle just for the hell of it? Well, you can’t because your debt has prevented you from building your savings and requires you to continuously earn more money at a constant pace so that you can pay it off. What debt will do to you is solidify your status as a wage slave for as long as it exists. You’re 65 now and you want to retire? Better have paid off your debt long ago or else you’ll be working a few more years.

How do I get all the important things in life without borrowing money?

You may be thinking about a college education, which will cost way more money than you can possibly earn while you’re going to school. And you’re probably thinking that this education will allow you to earn enough money to pay off your loan quickly afterwards. Well, I happen to know people well into their 30’s who are still paying off their student loans. There definitely are some people who manage to make a lot of money with their expensive college degrees, but it doesn’t always work out that way.

You have to honestly look at what you want to study and judge what kind of job it will get you. Study the path your career will take after graduation. Are you really going to make all that money? What I’m actually asking is: are you really more talented and tenacious than 95% of your class? Is it really a smart decision to spend 5 years studying to become a park ranger because it's your passion?

I’m not saying you shouldn't go to school. I’m just saying you shouldn’t get into debt for it unless you can realistically set a goal for paying it off that's more precise than "eventually." Understand that the hole you're digging yourself into will dictate your future for a very long time.

Cars depreciate. Never finance a car. If you have to finance it, it’s too fancy for you. Its value will drop and you will always end up paying well more than its worth. There is even a chance that something will go wrong and you’ll be stuck paying it off long after it has been dismantled for parts.

Should you take out a loan for a house? In 99% of all cases, you will probably need to. The two important questions to ask are: do you need a house? And will the house be worth more than you paid for it by the time you’re going to move out? If you can honestly answer yes to the first one and, to the best of your knowledge, answer yes to the second, then, fine, go into debt. But if there is no confidence in your voice, rethink your plan. You don’t have to do what everyone expects of you.

I realize that taking all of this to heart means radically rethinking how you currently see the world. You probably think nobody is going to respect you unless you have a nice car and a house. You see these expenses as necessary in order to get along in society. That’s too bad, really. Because there are cultures out there where money has very little to do with your social stature. What really matters there is your wisdom, and sometimes wisdom means driving around in a beater and living in a cheap apartment. You’re told that freedom means you can have anything you want, even when you don’t have the money in your bank account. I’m telling you that freedom is not even feeling the need for it.

What about building credit?

This may be controversial to say, but a credit rating is the biggest scam on the planet. It basically encourages people to borrow money for their entire lives so that they can appease the credit gods enough to be able to borrow even more money. If you must play the game, do it safely; open one single credit card, use it for small daily purchases, and never run the balance beyond what you can pay back at the end of the month.

Banks make most of their money off of your mistakes. Never be late to pay your bill. Never run your balance beyond what you're capable of repaying in a single billing period. Basically, treat your credit card like a debit card that requires you to have the funds in your account at the time of purchase.

Track your finances.

Sometimes bank account statements are depressing as hell to look at. When you were young and your parents set up a savings account for you, you probably looked forward to getting each statement in the mail to track that extra penny of interest that you earned. Now it's the opposite. Your account, as an expression of your livelihood, feels like a delicate flower withering in the desert sun. And it's too sad to look at.

Do it anyway. Sign up for Mint.com. Study where your money is coming from and where it is going. Set budget goals for yourself. Learn about different places to put your money. Educate yourself because they certainly don't have personal finance classes in high school.

What should I do with all this extra money then?

The flip side to debt is savings. I serve as a good example of what having no debt while also having a good savings ethic can get you. It’s unfortunate, but in the last 16 months, I’ve only managed to gain employment for 3 of them. Before that, though, I was employed for several years straight. During that time, after getting out of debt and limiting my consumption, I amassed a considerable savings account balance. Without that, I would not have been able to weather the last year. And, admittedly, I do it in style. I’ve traveled all over: Canada, Europe, Thailand, Cambodia, the USA, and even Burning Man. But being unemployed is no cakewalk; even when I am exploring, I am on a severely restricted budget.

With this history, I’ve been in the position of advising people on how to properly emerge from debt; do you put all of your money into savings and just pay the minimum on your debt until its gone or do you spread it around more evenly? In my opinion, your money should go mainly to paying off your debt. This is based on purely mathematical reasoning: the sooner you pay off your debt, the less interest you pay, the more money you get to keep for yourself in the end.

So the question then comes: what happens if you lose your income and are still in debt with no savings? I think this question points out the absurdity of getting into debt in the first place. The real solution would be to play it right from the beginning. However, failing that, the truth is that you actually should be putting money into both paying off your debt and building your savings. And if you say that you don’t make enough money to set anything aside, I’m sure that it’s actually more possible that you’re just living beyond your means.

And in closing...

There are two more things that I want to address. The first is that while I am heavily stressing personal responsibility, I still fully support helping those in need. I support a government with compassion for its poor and you should, too. If you’re struggling and resent giving your money away to the government, take heart. Though not all of it will be spent on things you support, a compassionate government will indeed spend it on things that support you. If you want nothing more than to be completely independent, just wait for things to get worse. Then you’ll understand why social services are necessary. We should all be working to raise up the lower class to where it is respectable, not treating it like it is a place for the lazy and failed among us because it's just not true.

Lastly, once you’ve grasped the notion of living below your means, the final step is to ensure you have a bright, opulent future. Every year, put aside $5000 and place it into an investment fund (like an IRA, for example) when you do your taxes. You’ll be able to deduct that money from your income (saving you around $1600 in taxes) and, if you start early enough, you’ll be able to retire a millionaire. (Compound interest, baby!)

This is all simple advice. You don’t need to know much about money to follow it. The only thing you need to know: never get into debt.