Debt Sucks - Why I Abhor Debt
Let me be upfront with you. Debt sucks. And if we want to achieve financial independence, we must learn to avoid it like the plague. Trying to achieve financial independence with debt is like trying to run uphill while dragging a dead horse. It’s already hard enough running uphill, but when we add unnecessary weight, it becomes ridiculously hard. And too much of it will make us actually go backwards. Rolling us back down to the base of the mountain. That’s why in this post I want to talk about something I have a visceral reaction to every time I think about - Debt. And I want to share with you why it is something we should do our best to avoid at all costs.
Debt Enables Overspending
When I was 23 years old, I had a chance to rent my own personal apartment. No roommates. No sharing of the bathroom. A place for just myself. However, I didn't have any furniture to fill it with. So as a naive 23 year old, I went to a local furniture store looking for some furniture to fill my apartment with. And what a lucky day for me, the furniture store was offering 0% financing for 12 months. I couldn’t believe my luck. 0% financing is practically free money right?
As you can guess what happened. I walked out of that furniture store with more expensive and way more furniture than I needed. All I really needed was a bed and maybe a couch. Yet by the time I was done, I had a full dresser set. A dining table for 4 and even a tv stand for a tv I didn’t even own.
Paying cash hurts. It affects how much we spend. But when we are paying with debt, we don’t feel the pain as much. There is this psychological concept called mental accounting, which basically means that we value money differently depending on how we acquired it.
For example, let’s say you have $100 credit on your credit card and $100 cash in your checking account. You would probably be more reluctant to spend the $100 cash in your checking account because you know that is money you have been saving up for a while.
On the other hand, you would be more inclined to spend the $100 credit on your credit card because that is the bank’s money. Even though both accounts have the same balance, we value them differently. The same concept applies to debt. We often value money we borrowed less than money we earned. And that’s why it is so easy to overspend when we are using debt. Because we don’t feel the pain as much.
High Debt = High Stress
There is something about owing someone money. Our stress levels build. It feels as if we are being buried alive. The emotional and psychological effects of being saddled with debt are real and dangerous. Some studies show that people who are in debt, especially a lot of it, endure the same type of negative emotions experienced by an addict: shame, guilt, loneliness, and above all, helplessness.
Your options can become so narrowed and your stress levels so high, you can turn to self-destructive patterns that only reinforce the dependence on spending. Drinking perhaps, or smoking. Or, ironically, shopping and still more spending. It’s a dangerous, self-perpetuating cycle. Though I thankfully didn’t go into destructive behavior, I know the feeling.
In 2009, after 6 amazing years in the US Army, I decided to transition to the civilian world. It was an amazing experience, but I wanted to see what else the world had to offer. So I enrolled in an MBA program. I definitely learned tons about the business world from my MBA education and it helped me to transition successfully to the corporate world, but one thing I wasn’t very smart about was how I funded it. The program was quite expensive and I came out of it with $87K in student loans afterwards.
It was only afterwards I realized how dumb and careless I was with money up to that money. And when we continue to live with debt in our lives, it focuses our attention on the past, present and future exclusively in the worst possible way. We become fixated on our past mistakes, our present pain and the disaster looming ahead. Your brain tends to shut down on the subject with the vague hope it will all resolve itself in some magical way and in the fantasy time later. Living with debt becomes hardwired in your financial attitudes, habits and values. This is no way to live. Life isn’t about living under high levels of stress at all times.
Debt Can Hurt Our Marriage
Debt and the stress that comes with debt can really hurt our marriage. Money is one of the most common reasons why couples fight. At the heart of many couples' financial fight is debt. Couples who have a lot of debt tend to fight about money more than couples who don’t have any debt. This makes perfect sense. Debt puts unnecessary pressure on the household’s finances and creates a lack of financial security for our spouse and our children.
We are overwhelmed and we argue about spending habits. Who is creating more debt. How much debt is too much. This constant bickering and fighting can really damage the relationship. It can create a rift that is hard to repair.
Thankfully due to my wife’s continual patience with me, our situation never got too bad, but I know the feeling of debt stress. And it could have easily boiled over to both of us pointing fingers at each other and escalating out of control. If we are in a relationship and we have debt, we need to be honest with our partner about our debt and our financial situation. Or better yet, figure out a way to pay down that debt so we can unburden ourselves of this toxic burden.
Debt Limits Our Options
Living life with debt is like walking on a very narrow hiking trail with no other path options. You want to explore other parts of the mountain, but you can’t. Either the forest is too thick or you don’t have the resources to try out other trails. You are stuck to this one narrow path whether you like it or not.
For example, let’s say you want to take a trip to Europe. But you can’t because you have $15,000 in credit card debt. You would need to use all of your savings to pay off the debt and then some, so taking the trip is out of the question. Or let’s say you want to quit your job and start your own business. But you can’t because you have $50,000 in student loans. You would need to find a way to pay off the loans before you could even think about quitting your job.
In both of these examples, debt has limited our options and made us feel stuck. When we have debt, we are enslaved to the lender because debt payment is always due. We can’t do the things we want to do because we can’t afford it. Our options become limited and our ability to live a joyful life is diminished. And that’s no way to live. We should have the freedom to do the things we want to do, when we want to do them. And the only way to do that is to be unburdened of debt.
Debt Is Expensive
When we have debt, we have interest that we have to pay. If you’ve read any of my other posts, I often talk about the power of compounding. How compounding overtime can multiply our investments and really grow our net worth. However, this only works when compounding is working for us. Not against us. When we are paying interest on debt we owe, our money is compounding for somebody else—our creditors.
Let’s look at this reverse compounding when it comes to credit card debt. Let’s say that we had an amazing week in Los Cabos last week and we racked up $20,000 in credit card debt. The average interest rate on credit cards today is about 15%. If you were to only pay the minimum on this credit card debt until all your debt was paid off, how long do you think it will take?
Are you ready for it? At a 2% minimum payment percentage it would take you 47 years to completely pay off that $20,000 in credit card debt. However, what’s worse is the total interest you would have paid to the credit card company: $32,789.56.
Now remember, the original credit card debt was $20,000. You essentially gave the credit card company additional $33 thousand dollars for the privilege of using their credit card service. Debt is bad, but credit card debt is just horrendous. Trying to build wealth with credit card debt is akin to trying to run uphill with a bag of rocks on your back while dragging a dead horse at the same time. We might have had a nice Los Cabos vacation, but was it really worth an additional $33 thousand dollars? Probably not.
What If I Already Have Debt?
Alright, enough about me railing about how bad debt is. Let’s talk about what we can do if we have them already. And I’ll be upfront with you. Despite me stating how much I dislike debt, sometimes it's ok to hold onto them for an extended period of time - of course depending on the interest rate and term. Just don’t consider them a normal way of life and don’t get too friendly with them.
My general rule of thumb is this. If the interest rate is less than 3% and it's fixed, it's ok to pay it off slowly following the debt payment schedule. For me my home mortgage payment falls in this category, so I plan on paying my minimum monthly mortgage payment for the next 15 years. Nothing more. If the interest rate is between 3 and 5%, use your personal discretion. If you don’t like debt, prioritize paying it off as soon as possible so you can focus your efforts on other things like investing afterwards. If you are somewhat comfortable with it, you could be ok just paying the minimum and using the extra money for investing. However, if the interest rate is more than 5%, you want to pay it off as soon as possible. Don’t think about it too much, just get it off your back.
