If you have debt, you have a debt problem.
Most people don’t believe this. They feel even if they have debt, so long as they are managing it appropriately, it’s not a problem. I’m not talking about careless people that only make the minimum payments on everything they owe, I mean the dedicated, want-to-get-debt-free people that are diligently putting 15%+ of their net income towards their balance owing. They have a debt problem. Why? Because all debt is a problem.
If you don’t think debt is a problem, you’re in denial or you’re not in debt.
Having debt should feel like your hair is on fire. Mr. Money Mustache even says your debt is an emergency. Most people don’t think of debt as an urgent issue, because they only think of it in the context of its balance and interest rate. This means the conversation in their head kind of goes something like,
“I owe $X at Y%, which isn’t too bad, it could definitely be worse.”
Um, no. It could not be worse. This is already the worst thing that’s ever happened to you. Now, I’m about to make you really sad. Grab a box of tissues if you need, because this is some heart-wrenching math that will make you wonder if there’s any good left in this wicked world. I want you to think of your debt in the context of how long you need to work, and how much you need to earn, in order to pay it back.
“That’s easy,” you think, “I owe $50,000 so therefore I need to earn $50,000 to pay it off.”
If you earn a salary of $50,000 per year before taxes and are diligently putting 15% of your net income (over $500 per month, good job) towards your debt, you’re actually going to need to earn over $450,000 to pay off your debt. Oh shit! That’s a lot of money to wrangle out of your employer just so you can take of your not-a-real-problem debt.
So is it a problem now?
If you’re wondering how I came up with an absurd figure of nearly a half-million dollars, let me explain. If your debt is $50K and being serviced by 15% of your net income, then you’ll need to net a total of
$50,000 / 0.15 = $333,333
This is after taxes, so assuming you’re paying an average tax rate of 27%, you’ll actually need to gross:
$333,333 / (1 – 0.27) = $456,621
How long does it take for you to gross $456,621? On a $60,000 salary that’s:
$456,621 / $60,000 = 7.61 years.
Oh, this is bleak. Bet you thought it would somehow pay itself in 3 years or less. Eight years is a long time to be stuck in indentured servitude to your education, car, home, or credit cards.
Indentured servitude was a labor system whereby young people paid for their passage to the New World by working for an employer for a certain number of years. It was widely employed in the 18th century in the British colonies in North America and elsewhere. (Wikipedia)
Does that sound familiar? That’s what your life is.
Every time you buy something with debt, you are giving your employer years of your life to pay for it.
This is less horrible if it’s for something that will also make your employer give you something back, ie. taking out student loans in order to earn a higher salary, but even that can descend to a dark place pretty fast. We are so comfortable with borrowing and making payments, we hardly think about how the exchange is really affecting our life.
Now, I’m not one to sing about financial freedom or financial independence, there’s a lot of dedicated early-retirement blogs that do just that, but I will tell you that one of keys to being in charge of your own life is to be in charge of your own money. If you owe someone else, your money isn’t yours. And if your money isn’t yours, then the time and effort it takes you to earn it aren’t either — they belong to your boss.
Just once I want someone to drive up to their office in the shiny new car they just financed and shout,
“Hi, boss! Check out the car I just bought, I am soooo excited to be working for you for at least the next 7 years!”
Then buff the hood with a grin.
I’ve been thinking a lot about the time-value of money, and the money value of my time. This is why I figured out the cost of my MBA would take 3 years to recoup. Before I started the program, I thought, “3 years isn’t so bad for a lifetime of oodles of money” and now you can find me staring wistfully at my account balance in my online banking, wishing my savings account could be returned to its former glory. It’s not debt, but the cost put me behind. I graduated three months ago; only 2.75 more years to go before my degree pays off. Not quite golden handcuffs, but certainly a fine shiny shade of brass. My employer owns me. They’re nice about it, so it’s alright, but I’m still here out of need. It’s ok to hate that.
A longer debt sentence, say 8 or 9 years, is no joke. Assuming you’re going to work for 40 years, then 8 years represents 20% of your working lifetime tied to your creditor of choice. Most people can’t even get their marriage to last that long, and yet here you are signing up for nearly a decade of misery with someone you don’t even like. Try to tell your bank that the private loan you share just isn’t working out and you want to start seeing other people. It’s not going to go over well.
How’s your debt looking now? Is it still not a problem?
I wish everyone that bought a house they couldn’t afford sent out Christmas cards with tidings of, “Seasons Greetings! This year we committed to paying the bank interest for 25 years!”. That’s like a really bad prison sentence, the kind you get when you’re a serious menace to society not just a happy couple looking to start a family in suburbia. What’s the real difference between 25-to-life and a mortgage with a HELOC, except that in one you get to choose the decor? “We couldn’t afford it any other way!” is everyone’s answer. Yeah, that’s what they said about catching a ride to the New World in the whole indentured servitude example.
If you rearrange the letters in the word “slavery” it can almost start to look like “leverage”.
Ok, ok. I’m being a tad over-dramatic, but I know you like my theatrics. That’s why you’re here. And because you don’t want to be stuck in indentured servitude that hasn’t matured since the 18th century, with the exception that this time around maybe you get a corporate smartphone with unlimited data. But I would wager you want your money to belong to you, every red cent of it. Somewhere deep inside there is a part of you that understands this game is being played with loaded dice, and you can’t win. Throw down your cards, friend, you can’t afford this buy-in. Fold.
You are not paying with your money, you are paying with your life.
I bet you didn’t think about a mortgage or a car loan or a student loan as a way of pledging a portion of your future earnings for upwards of 1/5th of your working lifetime. I bet you didn’t think of your future earnings as your future time, the years of your life that you could be doing whatever the hell you want, like reading lazily on a beach or backpacking through Nicaragua. I don’t know what you’d do with freedom, it’s your life. You do whatever you want.
No one wants to earn money more than me. Six- (seven-?) figure sums give me the warm & fuzzies. But want is not the same as need. I never want to need to sell my time and energy to keep up with my lifestyle, let alone a lifestyle I borrowed to afford.
And thus repaying your debt becomes an act of reclamation. Not merely of your money, but of the time and talents and skills you sold piecemeal to every creditor that offered you a “no-payment grace period!”. When you pay your debt, you take back yourself. Each extra payments is one that releases you from future work. Every single dollar gives you back minutes, hours, days, and months of your life.
Your life is worth it, pay up.