2017 Debt Avoidance

7 Reasons to Hate Debt

Wave Riding > Debt Servicing

Debt…ugh!  Where do I start on a topic that I hate so much?  Let’s go back to the summer of 1996.  After two years of full-time graduate school, I had just finished an MBA and my MATL.  In July, I landed my first job after graduate school, a position as an ESL instructor in Jubail, Saudi Arabia.  At the time, it was the best job I ever had:  $39,000 a year (mostly tax-free), 401k with automatic 10% employer contribution, housing, and the use of a car.  My only expenses were for food and phone calls.

I was very happy to have the job because I had a $20,000 student loan that I wanted to pay off.  I was 33 years old, and I had never been in debt…EVER.  I realized that I should use my first job to pay down my loan as quickly as possible.  When my first paycheck arrived, it was for nearly two months work, so I immediately sent Sallie Mae a check for $4,000.  The following month, I paid another $3,000 on the loan.  I was on a roll, but I had very little money to get me through the month.  Then, I had a moment of clarity while shopping for a bossa nova CD in a music store in Jubail…

The week before I had bought a Stan Getz & Joao Gilberto CD that I really liked (see above).  I returned to the record store in hope of buying another bossa nova CD to add to my collection.  After combing through the stacks of CDs, I found one that I was dying to buy.  (I can’t even remember the album or artist now.)  I was low on money, but somehow I was trying to talk myself into buy a $15 CD.  Then I remember thinking to myself:

“Hey idiot, what the heck are you thinking?
You have no money and your next paycheck is already accounted for; it’s going to Sallie Mae.”

Suddenly, it was clear to me that my freedom had been compromised and that the fruits of my labor would not be my own until I slayed that beastly loan.  Because I still owed $13,000 (at 8% if my memory is correct), I was a modern-day indentured servant.  Sure, I didn’t have to make such aggressive payments on the loan, but the thought of paying off the loan over the 15-year term was unthinkable.  I wanted to kick Sallie Mae’s fat, parasitic derriere to the street.

Over the course of about nine months, I managed to pay off the rest of my student loan.  Great, right?  Well kind of because in January of 1997 Edwina and I got married, and her $25,000 student loan came to live with us.  There was no way we were going to let her loan stay in the house, so we spent the next 15 months slaying that blood-sucker.  When we sent the last payment on her loan in, I remember thinking that we were finally “free” again.  At that point our net worth was about $1,000, but it was invigorating to know that our money from that point on would be OURS.

Warning: Debt Is Marketed to You! $658k?

After Saudi Arabia, we moved back to Georgia and became normal Americans.  We got a mortgage to buy a house, a home equity line of credit (HELOC), and a couple of credit cards.  Thankfully, we never had serious problems with credit card debt.  Our HELOC balance got out of hand as I used it to help us “make ends meet” whenever we had a cash flow crunch.  Our mortgage payments of $1,000 never seemed to be a problem; we never missed a payment.  We managed to avoid any car loans by paying cash for two reliable used cars that we drove for 12 years.  While my wife and I don’t represent a worst case debt scenario, we were far from perfect in our debt management.    The end result of our 12 years with debt (2004 to 2016) is that we hate debt and try to avoid it at all costs.

My Reasons to Hate Debt:

#1.  Debt represents someone else’s claim on your money, labor, time and life energy. * Now that’s a depressing sentence, isn’t it?  It reminds me of the bumper sticker that says, “I Owe I Owe So Its Off to Work I Go!”  Hilariously funny, right?  We’re indentured servants here, but it sure is funny.  To the contrary, debt is a contractual obligation that requires you to pay back what you borrowed regardless of how inconvenient it might be for you.  Hey pumpkin, are you tired of working that terrible job?  Tough, keep working because you owe me that money!  Would you prefer to do something else with your time?  Ha, who cares…get back to work, debtor!

#2.  Debt reduces your ability to save. * Duh!  How can you save money for yourself and your family when your money is already promised to someone else?  Without the ability to save money, your future financial success is in doubt.  Hardcore savings is THE key to wealth building (at least it was for us), so don’t ruin your ability to save with excessive debt.

#3.  Debt is paid for with after-tax dollars. * Humans never seem to understand this concept.  If you have a car loan with a $500 a month payment, you have to earn about $655 before taxes..  Why is that?  Let’s see:  7.65% for Social Security & Medicare + 6% state tax + 10% federal tax = 23.65% total tax.  That means you’d get around 76.35% of your pre-tax money, so your $500 payment requires you to earn $655 to service your debt ($500 / .7635).  A $1,000 mortgage payment would require earning $1,310 before taxes.  Servicing debt with after-tax dollars is more costly than most people realize.

#4.  Debt eats up your “free money” amount. * If you’ve read any of my “Free Money” posts, you know that we try to strike a balance between a comfortable lifestyle and income-tax efficiency.  In 2017, our “free money” income amount will be $34,850 for our family of three.  That’s not a lot of money, but it’s decent money if you’re not swamped with debt payments.  However, when you add debt to the mix, you need more money to service your debt.  That extra money requires increased income which increases your income tax obligation.  So much for income-tax efficiency.

#5.  Debt usually includes hefty interest payments. * Not only do you have to pay back the amount that you borrowed, but you also to deal with interest payments.  These rates are not cheap, especially on credit cards.  Do not, I repeat, do not get trapped in credit card Hell paying 29% interest for years on end.  If you avoid debt, you also avoid interest payments.

#6.  Debt induces anxiety, stress and sleeplessness. * It’s probably no surprise that debt can lead to lots of health and psychological problems.  After all, you only live “under the debt gun” for so long before you crack.  Money problems (usually debt related) also destroy many otherwise healthy marriages.  Your health and relationships are much more important than debt payments…avoid debt whenever possible!

#7.  Debt often leads to a loss of agency and dependency. * Many people become overwhelmed by their debt and simply give up.  People lose their homes, go bankrupt, and some even commit suicide.  Instead of believing that they control their debt, many people begin to believe that their debt controls them.  Who wants to live like that?  Not me.  People with debt problems are in need of debt solutions.  Often times they depend on relatives, friends, and politicians to help them with their debt problems.  Once again, who wants to live like that?  By controlling your debt (or avoiding it all together) you also control your financial life.

That’s my list.  I truly hate all seven of those reasons listed above.  Did I forget any other reasons I should hate debt.  I’m sure I did; please enlighten me in the comment section below.

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This Post Has 6 Comments

  1. I love the point on paying debt with after-tax dollars. Many people, including myself, are either ignorant or forget the tax implications on earned money. I coincidentally read your post just after completing the chapter in JL Collins’ book on Roth vs. Traditional IRAs. Before the new year, I switched from a Roth to a Traditional IRA when I realized the extra money I was giving Uncle Sam to fund my Roth could be moved to a taxable account for growth potential. I think this move freed up $900 to $1000 for additional investing. I also realized that my retirement income will probably be significantly less than what I make now with the goal of my family being in the 15% bracket with possibly only 3k to 5k being exposed to the 25% bracket. I’m sure there are other tax strategies I’ll learn along the way that will leverage that even further, but it’s amazing what a little tax knowledge can do. The FIRE community has definitely opened my eyes. Thanks for everything you guys do!

    1. Geoff, I have slowly begun converting some of my traditional IRA money to a Roth IRA. I’m hoping to build a Roth Conversion Ladder like these guys: #1, #2, and #3. That way we’ll eventually have a pot of tax-free money to better optimize our taxes. When it comes to retirement accounts, I always tax the tax deduction first and convert to a Roth account later if possible and tax-efficient (Gotta stay in that 10% bracket…maybe a little in the 15%, but 25%, no way!). Thanks for visiting and frugal on, Ed

  2. I agree with Geoff…it never ever occurred to me about paying back debt with after tax dollars…

    So I paid off my mortgage in November…so no more debt payments!

  3. I have $5900 left on a student loan and $6100 on a 401k loan. My goal is to knock out both loans this year and dedicate my free time to evangelism.

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