10. My Finance Journey
I am immensely grateful for the life I've been given. I've never (truly) wanted for food, never been homeless, and never been really sick or in life-threatening danger. As lives go, mine is really pretty good.
That being said, one of the things I've struggled with most in my life is money. I was raised in middle class Fort Collins, Colorado, so by "struggle" I don't mean that I've had a hard time finding my next meal, but I do mean that I've learned the hard way about what works in the world of personal finance and what doesn't.
I grew up under my dad's six-figure income as a pharmaceutical salesman and (like most Americans) was surrounded by advertisements from banks and car companies, so as a kid I was accustomed to an upper-middle class lifestyle. It goes something like this.
•Want to buy something that you can't afford? Buy it anyway and put it on payments for 5-10 years!
•Credit cards and personal loans are "powerful financial tools" you can use to build wealth and become successful.
•There's nothing wrong with eating out every night for dinner.
•It's "normal" to have a house payment, a car payment, a student loan payment, a smartphone payment, and just about everything else on a payment.
In short: spend, spend, spend. It was a rude awakening when I got out of the house, rented an apartment with a roommate, and was living on an income typical of a college student (in my case, $10,000-20,000/year). I quickly realized that I regularly spent $400-500/month on food just for myself, that it was a bad idea to go to college on student loans, and that it was an even worse idea to spend money on anything I saw.
Unfortunately, it still took me a long time to start on a path to fixing my financial problems. I paid for everything with a credit card, not bothering to track whether I was spending money faster than I was taking it in. For several months I could barely keep up with my student loan payments ($600/month). I found a better job and then bought a brand new car on a loan- adding another big monthly payment to my expenses ($450/month).
It was only after this- when I was making the most money I ever had in my life and was still struggling to pay the bills- when I realized I had to stop and fully commit to a new plan. The solution I found was the advice offered up by Dave Ramsey regarding personal finance.
The advice, in four words? Get out of debt. Here's why.
Debt is dangerous. Financially it's the most dangerous "tool" out there for you, and it's why we as a nation have $1.2 trillion in student loan debt and $800 billion in credit card debt. People come up with every excuse in the world to get debt, usually because some salesman somewhere lied to them. "It's a low interest rate" or "It gets me cash back rewards" or "It lets me get a new car/phone/shiny new toy whenever I want" or "I don't have to pay anything now" are some popular ones. It's great for the bank that loaned you the money, of course- but it's almost never good for you. The rare exception to this rule is real estate- but even there you should keep the mortgage on as short a term and as low an interest rate as possible. A fifteen-year fixed mortgage with a 20% down payment will ultimately cost you less than half what a thirty-year fixed mortgage would cost with a 3% down payment and private mortgage insurance.
Sure, there are people who pay their credit cards off in full every month and therefore use it more like a debit card. But most people are not disciplined enough with their money to do that consistently and end up being tempted by the "buy now, pay later" mentality that most Americans are trapped into. The U.S. has $20 trillion of debt- but as easy as it is to blame the government for that, it's worth remembering that a large portion of that is held by individuals who live here who buy things they can't afford.
What's the solution, then? It's simple: quit letting people sell you on the concept of debt. If a $25,000 car loan at a 4% interest rate sounds like a good deal to you, you need to get your head examined, like I clearly did. That 4% (compounded annually, usually, not over the course of the whole loan) is going straight into the pocket of whatever bank is doing the financing, rather than going toward YOU. You worked for that money- why should the bank get it? It should be used to provide for you and your family, not to line the pockets of the bank and the car dealer.
Yeah, some debts are less treacherous than others. Phones, for example, aren't financed with interest at a phone carrier. Even so, would you ultimately be spending less money if you had to buy that $700 smartphone at full price? Would you maybe only buy a shiny new phone once every three or four years instead of every two years (or worse, one or more times a year)?
That's what I thought.
So: debt is dumb. Dave Ramsey's plan recommends getting out of it with a "debt snowball": listing your debts smallest to largest (not based on interest rate- based on how fast you can knock them out), paying the minimum balances on all but the smallest one, and attacking the smallest one until it's paid off. Then, once it is, take the payment you were putting toward the smallest debt and use it to pay down the next-smallest debt on top of the original monthly payment. Keep piling up the payments, and then knock out all those monthly expenses!
I'm doing that myself now. I started with about $103,000 of debt earlier this year- mostly student loans, followed by car payments, and then some credit card balances here and there. I've knocked out about $5,000 of it so far and with the credit card payments done, it's only accelerating. I can't wait for the freedom that being debt-free will bring.
I tell this to you now, dear reader, because I don't want other people to make the mistakes I made. I don't want you to buy the lie that you need a good credit score to get ahead in life; you only need a good credit score to get more debt. You don't need a credit card. You don't need a personal loan. You can acquire scholarships or save up to go to college without debt. You don't need a new car- at most, you MIGHT need a used car. And you certainly don't need a payday loan or a timeshare.
Live debt free and living will be easy.