Tuesday, April 20, 2010

Piece of Advice #23: Realize that Debt = Slavery

Many people are not good with money and should only be allowed to handle it in small amounts.  This is a sad truth.  Another sad truth is that no one controls the access these people have to money and more importantly to credit.  What a disastrous combination! 

Since the economy melted down from the dance of immoral lenders and out-of-control borrowers, there has been some tightening of credit to individuals.  This is a good thing.  It shortens or frays the noose people can and do use to hang themselves.  But there is still plenty of credit people can and will get that will eventually prove their undoing.  


Gen X and Y have grown up with credit being a natural thing, the way things get done, the grease that keeps the wheels from squeaking too hard.  But before the proliferation of personal credit people still got things done.  They saved their money then they bought stuff.  It took longer.  It wasn't recreational, but it was far less stressful than the way we've done it these past few decades. 


When someone loans you money, they own part of you.  They own part of your future earnings.  That is the unpleasant reality behind credit.  Credit cards aren't money.  They are a loan and represent the price of the item you want to purchase plus whatever interest you accrue before reimbursing the credit card company for that item.  However, if you purchase a thing with credit and find you can't afford it later, you can always sell that object and pay the debt, provided the object retains its value.  Unfortunately, most of the stuff you buy at stores or in the mall depreciates in value, meaning the price you pay for the same item at a mall boutique and at a garage sale varies widely (widely, like the difference between 50 dollars and 50 cents).   If you purchase a vacation on credit, there is not undoing the experience so you can get a refund of your money to pay the credit card company.  The same with student loans and those, friends, cannot even be discharged in bankruptcy.  Which means plenty of young people will die in debt with those barnacles still on their backs.  


Ask yourself if that Psychology degree or trip to Jamaica is worth the bank owning your future earnings and affecting your opportunities to marry (because whoever marries you will be taking ownership of your debt too), have children, or work full- or part-time in a job, or even choose a job freely, as opposed to on salary alone.  Is it worth it?  


Young people rarely know the value of money in terms of how much it costs to pay for basics: rent, food, insurance, transportation, utilities - until they have paid for them for awhile with the money they make at a job.  They also have little idea of how long it will take to pay off, say, $70K in student loans on a $20K/year salary (the answer: literally forever; you will never pay it off).  I didn't know, and I was pretty careful with money and had a debilitating fear of debt passed down from my Depression-era grandparents.   Looking at the salary for a first job can be exhilarating after barely scraping by in college, but after the government takes its 50% in federal, state, local, Social Security/Medicare, sales, and property taxes and you've paid for the general necessities, what little is left should not be wasted making banks richer, it should go toward your future.  Currently the Federal Reserve has set interest rates so low that saving money is actually losing money, but not as much as paying interest on a debt.  


On a practical level the safest thing to do is to view all debt as dangerous and to work at paying for everything in cash out of money you have saved - even college.  If you have to work to save money for tuition, you may think twice about taking pointless classes and pick a major more wisely.  You may value your education more and work to bring home the grades or strive harder for scholarships.   Some people have managed to surf the credit wave spectacularly all the way to the beach, but many more have drowned out there in the deep and will never make it back.  If you aren't good or reliable with money or don't have the experience to tell, pay cash for everything.  It's the safest route and the wait between wanting something and purchasing will help you see clearer exactly what is a need, what is a want, and what is a complete and total waste of money.  



4 comments:

  1. Sad but true. My parents passed on a Depression era fear of basically *everything*, spending money and enjoying life in particular, which led me to fear nothing. A lot of parents also want to indulge their children, to give them things they didn't have, which is understandable but has to be done with great care.

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  2. I'm happy to see someone giving this advice. I'm really passionate about this subject recently. For this very reason I just decided not to go to an expensive trade school and take out private student loans in my attempts to become a photographer. A lot of my friends (we're 20somethings) treat student loan debt flippantly and say "well, everyone has it" or "student loan interest rates are going to be the lowest ever this year!" My response is, "well, I don't have to have it and I'm choosing not to." Hopefully if I do make it back to school (already got a bachelor's degree), I'll work my way through even if it takes longer.

    Really enjoying your posts. Keep up the writing.

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  3. dina - Welcome! I think it's very important to avoid the student loan trap. There's just no really good way to predict whether the investment in education will pay off long term to the point at which just those expensive loans can be paid off. Seriously, as a country we are selling our youth into indentured servitude, and no one is saying anything. Thanks for your kind comments.

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  4. Grerp, the NYT's just did an article on the effect of debt on relationships. My take here: http://gameformarriage.blogspot.com/2010/09/always-listen-to-grerp-piece-of-advice.html

    You might want to bump this post.

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