“Debt needs a constant drip of blood, and that blood comes from your gas tank of life: time. And since time is fixed, an increase in indentured time comes from only one source: your free time.” – MJ Demarco
“Debt is the ultimate dream crusher. Why settle for a house when it could stifle your quest to find what your good at and like?” – Mark Cuban
Debt kills the autonomy of a human. There is less flexibility in doing what you want to do. You have obligations to meet. You can’t take that less paying more fulfilling job because you are a slave to your bills. It’s more difficult to quit your job and try to go full time with your side gig.
Why do people get into so much debt – Part of is society encouraging a bunch of young people to go to college without thinking about the return of their degree. The encouragement of consumption, the new car or gadget, buying a home because that will make you “successful.” Another factor is the federal reserve inflating our purchasing power away, but that a different conversation. Typically, we don’t include in the message “your choices are now limited because you have obligations.”
College Debt – When it comes to college debt, this can be good debt, depending on getting a reasonable degree. Does the amount of debt proportionally increase your proposed earnings potential? Will I be gaining skills that are valuable in the marketplace?
Consumer Debt – Consumer debt comes from when we buy things that we shouldn’t be because we can’t afford it. If we have a lot of this debt, we can get in a deep hole. This can be caused by a lack of discipline or an unfortunate situation.
Car Debt – You don’t have to buy a new car. The car loses value as soon as you leave the lot. You are better off buying a reliable new vehicle. It understandable if you need to take some financing out because you can’t pay the whole amount at the same time at first. We just overemphasis buying a brand new vehicle when it isn’t needed especially since it will kill your cash flow.
Home Debt – This is the most controversial topic. People are split if you should go into home debt. There seems to be pressure on people to go into home debt without thinking. If you want to buy a home, ensure this is an area you wish to live awhile. Don’t just buy it because that’s what you have been programmed to do from family or friends. Remember, liabilities take cash out of your pocket; assets put money into your pocket.
A good thought exercise from MJ Demarco before buying a particular item. If you are going through thought exercises, if you can afford it, then you probably can’t. When is the last time you thought if you could afford a piece of gum? Is your life tokens worth this item?
When trying to take a more proactive role in paying off your debt, look for the high-interest debt first. A good mental model for this is each time you pay of a loan; you are locking in that return. If you are paying off a 20% credit card debt, you are getting a 20% return on your money. Good luck finding that in the market. I am not an expert on paying off debt consumption debt; there are many resources out there.
Another way is to focus on expanding your income. You can do this by gaining skills at your job that make you more valuable to the employer. If this is possible, looking for a job with a higher earnings upside. Many skills can be learned for free on youtube or cheap courses. Some examples include cybersecurity and programming. Expanding the income can also be done through a side hustle/business.
Once a debt is paid off, you regain your autonomy. Based on psychological studies, this is one of the top areas to help with happiness. When you have no obligations to others, you can feel a lot freer and take chances for what you want to do. In the end, we are looking to do what keeps us more fulfilled.