Your debt makes other people rich. You’re borrowing from your future self, who will be poorer, less secure, or lead a less abundant life because you wanted something now, before you could afford it.
You must get out of debt. You can’t save while you’re in debt, and it grows like a weed. Kill it!
Avoid debt like the plague
The only good debt is debt taken on for investment. In personal finance terms, that means an affordable mortgage to buy property for the long-term.
We all know what bad debt looks like:
- Excess clothes piled up on store cards.
- A loan taken out to fund a holiday.
- Flashing the plastic to keep up with your mates.
- The last week of every month’s expenses being put on a credit card and never actually paid off.
- Sundry pointless items bought on the ‘never never’ as our grandparents wisely called what we call credit.
Bad debt – non-mortgage debt – will make you poor if you’re not doing very well already, and it will stop you becoming rich if you are.
Too extreme, you say? Everyone has debt – surely millions can’t be wrong?
I disagree. The popularity of debt is down to:
- Emotional marketing by retailers to persuade us that we must have things we never knew we needed and most probably don’t.
- Emotional marketing by financial firms, who tell us we can have anything we want – now.
- People being too impatient nowadays to save for anything.
I know I sound old-fashioned, but we need to relearn some old ways of thinking.
Financially, borrowing to consume makes no sense to me, whatever economists tell you about balancing ‘consumption over a lifetime’ or similar wealth-sapping baloney.
- Debt makes everything much more expensive.
- While you’re paying off debts you’re not saving and investing.
- Debt saps your efforts to make more money.
Remember, you’re not getting anything free when you buy on credit. You’re only borrowing from your future self, who will be poorer as a result.
The bottom line on debt. Don’t do it.
Get out of debt, and stay out of debt. You’ll earn money instead of paying it, you’ll end up richer instead of poorer, and the only possible downside is less hours spent with bored 17-year old staff at your local retailer, if that happens to be your hobby – at least until your savings have caught up.
My guess is when you’ve got the money in the bank you’ll not want to spend so much on pointless gadgets and gizmos.
I’ll discuss how to get out of debt in detail in a future post.
The short version:
- Cut up all your cards to avoid getting new debt.
- Target the debt on the card with the highest interest first.
- Find more money: Sell unwanted stuff, do overtime, go busking.
- Pay as much over the minimum as you can each month to clear the card.
- Move on to the next card, and clear that.
- Consider shuffling debt onto 0% interest cards only if you’re sure you’ll keep up your repayments.
- Avoid falling for any debt settlement scams!
Please do subscribe to my feed to get the long version when it’s written, and do point out this article to any relevant friends. You might save a life!
Yes, get out of debt and have a plan for *staying* out of debt. I succeeded in paying off my cards once while living at home, but only to rack them up again when I moved out because I didn’t plan ahead. Stupid. Not going to do that again. Also, I recall one job I worked (this in response to your retire early post) where I was *constantly* thinking about all the other things I could be doing…. it was even the best job I’d had up to that point, and I couldn’t sit still or focus very long. I wouldn’t want to be in that position again.
I’m on my debt-freedom journey at the moment and hopefully have just a few more months to go. My “whatever happens” goal is New Years Day 2010, but I’m working extremely hard to beat that if I can.
Then it’s game on to growing my future 🙂 Thank you for your help with that.
Can’t argue with the “say no to debt” idea but the “time preference” aspect of consumption is more important than you seem to suggest. Having 11 grand after 40 years for an investment of 752 looks so impressive it’s tempting to ask why anyone would buy a bed now! But as you mention, you’ve actually sacrificed the utility you would have enjoyed from using the bed over a number of years. Put a nominal value per annum on the “service” the new bed provides and factor that in (and being able to get a used bed instead doesn’t change that, as you would have to say that’s an inferior item to a new one) . Then there’s the ~ 30% chance you’ll be dead by the time you come to enjoy the 11 thousand. So now there’s your risk premium to consider right there. Suddenly that compounded return on the 752 doesn’t look quite so stellar.
@Gazzer – Thanks for your comment on this very old post – indeed, thanks for managing to churn through it.
I have to admit I was so embarrassed by its size (nearly 3000 words!) and its lack of any formatting or pleasantries that I’ve spent the past *three* hours chopping it up into five pieces, and rewriting. (This is why I never sleep! 🙁 )
Readers – the article Gazzer is referring to with his very reasonable comments are now this one on the true cost of buying a bed on credit, and this one on what would happen if you paid cash and invested the interest payments instead.
Gazzer – As you know the £752 I’ve compounded is the interest bill – it’s the price you pay for not saving up in advance for the new bed (and tat) which costs £500 or whatever it was. So it’s £11,000 to pay for say six months sleeping on the used bed / mattress on the floor. Expensive I say!
Thanks for your interesting additions to the discussion, and I do appreciate I’m pushing the compound interest angle for thought experiment purposes here.
I hate debt… it’s like a cloud that’s over my head and never goes away. I only have some student loans at the moment, but just the thought of them are annoying!!! Did you have to work your way out of debt when you were younger?
.-= Ryan @ Planting Dollars on: Adding Content To Your Travel Site – Waikiki Site =-.
I have student loans (which I am told will be paid off in the same way I will pay national insurance and so it won’t appear part of my take-home pay) and an interest free (while a student) overdraft.
So I am not too worried about the debt tbh. I consider the student loans as just extra tax and I intend to pay back the overdraft before I graduate.
Seems like (almost) free money to me.
@Sam — I think you are closer to the truth with you ‘extra tax’ comment than your ‘free money’ one. 🙂
I understand debt is part of the university experience for most now — even if I think it should make many people reconsider going to university. But I would still urge any young person not to allow the idea of debt to become too normalized. Keep thinking of it as toxic, because it is!
Student debt, with its low interest rates and generous payback conditions might be the least toxic form in theory — more sugary snack than cigarette or outright poison! But they way it is making young people think of debt as just something to live with is pernicious, IMHO.
Thanks for stopping by and commenting! 🙂
I can say as I approach state pension age that I am finally free of ALL debt and it’s a great feeling. I worry though that kids leaving school have little financial education and will at some point in their lives be seduced by loans and credit cards and fall into that awful debt trap from which it’s not easy to escape.
Good solid advice from an early age is what’s needed.
So the banks have learnt their lesson have they? Just paid in a couple of cheques at my friendly Santander branch. ‘Oh!’ says the clerk ‘I see you have been approved for a loan’. ‘Thanks but I don’t want a loan’ I say. ‘Have you not got any debts or balances you would like to pay off?’ ‘No’ I reply, ‘I am in the happy situation of having no debts at all’. The clerk would not be deterred, ‘But wouldn’t I like a new car or something?’ Now, while hell would freeze over before I would fall for this type of hard sell (or any unsolicited sell for that matters) this mind set of banks is, I think, now hard wired. It is only by improving the financial literacy of the population (which is frankly dire and that this website does it’s modest best to improve) that the nations addiction to credit might be addressed. P.S. I made a complaint to head office to ask how the bank incentivise their staff in these circumstances – I don’t expect a transparent answer.
Great article and complete and makes utter sense. This should be taught in school (as if any of us at that age would heed the advice!). I spent my 20’s with a half decent salary but a lifestyle that exceeded it and racked up debt. Spent my 30’s slowly clearing it. Now in my forties, am debt free (except mortgage) and finally starting to put some investments together. Probably damaged my chances of retiring early, or being that well-off in later life. That said better late than never!
Well, yes
But if some day there is a “Debt jubilee” ala Solon, those without debt will look like idiots