We all know Mr. Burns from The Simpsons, don’t we? The hard-ass boss, hell-bent on world domination who owns the Springfield Nuclear Power Plant. Mr. Burns remains in a perpetual cloud of evil, wanting more. Always wanting more.
This article is a part of the Kill It! series of articles aimed at streamlining your life into a well-oiled machine.
It reminds me of debt. Debt is a powerful force, and it has a way of taking as much willpower from us as it can. It creeps up on us without us even knowing it. It is greedy and meticulous and drains us of our futures.
Like Mr. Burns, debt is as old as the hills. It’s been around forever – and from the looks of things, it’s only getting stronger.
Debts kill our chances at getting ahead. It puts us in a position of weakness by owing someone else money – and usually a great deal of it.
Interest on our debts has us paying more than the amount that we borrowed. Sometimes, much more. Debts don’t care about you. Not your family. Not your friends. None of your life goals matter to your debt.
They are almost identical to Mr. Burns.
Consider the horrifying reality of how infectious debt has become:
- U.S. consumer debt rose to $3.766 trillion in August 2017
- Of that debt (above), student loans account for more than $1.4 trillion
- Americans are saddled with almost a trillion in credit card debt
The cheap availability of credit makes it too easy to spend money that we do not have, rack up incredible amounts of debt and kill our chances at retiring before we hit 65.
Low-interest auto loans have increased borrowing for new cars (almost always a poor decision – and one that I’ve made). Student loans continue to soar, causing the delinquency rate (more than 90 days delinquent) to increase beyond 10%.
The two reasons to ever go into debt
Pardon me for stealing from an earlier article, but it applies so very well to our discussion of debt. I believe that there are only two reasons to let yourself go into debt. Ever.
1: YOU’RE IN GOOD FINANCIAL STANDING
Those who are in good financial standing can “afford” debt. They have a good, steady job and earn quite a bit more than the anticipated monthly payment to repay the debt.
They currently have no debts – or very little. If they lose their jobs suddenly, they can afford to keep paying their monthly payments for several months.
They have an emergency fund with at least three months of living expenses.
They don’t live paycheck to paycheck and have a proven track record of paying monthly bills on-time. Automatic monthly payments are even better.
They regularly spend less than they earn.
How much debt to accept: If we are talking about mortgage debt, conservatively, do not take on a mortgage payment of more than 30% of your take-home pay. Take-home pay means after taxes. If you’re willing to accept more risk, then don’t let your mortgage payment exceed 30% of your pre-tax pay.
For student loans, don’t take on debt to attend an out-of-state school! All accredited universities in the United States – yes, including your state school(s), provide fine educations to get your foot in the door in corporate America. Don’t kid yourself into believing that expensive out-of-state schools are somehow “better”. They aren’t.
Also, choose a degree program with earnings potential. Students who major in subjects like Art, History, English and Medieval Studies face an uphill battle after graduation. Although student loans can be deferred, the debt will remain attached to you like that tattoo of your boyfriend/girlfriend’s name you foolishly got when you were 17. The greater your salary, the quicker your debts go away.
2: THERE IS A DAMN GOOD REASON / GOOD PAYOFF
The payoff must be worth the risk of taking on debt. For example, using a student loan to fund a computer science degree, for example, can easily turn positive after just a few years of working in information technology – a sector with traditionally big salaries. Business Management, Accounting and Finance degree programs are other good choices for bigger payoffs.
However, it is probably tough to argue that a $40,000 car loan was worth the risk. Less expensive cars exist – nice cars that “go”. They get you from Point A to Point B just like the expensive car.
Buying a house with a $150,000 mortgage in a real estate market where rents are high may also make sense. But even then, understand how expensive homeownership truly is.
Smart debts offer a quantifiable return.
Is there a quantifiable return on the debt? If so, consider taking on the debt if your financial standing is solid. Or if you’re a student, consider the debt if the degree program produces a reasonable expectation of a good income and dependable job prospects.
What to do if you’re in debt
Well, pay it off of course! Naturally, that’s easier said than done. Consider these techniques:
If you are in debt:
Don’t take on additional debt – The last thing we need when escaping the dreaded stink of debt is, well, more debt. If you are already in debt, don’t willingly accept more of it. You may think this goes without saying, but there is a reason why the total credit card debt in the U.S. is more than $500 billion. That’s billion, with a b. Put another way, $500,000,000,000.
Prioritize paying off your debt – Make it your mission in life to pay off your debt. Change your lifestyle in ways that put your debt first on your list of priorities. While you don’t need to give up everything, look at where you can cut back. For example, maybe that $10,000 vacation isn’t the smartest thing to be doing with your money at the moment. Or that new BMW.
With every big expense you make, ask yourself one simple question: Is it worth staying in debt longer? If the answer is “Yes”, that’s okay. Do it. But, understand that your debts will never disappear until you make them.
Pay off high-interest debts first – Once you decide to pay off debt, get rid of those high-interest debts first. Those are the debts that you’re paying significantly more to hold. Credit card debt is a very common high-interest debt. Get rid of it. Then, proceed to your next largest debt, which might be a car or student loan. Whatever it is, get rid of it.
The one exception: I believe in giving ourselves small victories along the way. If you have a debt that’s so small that you could pay it off tomorrow – or within a few months, even if the interest rate is low, consider taking care of that one first. It’s a small victory, but it’s also an accomplishment.
Make it automated – When you don’t need to think about it, paying off debt gets much, much easier. Whenever possible, use bank transfers and/or other auto deductions from your checking or savings account to pay off debts. Set it up once, then forget about it until its done. The less that you need to think about your paying off your debts, the easier they will be to demolish.
Check out the Automatic Millionaire, by David Boch, for an excellent in-depth look at how automation kicks our finances into high gear.
Kill It challenge: Pick a debt and destroy it
If you are in debt, here’s a challenge. Right now, pick a debt. Even if its a small debt. Pick one. Got it? Now, commit to killing it. Just that one debt. Don’t worry about your other debts for a second. Circle that one. Post on Facebook or Twitter about it. Make yourself accountable. Pick a debt that you currently hold and destroy that sucker. Then, claim success.
…and pick another one.
Steve is a 38-year-old early retiree who writes about the intersection of happiness and financial independence. Steve is a regular contributor to MarketWatch, CNBC, and The Ladders. He lives full-time in his 30′ Airstream Classic and travels the country with his wife Courtney and two rescued dogs.