The Nefarious Hidden Costs of Debt
“Felix qui nihil debet." (“Happy is he who owes nothing.")
Roman Proverb
Debt is this century’s version of indentured servitude. Historically, indentured servants traded their freedom for safe passage to another country. If they couldn’t pay enough to secure their ticket to the “New World," another person would pay their passage in exchange for 3-7 years of their life, which was spent doing hard labor or household duties for their new master.
Debt is purchasing goods or services today in exchange for tomorrow’s money. It’s a seductive offer - a promise and a contract for instant gratification instead of months (or years) of saving and waiting. It’s doubly seductive when you’re purchasing an “investment" - something that promises to make you even more money down the road, like a house or a degree.
The problem with debt is that it creates huge invisible opportunity costs. Take, for example, someone who successfully obtains a $100,000 MBA from an Ivy League school. Will it open doors? Sure. But as some doors open, others close.
How easy will it be for our hypothetical newly-minted MBA to drop everything and travel abroad for a few years, living cheaply and working odd jobs to earn their keep? It’d be almost impossible to have this life-changing experience, even if he/she wanted it badly - the tuition bill must be paid.
How easy will it be to work for a non-profit, the social sector, or education, where wages are typically low? Not very easy at all, even if they feel called to the work - large debts require large (and consistent) paychecks.
How easy will it be to give up a life of 80-hour-a-week consulting or financial services work to attempt to start their own business? Reaching the point of sufficiency for the new startup will be more difficult than it already is - it’s hard to be “ramen profitable" with a thousand-dollar-a-month student loan that must be paid every month on top of earthly necessities.
By taking on debt, you’re giving up all of the things you could do with the monthly debt service in the future until the debt is repaid. With large sums and long timeframes, you’re forgoing a huge amount of valuable flexibility without understanding the full extent of what you’re giving up.
There’s a reason that many Fortune 500 companies offer to pay your relocation and closing costs when you buy a new house - once you’re saddled with a mortgage, it’s harder for you to leave the company, even if you want to. Good for them, bad for you.
The Benefits of Debt
Debt can be beneficial in the same way that fire is beneficial - it can be a useful tool, but you’ll get burned if you’re not careful.
Here’s an example: I used a credit card to purchase the laptop I’m using right now. It’s the primary tool I use in my work - I use it to write, manage this website, communicate with clients, and finish projects. Having a good computer makes it much easier to do my work, so I took on a reasonable amount of debt to obtain a good one.
Taking on a small amount of debt gave me access to a very useful tool 2-3 months before I’d be able to save enough money to purchase one with cash, and actually having the computer gave me the capability to pay it off a month later. That was a good investment, and a good use of debt.
Small revolving debts usually won’t get you in trouble. Debt becomes destructive as the amount gets bigger, either through large investments or the accumulation of small purchases.
The easiest way to stay out of debt is to avoid taking it on in the first place. Here’s a useful rule of thumb that’ll keep you out of trouble: if it’s not going to help you make more money within the next 3 months, don’t take on debt to buy it. That goes for everything from household goods to movie tickets.
Your Personal War on Debt
Repaying all outstanding debt is the first step of re-claiming your own personal sovereignty. It’s not easy, but the increased control you’ll have over your own life and choices is well worth the effort.
Here are a few books that will help you tackle your current debt, as well as resist the temptation of taking on new obligations:
There are also quite a few fantastic personal finance blogs you can also follow for useful advice and perspective. Here are my favorites:
I used debt to finance some of my business’ startup costs, and I’m still paying a few of those debts down. My goal is to have 100% of my debt eliminated by the end of this year, and I’m looking forward to the day when I don’t owe anyone a dime.
What are you currently doing to manage your debts? What do you do to keep yourself from taking on more?
Read more essays by Josh Kaufman »