The Hard Truth About DebtApril 16, 2015
Tell me if you’ve heard statements like this before – having debt means you’re an adult. Building your savings while you’re in debt is the responsible thing to do. Being in debt isn’t an urgent situation – there’s no need to rush paying it off. If you can make the monthly payments, you can afford it.
These are just a few of the statements we’re fed in our day-to-day lives, and they’re complete garbage.
If there’s one thing that we must truly acknowledge as a culture in how we approach our debt, it’s that the money you gain while you’re in debt is never truly your money. Having $10,000 in debt means that your overall net worth will always have $10,000 subtracted from it. In many cases, this means that people carry on through their lives with a net worth far below $0.
We all need to realize that carrying a sub-zero net worth in America, where the median monthly take home pay is $3,600, is simply unacceptable. Living this way is the truest example of living beyond your means.
It’s Not Savings If You’re In Debt
I have an issue with the idea of building savings while you’re in debt. Many studies have been done on calculating interest rates and savings-to-debt ratios, and they all seem to have varying conclusions whether savings or debt should be a priority. However, one thing is always the case – your debt is going to be paid one way or another. Money you make after buying a new car or TV is spoken for. Because you’ve gone ahead and purchased these items, the money must be paid back at some point. If you are building your savings while sitting on any form of debt, that money will eventually be directly or indirectly paid towards that debt. It’s simply a matter of how long it takes to do so.
We’re not advocating that you avoid building savings while you’re in debt. Instead, we recommend that you limit your savings during this time and build a $1,000 emergency fund. The idea is to reasonably ensure that you can prevent sliding further into debt while you’re paying it down. If you feel that it should be more than $1,000, that’s fine, but just remember that in the grand scheme of things, your debt will always come first.
Giving Away Money That Isn’t Yours
For many, giving to charitable causes or tithing is an important part of their financial life. Giving away your money can be a great thing, but it can be problematic when the money you’re giving is not actually yours to give.
This next part may be problematic for you, but it’s important that we consider this – when you’re giving your money away while you’re in debt, you’re giving away the money of those you’re indebted to. This is due to the fact that owing people money means that they technically own the money that you bring in until they are paid back. This may seem a bit ridiculous at first, but truly consider the fact that debt in America absolutely crushes people who don’t have the ability to pay it back. There is a crippling sense of ownership with lenders and their debtors.
It is impossible to truly give charitably when what you’re giving is not yours in the first place. If you go out and spend $20,000 on a new car, the next $20,000 of income that you make is spoken for – it’s meant to pay off your new car, but the reality is that our minds don’t think of debt in this way. The truth is that because that money is named — “auto loan,” “mortgage,” “student loans,” or “credit card debt” — it doesn’t technically belong to us.
Here’s the takeaway: first, calculate your net worth. From that number, you can derive how much you’re actually able to give of your own money. A net worth of $20,000 means that you could give away $20,000 of your own possessions. If it’s below zero, you’re not actually able to give any of your own money. You are in debt, and you’re not in a good position to be charitable with your money. A great alternative is to consider giving your time to causes you support. Consider volunteering during your weekends or providing goods and services to your church or community.
It’s All About Your Attitude
Let’s be real for a moment – debt can be unavoidable for many people. Whether it be a large unexpected expense, sky-high college tuition, or simply a mortgage, we will all undoubtedly carry some form of debt at some point in our lives. It’s not wrong to be in debt. The problem comes from being numb to it. Your debt is an emergency.
The truth of the matter is when you have debt, of any kind, you don’t have money. It’s time to take off the financial training wheels and put on our big kid pants (aka responsibility). Stop coddling yourself, making excuses for your situation, and be proactive. It will take sacrifice and hard work — things we don’t naturally want to do when it comes to our money — to pay back the money owed. Freedom from debt, both monetarily and psychologically, is worth every damn penny.