Your Debt Is Acceptable Only in One Case—Otherwise Pay It Off

Jared Dillian  |


Let’s think about what debt is, philosophically speaking.

Debt allows you to enjoy a higher standard of living today, at the cost of having a lower standard of living tomorrow.

Let’s now talk about savings, philosophically speaking.

If you save money, it allows you to have a higher standard of living tomorrow, at the cost of having a lower standard of living today.

So which would you rather do? Would you rather eat ramen noodles at age 25, or Alpo at age 75?

You must pick one or the other. Everyone faces this choice, unless they have help.

A third option is to make more money, but that doesn’t usually fix people’s bad spending and borrowing habits.

The United States of America

The US is now the third-most indebted country in the world (by total debt-to-GDP), behind Japan and Italy.

This means we have borrowed our standard of living from the future. We enjoy a higher-than-normal standard of living today than we otherwise would. That means we will have a lower standard of living in the future.

There is no way around it.

As a country, we can do some paper shuffling, print dollars to buy government bonds, and cancel them out. But you can’t fool the laws of economics. We will just have a lower standard of living because of inflation, rather than austerity.

What do you think the people in charge would say if you gave them the same choice I gave you earlier in this essay?

Would you rather eat ramen noodles at age 25, or Alpo at age 75?

It’s not the same choice because the people in charge today will not be around in 30–40 years when things go bad.

Now younger generations, particularly the Millennials, are starting to realize that they will be the ones eating the Alpo. For Trump, a baby boomer and a borrower—who engages in classic baby boomer behaviour—debt is someone else’s problem.

I remember people squawking about debt when I was in business school 20 years ago. It is almost twice as high today. Perhaps that is the reason people never take debt seriously—the margin call never seems to happen.

Debt Is Sometimes Acceptable

General rule of thumb on consumer debt: never borrow anything you can’t outgrow.

For example, don’t take out a car loan at 4% interest if you’re not growing your income more than 4% a year.

If your income is stagnant or shrinking, debt is an even more terrible idea because it will be getting larger in real terms.

Also, very few people can buy a house without a mortgage. But that is something you should aspire to! I have done it once in my life.

If you must get a mortgage, make it 15 years, so it amortizes more quickly. You will probably see that you can’t afford as big of a house with a 15-year mortgage. That is the point.

Then, pay it off as quickly as possible. If you are diligent, you should be able to pay it off in five years.

Ramen today, or Alpo tomorrow, that is the choice.

And Finally, Student Loans

Student loans fall under the category of debt that you can outgrow.

Unless…

They are so large that you can’t outgrow them!

Stories where young people graduate with $200,000 in debt are not uncommon. $200,000 of debt is difficult to outgrow under any circumstances.

Even if you become an investment banker, it will still take you some time to pay off a $200,000 loan. And your standard of living will be lower in the meantime.

Here is my rubric for college (and paying for it).

If you get into a top three school (Harvard, Yale, Stanford), just go and worry about the money later. Provided you don’t major in underwater basket weaving, you will be set for life.

If you get into a top 30 school (the rest of the Ivies, plus others), you should try to keep the debt under $100,000. If you can’t, then don’t go.

Instead, go to a cheaper state school, and keep your total debt under $30,000. Then work twice as hard to create opportunities.

I am not one of these people who believes that an “honors program” at a state school is in any way competitive with a name brand Ivy League school. There is no comparison. But if you can’t make the math work, then don’t do it.

If you’re buried under student loan debt, you can’t buy a car, you can’t buy a house, and you can’t start a family. Some people like to use the term “debt slavery.” I’m not comfortable with that language, but that’s exactly what it is.

And finally, if you have student loan debt, I would not count on some sort of bailout or forgiveness at the federal level. It’s not going to happen—even with a President Bernie. Just pay it off, pay it off, pay it off.

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