On Debt

You may have noticed one important component of financial literacy that has been conspicuously absent from this blog thus far: debt. It isn’t included in my net worth, and you won’t find it in my budget.

The reason I haven’t talked about debt yet is very simple. On this blog, I write what I know, and debt is not something that I know very well. While I do have a mortgage (don’t worry, I’m well above water on it), I have never had consumer debt, student loan debt, car loan debt, or any other kind of debt.

So how did I manage to make it to 27 without debt? I’ll break it down into two key factors, which are really one factor that you’ve heard about before: my parents.

Raised on a debt-free diet

I grew up in a house where debt was just not a thing we discussed. This was not because it was a taboo subject, or because my parents were embarrassed to talk about it, it really just wasn’t even an option. In fact, it wasn’t until I was in college that I came to understand that you could use a credit card and NOT pay it off in full at the end of the month. You can accumulate a BALANCE and go into DEBT on a credit card!? Who knew?

My parents taught me and my younger brother early on that if you want something, you save your money until you can buy it. I got a small weekly allowance for completing certain chores, and if I wanted a new toy, I had to save my money and buy it myself. My parents did not extend credit and allow us to pay them back later. They did not buy us extraneous items (expect on holidays). So we learned to make do with what we had, save up and spend judiciously.

While I took these lessons to heart, my brother really got into the world of saving quite early on. One of my earliest childhood memories is of my brother, maybe 5 or 6 years old at the time, bragging about how he had saved $80 (probably from birthday money) and was “rich for a kid.” He didn’t go out and spend that money on a new toy. He opened a bank account, and deposited his money, because we were taught that when you have extra money you save it.

Not only did my parents teach us these lessons, but they modeled these behaviors themselves. My parents buy cars in cash and drive them into the ground. They live simply as compared to some of their friends, and certainly well below their means. They are conscious of the money they spend, acknowledging that even small purchases, such as buying a more expensive item at the grocery store, can have an impact on overall financial well-being.

So really, I was lucky to be raised in a way that taught me how to save, how to spend, and how to avoid debt. I can take no credit for this, although I did listen to my parents’ teachings and adopt their frugal ways. I have many friends whose parents never discussed money at all, yet lived extravagant lifestyles (dinner out several nights a week, new toys whenever they were desired), possibly supported by consumer debt. These friends were not given the advantage I was, of understanding how money works, even though as a child I was often jealous of their seemingly luxurious life.

No student loans

Education was a high priority in my house. My brother and I both did well in school and it was basically assumed that we would both go on to four year colleges. Sending two kids to college wasn’t cheap, but it was where my parents saw value and therefore they were happy to put their money into our education.

So how did they pay for our college educations? My parents consistently lived below their means. Both of my parents worked (which was not altogether common in the town I grew up in). My mom actually says that the reason she went back to work when my brother and I were young was to pay for college. We didn’t go on extravagant vacations. We shopped sales. We drove older cars. We ate dinner at home. It all sounds very simple, but it adds up.

Sometimes I think about what I would have done if my parents were not able to pay for college. Would I still have chosen to go to an expensive, private university? Would I still have picked a major that I loved but wouldn’t yield a lucrative job? I like to think I would have been smart enough to understand that tons of debt was not worth it, and found a way to get a great education for less, but who knows. These are big decisions for an 18 year old to make.

I was more conscious of the cost of higher education when it came time to pursue my graduate degree. I considered attending a full-time MBA program, which would have run me over $150k for two years (plus substantial lost income). Instead, I opted to attend a part-time MBA program, which cost substantially less. Again, I was spoiled when my parents agreed to contribute to my graduate schooling. That, together with tuition reimbursement from my work, allowed me to complete my MBA debt free.

What if I had debt?

I recognize that I have been extremely lucky and that it is mainly good fortune that has allowed me to get to this point in my life without debt. What would I do if I hadn’t been so lucky?

While I think it is pretty hard to make a case for taking on consumer debt, I think there are often good reasons to take on student loan debt. If I had student loan debt, I would pay it off as quickly as I could. I would prioritize debt repayment over savings (once I had an emergency fund) because interest rates on loans are almost always higher than the return on savings. I would focus on the debt with the highest interest rate first, being careful to make minimum payments on all loans so as not to jeopardize my credit. I would live as frugally as possible until my debt was gone.

I guess it is easy for me to say this since it is all hypothetical, and I am sure that it is harder to do. I know the feeling of frustration when you seem to be working hard but getting nowhere, and I can imagine that debt repayment must often feel this way. I can only hope that, in the end, the hard work feels worth it for whatever benefit was derived.

Do you have debt? What for? Was it worth it? If you don’t have debt, how did you avoid it?

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