I hate Debt.
I am probably the only financial advisor in the world who will openly admit that I have had a long and checkered history with my own finances. I’ve been in business in one form or another for over 20 years. During that time I have lost everything not once, not twice but three times. You could say I’m just a slow learner and in a lot of ways I am the absolute last person anyone should be taking financial advice from. Yet I am also the only person you should be taking advice from. I’ve been there, multiple times, so I can see the signs of impending doom long before many of my clients do.
Here are three things I have learned in my dealings with debt.
1) Debt is far too easy to acquire.
Pop Quiz – What is the main business of the bank?
I used to think it was providing a secure depository for my money. After all, they charge me a fee to hold my money, another fee every time I write a cheque and still more fees for things like safety deposit boxes and ordering those fancy printed cheque books. But no – the main business of banks is lending money. As such they make it far too easy to acquire debt. If you have a job, any job, you can generally get some form of credit from a bank.
For instance; I know of one 19 year old, with a history of drug abuse and other trouble with the law who when he decided to get his life in order got a minimum wage job and went to open his first bank account, he left the bank that day not only with a new chequeing account but a $10,000 line of credit as well. Who gives a 19 year old kid, with no employment history and a drug problem $10,000?
2) Nobody understands the magic (witchcraft?) of compounding interest.
In 2010 the Canadian government made it mandatory for credit card companies to tell you, right on your statement, how long it would take to pay off your balance by making only the minimum payment. They did this because credit cards are sold to consumers on the basis of a low monthly payment but it is never explained what those low payments mean to the actual cost of the goods purchased. The shocking truth; by making only the minimum payment the average credit card will take over 26 years to pay off and the amount of money spent is over 4 times the actual cost of the goods purchased. That’s right, that $15.00 lunch will actually cost you $60.00 by the time it’s paid for and if you think the price of gas is high now, would you change your driving habits if you knew that you were actually paying upwards of $5.00 a litre when you put on your MasterCard?
Compounding interest is a double edged sword that is great when you put to work for you at 6-8% in your RRSP or other savings accounts but with most consumer debt running at 18-25% you’ll never have enough extra to make a meaningful contribution to your savings plan in the first place if you don’t get out of debt first.
3) Living debt-free is not only possible – it’s fun!
I don’t have any fancy statistics or quantifiable information on this one; it’s just my personal experience. Paid for things feel different because they are mine. A paid for car runs better, the picture on a paid for TV is sharper, and a fancy meal bought with cash just tastes better. It’s a fact! But until you experience it for yourself you’ll never understand what I’m talking about.
When I was deep in debt I was afraid to answer the phone or go to the mail for fear of whom or what was on the other end and I was constantly worried that the things I bought would break or wear out before I was done paying for them. Now as a financial advisor I tell all my clients that the first step toward financial security is managing debt. Until you can learn to do that nothing else I can teach you will matter all that much.
Check out this additional article on debt management from the blog “Retire Happy” that I find helpful in illustrating my point.
And check out my proven method for getting (and staying) out of debt under the Meekonomist Manifesto here, “The Debt Snowball vs The Debt Avalance”