“A man in debt is so far a slave” – Ralph Waldo Emerson
One of the greatest hardships a person can face is being burdened by
debt. In addition to paying off the original loan, interest (often at
extremely high rates) continues to add to the total, making the ultimate
pay off far higher than what was borrowed in the first place.
Having debt robs a person of freedom. They can’t leave a job they
don’t like to pursue a new career, bad credit often prevents them from
buying essentials like a home or a car, and it hangs over them for
years, chipping away at the amount they can spend and save. It also
creates stress, because someone with a great deal of debt is only one
misfortune away from bankruptcy.
Fortunately, debt problems are completely avoidable. All it takes is
an understanding of the seriousness of debt and some personal restraint.
Don’t Be an Idiot with Credit Cards
Everyone should repeat this mantra until it’s burned into their
unconscious: Carrying a balance on your credit card is one of the
stupidest things you can do. Credit card interest rates are extremely
high, and the longer you wait to pay them off the more interest charges
pile up. There is no excuse for using credit cards to buy something you
don’t have the cash to pay for today.
Credit card companies love people dumb enough to make only the
minimum payments because that’s how they make all their money. On top of
that, they load their contracts with loopholes that allow them to jack
up your rates at any time or hit you with charges for any number of
small infractions.
I don’t believe there is any reason why a person has to have a credit
card, but if you feel the need to have one anyway, you must avoid
purchases you can’t afford and religiously pay off your balance before
the end of each month. If you can do that, then you’ll have avoided one
the most common causes of debt.
Do You REALLY Need that Degree?
Another leading cause of debt is student loans. While education can
be a great investment that increases income over the course of your
career, it can also be a gigantic waste of money.
If you want to avoid burdensome debt, it’s important to seriously
consider the costs and benefits of attending a particular school. Is the
degree going to improve your employment prospects? Is it going to help
you start out in a higher paying position? What level of salary can you
expect? What would you lose by attending a cheaper school (such as a
state university)? Are you really sure you want a career in this field?
Whenever possible, you should look for cheaper alternatives and
scholarships you might be eligible for. A top flight university looks
great on a diploma, but if it puts you in debt for 20 years, the price
might be too dear.
People also get themselves in trouble by changing their minds about a
particular career path. I personally know more than one law school
graduate that quickly decided that lawyering wasn’t for them.
Unfortunately they couldn’t abandon the 6 figures of student debt quite
so easily. This is also common among doctors.
The key point here is to avoid student debt as best you can, and when
you do take it on, to be completely sure it’s an investment that will
pay for itself.
Skip the Flashy House and Car
It’s trivially obvious, but still bears repeating. If you want to
avoid debt, live within your means. Part of the reason people go astray
is that it’s extremely tempting to spend. A future life with freedom
from debt is intangible, but that sweet ride or the brand new condo are
tangible things, tempting you with immediate gratification.
On top of that, there are salespeople doing everything in their power
to persuade you. Keep in mind that these people do not care about you.
All they care about is their sales commission and will say pretty much
anything to get it. You should also ignore the spending habits of other
people. Just because someone else is acting like an idiot is no reason
to follow suit. You will never catch up to someone with more money by
spending more than you should. If you want to buy luxuries then you need
to work harder, not dig yourself a hole.
On large purchases you also need to be careful of shady lenders. Car
dealerships make a large chunk of their profits by providing financing,
generally at much higher rates than you could get through your bank.
Mortgage brokers are also known for being extremely corrupt. They were a
large cause of the financial crisis. If you start to hear terms like
“adjustable rate” or “interest only” you should run for the door.
Keep Yourself Insured
Another common cause of debt is health problems. This generally
happens when someone gets sick or injured and doesn’t have health
insurance, or for some reason loses their coverage. It’s easy to let
your coverage lapse if you become self employed or have a job that
doesn’t provide it, so it’s important to understand what a tremendous
risk that is. Medical problems cause 60% of all US bankruptcies.
Although you might think it makes sense to save money on premiums if
you are young and in good health, health problems can happen to anyone,
and they are frequently unforeseen and highly expensive.
Run From Short Term Debt Offers
This should be obvious, but any type of short term loan or cash
advance you might be offered will come with ridiculous interest rates.
These companies will often get celebrity endorsements and buy radio or
TV ads touting the benefits of their loans: “All I had to do was fill
out a form and they gave me $1000 cash”. What they don’t mention is that
you’ll often be paying a 15% (or more) premium on whatever you borrow,
due in a matter of weeks. Needless to say, this is a terrible deal for
the borrower.
Stay the Path and Enjoy Your Freedom
Hopefully I haven’t overwhelmed you with too many instructions in
this article, but the truth is that avoiding debt is mostly common sense
and responsibility. These aren’t very sexy values, especially compared
to promises of easy money that lenders offer. But unlike the those
promises, they actually offer real rewards. By looking after your own
best interests and keeping debt fueled expenditures under control, you
can easily avoid soul crushing debt.
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