I like to think of Adm Karpinsk as an advanced personal finance blog. We don’t talk about cutting up our credit cards, or clipping coupons to save $5.00 on the newest Swiffer mop, or making a budget that forces us to save 10% of our income while we devote the rest to “guilt-free spending”.
I don’t talk about my own personal battle with consumer debt and how much I struggled to get out of it, because come on, I am Mr. Effing Money Mustache. I was cleaning and ironing my five dollar bills and storing them meticulously in a photo album at age ten*, obviously I was never going to go out and spend so much on my credit card that I couldn’t pay it back at the end of the month!
This unique history and perspective allows me to see some things that are not immediately obvious to people who have been raised in the current consumer/debt society. And for all the Beginner Mustachians in attendance today, I would like to share one of these observations:
Your Debt is not something you “work on”. It is a HUGE, FLAMING EMERGENCY!!!
Let’s illustrate what I mean with a few examples:
One time, I lent money to a friend so he could pay his university tuition. The cash came right out of my own bank account, and since I had already paid my own tuition, I had just enough left to cover my groceries and other expenses for the school year. After the loan, that left pretty much nothing, but I assumed that my friend would have the balance paid back within just a few paychecks. I was therefore surprised when the friend proceeded to live a normal university life of partying and eating out, even during the delayed repayment process. Everything worked out fine in the end, since this was an honorable friend, but I still learned something about society’s differing opinions about debt.
On another occasion I was visiting some friends – a married couple. The guy was showing me his new TV and video game system. Later, the wife came home from working at the part-time second job she had boldly taken to accelerate the paydown of some old personal debts. On the way home from work, she had picked up a bottle of wine and purchased a DVD containing some episodes of a popular TV show. This may sound like a normal Friday night to most people, but note that the purchasing of expensive beverages, DVDs, and video games was put at a higher priority than paying off the debt. The girl thought she was taking a second job to pay down debt, but in reality her second job was to pay for wine, DVDs, and video games.
And finally, nowadays I receive emails from people who are working on developing their own Money Mustaches. They often detail income, spending, and debt situations. Often, there is a category for credit card debt. Yet these budget sketches also include amounts for entertainment, cable TV, and multiple cars.
The final straw was when I ventured out to poke around on some other personal finance sites last week. I found one that had a post from one of the authors, containing a table like this:
Mortgage: $75,000 @ 4.5% interest
Bank of America credit card: $4500 @11.9 interest
Wells Fargo credit card: $17500 @ 18.9% interest (<-we HATE this debt!)
Citibank credit card: $2900 @ 14.5% interest
We’ve really cut down on our dinners out and Brad has even started biking to work once a week to save gas in his 15MPG F-150 truck…
Do you see the glaring problems in these stories? If not, you have not yet developed the appropriate hatred for unnecessary debt. So let me spell it out for you.
The correct response to this sort of debt is, “AAAAAUUUUUUGGGHHHH!!!! THERE IS A CLOUD OF KILLER BEES COVERING EVERY SQUARE INCH OF MY BODY AND STINGING ME CONSTANTLY!!!! I NEED TO STOP IT BEFORE I AM KILLED!!!”
Go back and imagine this person about one month after they got that first Bank of America credit card. They went out for dinner a few times a week and bought some shoes and a few tanks of gas in that first month, and eventually the bill came in the mail for $1125. They realized that they only had $600 in the bank, but that was OK, since the “minimum payment’ was only $75.
In the absolute worst case, it is at this moment that the emergency bell should sound, for anyone in the world. The response should be:
SHIT!!! I just totally blew it and spent more money than I earned! I need to fix this immediately, so obviously all spending beyond food, and getting to and from work in the cheapest way possible, is now suspended. No, I don’t need a budget to pay back my debt, and I certainly don’t need two more credit cards. I simply need to do zero extra spending until my debt is corrected.
Logically, it follows that even if you only wake up several credit cards later and realize that you have fucked up, the emergency applies to an even greater degree.
If you borrow even one dollar for anything other than your primary house or a profitable investment, the very next dollar you can get your hands on should go to paying that back. You don’t space it out all nice and casual with “monthly payments”, and you don’t have a “budget”, “entertainment allowance”, or any other such nonsense. You don’t start a family or get yourself a dog, and you don’t go out for drinks and dinner with your friends. There will be plenty of time for these things later, and they will feel much better when they are not set against the backdrop of Incorrect Debt Due to Error.
Don’t worry, there is nothing wrong with making errors. They are actually good things, since they help you to learn. But you learn by fixing them, rather than letting them ride.
“Sure Adm Karpinsk”, some beginners will now say. “Of course you would say that, but I’m still less practiced than you. I still need my Starbucks Lattes and my husband likes TV sports so I can’t cancel cable. Can you please stop punching me in the face and let me adjust my consumption gradually instead of suddenly?”
Wrong Attitude! Even if you are an absolute Beginner Consumer Sucka and your goal is still to consume the maximum amount of luxury products, you are still cheating yourself out of stuff just by running a consumer debt balance. Every dollar you pay in interest to the credit card company is stealing dollars away that you could be using for more luxury purchases for yourself. Those dollars are gone forever, and you’ve permanently lowered your ability to consume luxury products, for the rest of your life.
Since you need those luxury products so much, you’d better get out of debt quickly so you can afford to buy more. The credit card debts above are eating up over $4000 per year of your after-tax salary just due to interest payments. That’s hundreds of lattes, several pairs of shoes, thousands of miles worth of gasoline for your SUV, and even some massages at the spa and a couple of cross-country flights that you are foregoing every year.
Or, of course, once you start your Money Mustache, the interest savings could also be used to shave decades off of your mandatory working career..
And there is more good news, since this is an Advanced blog: your debts are tiny.
I always have a little chuckle when people talk about a $10,000 debt, or even a $70,000 or $200,000 one as if it is insurmountable.
Sure, these sums of money are big when measured against the cost of groceries, and they are not sums of money to be wasted. But this is an early retirement blog. Here we are learning how to rake together much larger sums of money to allow us to live our lives free from mandatory work. For most of us, that means somewhere between $400,000 and $1.5 million. Beginners to Mustachianism find these sums unimaginable, but after a few years, the same people find their net worth spreadsheets increasing at over $100 grand per year due to investment returns and reduced spending. Getting rich really is an exponential process, a concept that is hard to grasp until you realize that your money can work harder than you can. Once this higher level of financial skill is reached, you will realize that the debts of your youth were indeed small potatoes.
How do you get this elusive financial skill? If you’re still in debt, you get it by getting much more bold about wiping it out. Sure, you can do it slowly, just as you can lose 100 pounds by lifting a 5-pound dumbell a few times each day while you sit on the couch and watch Oprah. But I recommend the more efficient path: put on your walking shoes and start walking as much as you can. Eight hours a day. Go straight to the most healthy and balanced eating regime and never deviate. Stay on it and let the forward progress accelerate your progress each day. Consumer debt and excessive amounts of body fat are virtually identical.
The more vigorous method has multiple exponential benefits: every dollar of debt you pay off creates a compounding snowball of savings that continue for a lifetime. And every dollar you manage not to waste, builds your skill at saving money and learning to spend it more efficiently. These skills stick with you for life as well.
So if you still have a car loan, credit card, department store or even a student loan debt, you should destroy that as a prerequisite to beginning the more relaxed stage of saving for financial independence. At the later stages, you can start to take it easy, but right now is the time for some hard work. Depending on your life situation, you might decide to go car-free, live with roommates, eat a vegetarian diet, take on extra jobs, delay parenthood, enjoy only local travel, and do any number of other things to get the job done. This stage will be short and effective.
Then I’ll see you at the next stage, which is really where this more advanced blog begins.
Further Reading: one man’s description of what it feels like to escape from over $100k of student loan debt in less than a year – by treating it like an emergency and applying some real effort to it:
Or if you prefer a 4-minute video summary of his experience: http://youtube.com/watch?feature=player_embedded&v=1Y6kTsBNH78
* This is actually true