2990: Reject The Everyone Has Debt Mentality by Paula Pant of Afford Anything on Long-Term Financial Health

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[00:00:39] [SPEAKER_00]: This is Optimal Finance Daily. Reject The Everyone Has Debt Mentality by Paula Pant of AffordAnything.com

[00:00:50] [SPEAKER_00]: Recently, Ben, a nice-looking fellow who works at an oil rig in the Gulf of Mexico, wrote a detailed story about how he and his wife repaid $90,000 of debt. Their debt didn't include a mortgage. It consisted of car loans, credit card balances, student loans, and a $10,000 bank loan to pay for their wedding. Ben's story included a powerful sentence, which he uttered the day he tallied his debts.

[00:01:18] [SPEAKER_00]: Quote, I knew we owed some money, but I assumed this was a normal part of living in the real world.

[00:01:25] [SPEAKER_00]: He goes on, Everybody has car loans. Everyone has credit card debt. Everyone has student loans.

[00:01:32] [SPEAKER_00]: But it wasn't until I added all these balances up that I knew we had a problem. End quote.

[00:01:38] [SPEAKER_00]: Not to harp on Ben. He's done a great job cleaning up his finances. But I hear his premise repeated enough that it's time to put an end to it.

[00:01:47] [SPEAKER_00]: Let me be clear. This mentality, the everyone has debt mentality, is dangerous.

[00:01:54] [SPEAKER_00]: There's an idea that it's okay to carry debt because everyone else is doing the same.

[00:01:59] [SPEAKER_00]: I call this the normalization of debt.

[00:02:02] [SPEAKER_00]: Trent Hamm, author of The Simple Dollar, describes the same experience when he spiraled into $20,000 of debt.

[00:02:10] [SPEAKER_00]: Quote, we had a gorgeous dining table, but it was stacked full of credit card bills. End quote.

[00:02:16] [SPEAKER_00]: Quote, like Ben, he also made a respectable income, but spent more than he earned because he believed it was normal to do so.

[00:02:25] [SPEAKER_00]: The normalization of debt.

[00:02:27] [SPEAKER_00]: I'd love to be able to tell you that this normalization is a myth.

[00:02:31] [SPEAKER_00]: Carrying debt is abnormal.

[00:02:33] [SPEAKER_00]: Unfortunately, the statistics say otherwise.

[00:02:36] [SPEAKER_00]: The average American household carries $10,700 in credit card debt, according to CNN Money.

[00:02:44] [SPEAKER_00]: This actual figure is in question.

[00:02:47] [SPEAKER_00]: WIS-TV in South Carolina says the average household credit card debt is around $15,000.

[00:02:54] [SPEAKER_00]: While television personality Clark Howard cites the average personal debt as $24,775 for residents of the 20 largest U.S. cities.

[00:03:07] [SPEAKER_00]: On the other hand, 46% of Americans say they're suffering from debt-related stress, according to USA Today,

[00:03:16] [SPEAKER_00]: which means the majority, 53%, are not.

[00:03:20] [SPEAKER_00]: That doesn't mean they're not in debt, however.

[00:03:22] [SPEAKER_00]: It just means they're not stressed about it, either because they have a plan in place for dealing with it,

[00:03:27] [SPEAKER_00]: or because they're not paying attention.

[00:03:29] [SPEAKER_00]: The cost of missed opportunity.

[00:03:33] [SPEAKER_00]: But just because everyone seems to have personal debt doesn't make it any less atrocious.

[00:03:39] [SPEAKER_00]: Imagine that you have a credit card balance of $10,000, by all accounts less than the average U.S. household,

[00:03:46] [SPEAKER_00]: and an interest rate of a meager 10%.

[00:03:49] [SPEAKER_00]: Good luck finding that rate on a credit card.

[00:03:52] [SPEAKER_00]: With payments of $200 per month, you'll need 65 months, almost five and a half years, to pay it away.

[00:04:00] [SPEAKER_00]: Worse yet, you'll cough up over $2,990 in interest.

[00:04:05] [SPEAKER_00]: Now, let's imagine you have no debt.

[00:04:07] [SPEAKER_00]: You save the same $200 per month in a Roth IRA retirement account,

[00:04:12] [SPEAKER_00]: which you invest in a mix of 70% stocks and 30% bonds.

[00:04:17] [SPEAKER_00]: After five years, if the market performs on average, you'll have $16,000.

[00:04:22] [SPEAKER_00]: The debt in the first scenario costs you more than a mere $12,990, the balance plus interest.

[00:04:32] [SPEAKER_00]: Your $10,000 of debt costs you $16,000 in lost opportunity.

[00:04:38] [SPEAKER_00]: Look at it another way.

[00:04:40] [SPEAKER_00]: For every dollar you spend, you pay $1.60 in missed opportunity.

[00:04:47] [SPEAKER_00]: For every $10 you spend, you're really spending $16.

[00:04:53] [SPEAKER_00]: Who cares if it's normal?

[00:04:55] [SPEAKER_00]: Is it good?

[00:04:56] [SPEAKER_00]: The question people should be asking themselves isn't,

[00:04:59] [SPEAKER_00]: is it normal to have this debt?

[00:05:01] [SPEAKER_00]: But rather, is it good to have this debt?

[00:05:04] [SPEAKER_00]: Sometimes the answer is yes.

[00:05:06] [SPEAKER_00]: If you have no way of going to college other than carrying student loans,

[00:05:10] [SPEAKER_00]: there's a chance that those loans will be good debt for you to carry.

[00:05:13] [SPEAKER_00]: The average college graduate earns a million dollars more

[00:05:17] [SPEAKER_00]: than the average person with a high school diploma over the span of his or her lifetime.

[00:05:23] [SPEAKER_00]: That statistic, of course, is skewed upwards by college grads in high-paying professions

[00:05:28] [SPEAKER_00]: like neurosurgeons and chemical engineers.

[00:05:31] [SPEAKER_00]: Let's use some conservative assumptions.

[00:05:34] [SPEAKER_00]: You earn half of the average that most college grads get.

[00:05:38] [SPEAKER_00]: This means you earn an extra $500,000 over the span of your lifetime

[00:05:43] [SPEAKER_00]: as compared to a high school grad.

[00:05:45] [SPEAKER_00]: Over the span of a 45-year career,

[00:05:48] [SPEAKER_00]: that means you earn an extra $11,111 per year

[00:05:53] [SPEAKER_00]: as compared to a high school grad.

[00:05:56] [SPEAKER_00]: That's like the high school grad making $30,000

[00:05:59] [SPEAKER_00]: while you make $41,111.

[00:06:03] [SPEAKER_00]: It's reasonable.

[00:06:04] [SPEAKER_00]: Let's also assume you paid $50,000 in student loans and interest.

[00:06:10] [SPEAKER_00]: For every dollar you borrow and invest in your college education,

[00:06:14] [SPEAKER_00]: you'll earn $10.

[00:06:16] [SPEAKER_00]: In this case, debt can be a good thing.

[00:06:19] [SPEAKER_00]: But when buying consumer items, like a car or a wedding,

[00:06:23] [SPEAKER_00]: the answer to is it good is almost universally a resounding no.

[00:06:30] [SPEAKER_00]: You and your soulmate will be together forever,

[00:06:33] [SPEAKER_00]: regardless of whether or not you have a gorgeous wedding.

[00:06:36] [SPEAKER_00]: You can just as safely leave the house in an eight-year-old car

[00:06:40] [SPEAKER_00]: or a brand new car.

[00:06:42] [SPEAKER_00]: Unfortunately, most people haven't figured this out,

[00:06:44] [SPEAKER_00]: which is why you should stop listening to most people.

[00:06:48] [SPEAKER_00]: Reject the normalization of debt.

[00:06:50] [SPEAKER_00]: Focus on making good choices, not common ones.

[00:06:58] [SPEAKER_00]: You just listened to the post titled,

[00:07:00] [SPEAKER_00]: Reject the Everyone Has Debt Mentality

[00:07:03] [SPEAKER_00]: by Paula Pant of AffordAnything.com.

[00:07:06] [SPEAKER_00]: You sign up for something,

[00:07:08] [SPEAKER_00]: forget about it after the trial period ends,

[00:07:10] [SPEAKER_00]: then you're charged month after month after month.

[00:07:14] [SPEAKER_00]: The subscriptions are there, but you're not using them.

[00:07:17] [SPEAKER_00]: In fact, I just learned that 85% of people

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[00:08:12] [SPEAKER_00]: This article had me reflecting back

[00:08:15] [SPEAKER_00]: on my own attitudes about debt

[00:08:17] [SPEAKER_00]: while I was digging myself into a hole.

[00:08:19] [SPEAKER_00]: In addition to the notion that everyone else was doing it,

[00:08:23] [SPEAKER_00]: I think my biggest problem in my 20s

[00:08:25] [SPEAKER_00]: was simply that I wasn't all that aware

[00:08:27] [SPEAKER_00]: of my financial situation.

[00:08:29] [SPEAKER_00]: I knew I had some debt,

[00:08:31] [SPEAKER_00]: but it wasn't until I ran my free credit report

[00:08:34] [SPEAKER_00]: and looked at everything collectively

[00:08:36] [SPEAKER_00]: that I realized I was actually $30,000 in debt.

[00:08:40] [SPEAKER_00]: That certainly created some urgency,

[00:08:43] [SPEAKER_00]: but if I didn't get curious,

[00:08:44] [SPEAKER_00]: I might still be blissfully unaware.

[00:08:47] [SPEAKER_00]: The other way I justified debt

[00:08:50] [SPEAKER_00]: was by thinking that I'd be making so much money one day

[00:08:53] [SPEAKER_00]: that I could just pay off my debt later

[00:08:55] [SPEAKER_00]: and my lack of saving and investing

[00:08:57] [SPEAKER_00]: when I was young wouldn't matter.

[00:08:59] [SPEAKER_00]: I mean, it's great that I had confidence

[00:09:02] [SPEAKER_00]: in my earning potential,

[00:09:03] [SPEAKER_00]: but it's also a god-awful strategy.

[00:09:06] [SPEAKER_00]: I had no idea about the power of compound interest

[00:09:09] [SPEAKER_00]: and definitely lost out on investment gains

[00:09:12] [SPEAKER_00]: in my younger years.

[00:09:13] [SPEAKER_00]: But the thing is, everything is figureoutable.

[00:09:16] [SPEAKER_00]: Even if you're getting a late start.

[00:09:18] [SPEAKER_00]: For me, I started at 28 years old.

[00:09:21] [SPEAKER_00]: You can fix this and you can change your mind

[00:09:24] [SPEAKER_00]: about things like the normalization of debt.

[00:09:27] [SPEAKER_00]: That should do it for today.

[00:09:29] [SPEAKER_00]: Have a happy rest of your day

[00:09:30] [SPEAKER_00]: and I'll see you on the Thursday show tomorrow

[00:09:33] [SPEAKER_00]: where your optimal life awaits.

[00:09:34] [SPEAKER_00]: Let's see you on the next one.

[00:09:34] [SPEAKER_00]: Let's see you on the next one.

[00:09:34] [SPEAKER_00]: Let's see you on the next one.

[00:09:34] [SPEAKER_00]: Let's see you on the next one.

[00:09:34] Let's see you on the next one.

[00:09:35] Let's see you on the next one.

[00:09:35] You