A conversation about debt

(My friend Saul of Hearts recently posted an article about his experiences with leveraging debt. As I thought it was an interesting take on a subject that I have some strong feelings about, we talked about me writing a response post and going from there. He agreed, and here is the result.)

(Update: Saul responded to this post.)


Is debt a worthy price to pay for a recent college graduate with big plans?

That, to me, is the question at the heart of Saul of Hearts’ latest post about debt. In it, he recounts his experiences moving to Los Angeles, experiencing Burning Man, and starting his freelancing businesses along the way. His thesis statement is as follows:

“[D]ebt is necessary. I wouldn’t be where I am today—a semi-self-employed freelancer—if I had ‘lived within my means’ … My advice? Get into debt—a little of it—and then get out of it. Then repeat.”

A bold claim to be sure. But how does it stand up?

It’s a jungle out there

Now, my secret is that I know Saul, and I know he’s no slave to consumerism. While many people stress about keeping up with the Joneses, Saul would probably look at them curiously and then want to shoot a documentary about them. So it’s not like this is an argument for why you should buy a bigger TV.

Instead, it’s an argument that speaks volumes about the current situation facing college graduates at the tail end of the Global Financial Crisis. And it’s not pretty.

“Pretending that it’s possible for college grads to stay out of debt is to deny the reality of the world that we live in.”

It’s impossible to argue with the fact that college grads today face a pretty bleak situation, what with having to pay for runaway college costs and entering a tepid job market. I would say it’s damn near impossible for college grads to stay out of debt.

But not impossible. People do it.

Books have been written about this, in fact.

You might need to go to community college for two years and then transfer to a state school, all while working. And much of it might suck a lot. But it’s not impossible, just really really hard. The question becomes then if it’s worth it..

Why you’d want to live here

“I moved to Los Angeles and spent several years trying to find work. I did research studies for extra cash, used up all of my savings, and borrowed a lot of money along the way. Do I regret it? Not at all. Those years of unemployment — of living on couches, scrambling to make a buck on Airbnb or Taskrabbit — are what gave me the skills and life experiences I needed…”

If I were looking for help with freelancing, Saul would be one of the first people I would call upon for advice. As far as I’m concerned, he is Taskrabbit.

The assertion here is that going into debt temporarily is okay because it will enable you to be in a place where you can hustle enough to get out of debt. But this is not necessarily universal. True, this certainly worked in this particular case. But it is just as possible that someone could go into debt, not find those jobs panning out, and be in a world of trouble, with tons of debt and no plan to get out. Is that worth the risk?

Once in a lifetime

“[M]oney is a renewable resource; time isn’t. I could always earn more money, but I could never go back and relive that year’s Burn[ing Man Festival].”

I struggle with this one. Life isn’t something that you should put off indefinitely. As the quote goes: “A life which is empty of purpose until 65 will not suddenly become filled on retirement.”

But what if something really is a “once-in-a-lifetime experience?” At what point does not putting something off for tomorrow become reckless?  This is a call that we each need to make on our own. The question to answer is whether the risk is worth the reward.

Buy now, pay later

“But there are some things I needed to buy in order to make my life in LA practical. I took out a loan on a car so I could get around, and I charged a video camera and other equipment to my credit card. Could I have done without these things? Sure. … But having a car and camera equipment allowed me to get more video editing gigs more quickly.”

I would argue that there’s nothing practical about living in LA, but that’s a different discussion. (Joke.)

The equation here is that the time saved (instead of waiting to save up for these things) is greater than the opportunity cost of all that money that went to interest and the risk of going into debt can incur. You can work this out for yourself, and then decide. Money on one side, your time on the other.

But let’s define the terms first.

The two reasons not to go into debt

As I see it, there are two primary reasons not get into debt: opportunity cost and risk. (That’s putting aside the moral/political implications, which are real.)

Opportunity cost refers to what you could have done with the money if you allocated it somewhere else. The money that you pay back on a loan you owe is money that you could be investing, or using for some other purpose.

Let’s say you paid $100 a month in interest. Let’s say that you kept this up in perpetuity. In 30 years, you would have paid $36,000. A lot perhaps. But if you would have invested this money, you could have anywhere from $69,600 (4% interest) to $228,000 (10% interest) or even more if you’re particularly savvy. Yikes.

Now granted 30 years is a long time, and neither one of us is advocating sitting on any debt for 30 years. But it’s important to realize the cost of this “only $100.” In the most literal way, it adds up.

What if interest rates aren’t a problem? I hear this a lot from people. The exaggerated claim often goes like this: “My debt is at 0.0001% interest for the next 500 years with no minimum payment ever. Why should I bother paying it back?”

One word: risk.

When you have a mortgage (which is just debt owed on a house), and you become unable to pay your mortgage, the bank will foreclose on (repossess) the house.

But student loans and other “unsecured” debt don’t have this same type of risk. No one’s going to repossess your knowledge. (Now that’s a creepy thought.) So it should follow that a low interest loan should have no risk associated with it.

But here’s the rub: how can you guarantee that the terms and conditions are static, that they won’t jack up the interest rates (or worse)? You can miss a payment on one pile of debt, and then the other credit companies might panic and decide to hike your interest rates up to 22%. What if your debt gets sent to a collection agency? I guarantee they won’t be calling you to ask how your freelancing gig is going.

Back to the claim

So looking at the original claim, that he “wouldn’t be where [he is] today” if he had lived within his means? Well, perhaps he’s right. Perhaps it would have taken longer. Perhaps it would have been more difficult. Perhaps some things would have had to have been put off. It would have been a less risky move to move forward without debt. But just because a risk taken led to success in one case, it doesn’t follow that we can say that it holds for everyone. That’s why it’s a risk.

Personally, when it comes to money, I’m boring and risk-averse. I don’t time the market, I don’t play interest rate arbitrage, and while I err on the side of putting things off, I work hard to so I can minimize that.

And now that I’ve been out of debt for a few years, I can’t imagine going back. The peace of mind I feel knowing that I basically owe no one anything (yes yes, I still rent) is real and lasting. It’s hard to quantify how much that’s worth in a dollar value, but I’d put that pretty high. And all the money that I was putting toward paying off loans are now going to adventures, the future, and other yet-to-be-discussed schemes. I live for today and for tomorrow, which I think is the best way to go for me right now.

When it comes down to it, I think what may be most important part of this discussion, and where I’m sure we both agree, is that you are better off when you are intentional with your money. If you’re going to go into debt, know exactly why you’re doing it. And then do it with intention. Have a plan. And then, as Saul and I both would say, “get out of it.”

(Thanks again to Saul for an interesting conversation and being such a good sport. Now go hire him.)

But enough about Saul and me. Is debt worth the risk for you?

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