Sell Your Options Dearly: DEBT
Andy note: "Best of Eddie" - while Eddie is on vacation we're throwing up some of his classic posts from the past. This one from June 2010 is part of the very popular "Sell Your Options" 5-part series. More to come later this week & next. If there's an old post from Eddie you'd like to see up again shoot me a message.
Unsecured consumer debt is a relatively new phenomenon in our country's history. Believe it or not, I can remember a time before Visa. When I was a little kid, credit cards were so rare that most businesses didn't accept them (debit cards didn't exist either because, well, ATM machines hadn't been invented yet). The mere suggestion of paying for a restaurant meal on credit would have precipitated a sound thrashing from a member of my parents' generation.
But the popularity of consumer credit grew quickly in the 1970's. Before, there was only American Express (a "charge" card that had to be zeroed out each month), Diner's Club (for the wealthy), and MasterCharge. MasterCharge was the first company to really market revolving credit to the masses. When Visa came on the scene in the mid-70's, MasterCharge became MasterCard and the ensuing competition between the two buried America in a mountain of revolving debt over the subsequent three decades.
The majority of Wall Street Oasis readers fall into the "Millenial" generation, made up of those people born between 1980-2000. This generation is also perjoritavely known as "Gen Y", and the people who refer to it thusly usually do so to point out what a shiftless bunch of fuckwits you guys are. Nothing could be further from the truth. You were, however, raised by a generation (in some cases mine) where bad fiscal behavior was more or less institutionalized and a buy-it-now-pay-for-it-later mentality prevailed.
What was once unthinkable is now commonplace. It's not unheard of for high school kids to have a credit card. If a kid tried to pay with a credit card when I was in high school, somebody would've called a cop. Consumer credit has become so ubiquitous, that only the oddballs don't have some form of credit card in college.
The first major credit I ever received was an AT&T calling card when I was 19. It practically took a colonoscopy to qualify for (I didn't ask my folks to co-sign or anything) and when it arrived it had a $100 limit. This was in the days before cell phones, and you needed a calling card unless you wanted to walk around with rolls of quarters in your pockets for the pay phones. To illustrate how massive the explosion in credit was (and virtually overnight), my responsible handling of that $100-limit calling card qualified me for a mortgage on my first home at age 22 and a $25,000-limit Visa card at age 24.
I'm here to tell you that nothing can ruin your life faster than excessive debt. Even a bad marriage takes a while to go South. Debt is an absolute dream killer. Debt takes all your options and trashes them. You become a slave to debt service.
Your career mobility goes down the tubes. You can't take a risk on that exciting start-up with the disruptive technology, because you have to pay your bills. You can't take a year off and travel around the world, because you have to pay your bills. God forbid you get hurt or sick, your life will spiral into a whole new nightmare when you can't pay your bills.
I speak from experience. My first decent paycheck in banking was just over $12,000 (we were paid monthly back then – total pain in the ass to get used to). I was so excited that I actually cashed the check, because I wanted to see what that much cash looked like. I went out that weekend and bought not one, but two brand new vehicles (a sedan and an SUV) for $35,000. In the bargain, I traded in my cherry 1968 Mercury Cougar that was all-original down to the 8-track player in the dash. My wife gave up her still very reliable Toyota. We had a very non-PC term for this style of faux affluence back in the day. Some of the older guys probably know what I'm talking about.
So here I am at age 24 with a mortgage, two car payments, and a couple of credit cards whose balance never seems to get lower. But I sure feel like a big shot when I pull into my own garage in a new car after signing for a bar tab. Fucking jerkoff. It's nice when you make $10,000 a month at age 24; it sucks when you have to.
Unfortunately for the Millenial generation, avoiding this trap has to start earlier in life than it has for any previous generation, including mine. You've been tempted, marketed, and cajoled into using revolving debt since high school in most cases. College tuition has increased 400% in the past 25 years, while the percentage of students accessing student loans to cover it has increased from 39% to 65% over the same period. It is now commonplace for a young person to enter the workforce buried in debt.
These are the real numbers you need to be aware of:
- 37% of people 18-29 have been unemployed or underemployed during the recession, more than any other demographic
- Millenials carry an average of 3 credit cards each, and 1 in 5 carries a balance over $10,000
- Only 58% pay their monthly bills on time
- 70% have no savings
- The average Millenial graduates college with $23,200 in student debt
- 60% of workers in their 20's cash out their 401(k)'s when they lose a job or change employment
If you fall into any of those categories, stop whatever you are doing spending-wise immediately and get to work fixing the situation. The debt will kill you. It will indenture you to your employer even if you hate your work. There is no feeling in the world like being debt free.
If you are very young, and are preparing for or just entering college, seriously reconsider going into debt to get a degree. Be aware of the statistics. 20% of students who take out student loans don't even finish college, so they end up with the debt and no degree to show for it. Even the kids who qualify for Pell grants are forced to take out loans for school, and they finish up $2,000 in deeper debt than the average ($25,200). It's no way to start out in life.
If you feel yourself falling into the debt trap:
- Stop spending immediately – cut out all discretionary spending and commit any overage to debt repayment
- Curtail your lifestyle – if you are living above your means, and the numbers resoundingly indicate that you are, cut back. Move to a cheaper place, get roommates, move back home if that's a possibility. Take extreme measures to pay off your debt.
- Pay cash for everything! - if you can't pay cash for it, don't buy it. PERIOD.
- Sell your shit – look around you. There's a ton of shit you don't need. Sell it, and use the money to retire debt.
I can't stress how serious this is. Debt will ruin your life. Plain and simple. People who are debt free can do whatever makes the most sense for them career-wise, lifestyle-wise, travel-wise, etc... Do you really want a $5 latté you charged two years ago to dictate whether you can take a career risk?
I'm almost done, I just want to touch on the concept of "good" debt. Many people will tell you that there is such a thing as good debt. They'll usually give you an example of mortgaging a rental property that brings in more in cash flow than is required in debt service, or they'll tell you that buying a house is better than renting, etc... While I'll make allowances that some debt is better than others, I'll never say that any debt is good.
When it comes to buying your own home, buy far less than you can afford, get a fixed-rate loan for no longer than 15 years, and pay it off in 5. Actually, if I remember correctly (and correct me if I'm wrong), monty09 said he bought his house for a little over $100,000 and had it paid off in 11 months. That's fucking baller, and that's how you "do" debt.
Anything else is just a trap.
Resources:
http://www.usatoday.com/money/economy/2010-04-23-1...
http://www.usatoday.com/news/education/2010-02-24-...
http://www.bankruptcysandiegoattorney.com/2010/04/...
Comments
Good read for us younger
Good read for us younger folk. I see lots of people falling into this trap, and like you said, it's a very viscous cycle. In my opinion, a lot of it comes from the idea that you "have to" go to college. It's the thing to do. But when I see people at my school getting silly degrees, with mediocre grades, in a field they don't like, I question whether or not it's worth their expense to be there. This all gets back to the NYU article with the girl who went massively into debt for a world religions degree. IMO, we have to change society to realize that college ISN'T the best option for everyone.
/end slightly off topic rant. Great post Edmundo.
Great post on debt. I believe
Great post on debt. I believe in some debt. College if you seriously want it, and you think the debt is worth it. House if you want it, and think it's a better option than renting. Car if you need it, but nothing stupidly above what you can afford to pay off quickly (depreciating asset bit time). But then there is plainly stupid debt. That's the debt that one should believe in a giant red cross being put over.
I thought I'd edit and put this in: I know some might not like this, and each to his own if you disagree, but I think it's a very good idea not to smoke and drink when younger. By drinking I mean sure, everyone wants the occasional drink, but I mean avoid drinking every weekend spending a lot of money on it. If you are a smoker and/or a weekendly (or more) drinker then you can save so much money by quitting.
I fall right into the
I fall right into the millennials category: I was born in 1990, my savings is a low 4 digit number, I have credit cards in my parents names that are the only reason I survive (basically they purchase all my food, gas, etc), my job pays absolute shit (but its a great opportunity! :-/ ), and my parents have me taking $20,000 a year in college loans. I also literally just watch my parents sink deeper and deeper into debt. Granted, I can't know this, maybe they're doing totally fine, but all the signs are there. They've never asked or anything, why would they, but I've always promised to be successful and retire the both of them to a comfortable place in Palm Beach, Beaver Creek, or Scottsdale. This post didn't get me thinking so much about debt, but of the value of my college education and the duties of parents in financing their brats. It's something I'd really like to write a long blog post on, but i don't know if that's appropriate given my age and being such a new member around here.
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John Tabacco's raw, unique market commentary based on real information from real short sellers:
http://www.TheDailyShortReport.com
Informative and entertaining
Informative and entertaining - thanks.
blong131 wrote: I fall right
I fall right into the millennials category: I was born in 1990, my savings is a low 4 digit number, I have credit cards in my parents names that are the only reason I survive (basically they purchase all my food, gas, etc), my job pays absolute shit (but its a great opportunity! :-/ ), and my parents have me taking $20,000 a year in college loans. I also literally just watch my parents sink deeper and deeper into debt. Granted, I can't know this, maybe they're doing totally fine, but all the signs are there. They've never asked or anything, why would they, but I've always promised to be successful and retire the both of them to a comfortable place in Palm Beach, Beaver Creek, or Scottsdale. This post didn't get me thinking so much about debt, but of the value of my college education and the duties of parents in financing their brats. It's something I'd really like to write a long blog post on, but i don't know if that's appropriate given my age and being such a new member around here.
You bring up a fresh perspective. Most people only think of themselves when they take on college debt but you're the first person I've read who's concerned about their parents' well-being. Write a long post if you want. This is a forum where people of all ages (and evolutions) can discuss what they want.
Great post. I will never
Great post. I will never forget how much a car salesman's jaw dropped when after I graduated college and I walked into his dealership. He asked me how much I wanted to put down, and I said "14." He was like ok, $1400? I said no... thousand. I guess he had never seen anything like that before, because he just looked at me in disbelief. I went to a state school on a scholarship, and I was a CS major during the .com boom so I had decent paying jobs (~$12/hr), so I actually managed to save money during college. Working 60 hours a week as a waiter during my first two summers helped as well.
That was my one stupid financial mistake- buying a brand new car out of college. In my defense, I drove absolute piece of S*** death-mobiles in high school/college (an early 80's Subaru, and a mid 80's Oldsmobile in the late 90's) and was desperate just to have a functioning car. I did make a good move financing though- they offered me either a 2 year 8% loan, or a 4 year 14% loan with $2k cash back. I took the cash back, and I ended up paying the thing off in about 6 months and pocketing almost all of the $2k. I will never buy a new car again though.
On another note, I am pleased that the question "Is college a good investment?" is finally being asked. It seemed that for years it was just passed down from Mt. Sinai in rock that college was the best choice for anyone, and if you weren't doing that, then your life was headed nowhere. It is true that in some form, college is almost always a good investment. If you aren't the brightest bulb, going to a community college is cheap and will at the very least get you from being the lowest of the grunts to a shift supervisor, or add a few $/hr to your receptionist/secretary salary. On the other hand though, if you are handy or mechanically inclined, being ushered off to a big name expensive college for 4 years where all you acquire is debt, a drinking problem, and a useless degree in communications or psych, when you could have been 4 years into your career as a tradesman (which make around $100k in the NYC area) was probably the worst decision you could have made.
A few years ago when my friends were all 24-25, hence a few years into their careers and getting antsy that they weren't getting the corner office or VP title bestowed upon them, a few went to b school. One went to a pretty good school, the rest went to very expensive private schools and put themselves 40k in debt. I wouldn't call any of them a success now. It may have worked out that their salary was 10-20% higher than when they went in, but that probably would have happened anyway. They didn't take into account the opportunity cost of not getting experience for 2 years. I clearly remember a friend of mine, 28 and an MBA for a year sending me an IM about how he was so excited about getting to run a meeting. I didn't have the heart to tell him I ran my first meeting when I was around 25.
Too many people just think that having an MBA is going to open up magic doors where jobs are offered to them where they are running multi-million dollar divisions. Really people need to set a goal or a job they want first, then get a degree that will help them achieve that goal and focus their studies in that area. Most of my classmates in college that are successful now knew what they wanted to do the moment they stepped on campus.
I'm glad we're talking about
I'm glad we're talking about this. Just to run some quick numbers, if you come out of college with $23,200 in student loan debt and you're the most responsible kid on the face of the Earth and want to have it paid off in a year, you'll have to come up with an extra $2,000 a month.
That's after taxes, after living expenses, after everything. An extra $2,000 a month. In real terms, that's an extra $40,000 in salary if you live in NYC, $35,000 just about anywhere else. You'd better be splitting atoms for a living if you hope to pull that off, because banking sure as hell isn't going to get it done.
I work for a major credit
I work for a major credit card issuer in CorpDev and we dominate the "new to credit" space, as in all the H1B finance workers who just got jobs here or college kids who weren't lucky enough to ride on their credit coat tails. So form a business stand point, we make a shitload of money on essentially enslaving young people early. Socking one of you IBanker kids with 10-20 grand in card debt at a 24.9% rate because you paid a single bill late is our business models home run scenario. If you are in an uncontrolable revolving debt situation you should follow the OPs advice and go into hardcore paydown mode. If however you are run of the mill stupid as opposed to shockingly reckless credit cards are actually your friend. Many card companies have ways to track your spending at the end of the month so you get to see a nice chart indicating you spend 75% of your disposable income on booze. That might get you to start to re-evaluate your lifestyle choices. Rewards are also nice if you spend a lot of money every month and some landlords will even take credit cards for your rent, if that's the case you probably are going to be able to get a free plane ticket or two in a year.
The key to credit cards is don't carry a balance if you can at all avoid it and if you have to (wedding, vacation etc) try to pay it down as quickly as possible. That said you don't want to go to a cash only policy and you don't want to close your cards. While its a myth that your FICO score is hurt if you don't carry a balance it does take into account your oldest open line of credit across different categories (loans, mortgages, credit cards). So even if you are some kind of degenerate debt junky that can't help but buy your models and bottles if you are packing plastic, keep your cards in a drawer at home and don't class them while you are still paying down. It will help you in the long run when you want to acquire good "debt". Also I know a bunch of tactical stuff about the best way to pay down or shift balances around to get the best deals if people are really struggling but have a steady cash flow. Feel free to PM me for advice.
Aggravate wrote: Also I know
Also I know a bunch of tactical stuff about the best way to pay down or shift balances around to get the best deals if people are really struggling but have a steady cash flow. Feel free to PM me for advice.
Dude, share the advice here, please! That's what this thread is for. You've probably got a lot of nasty insider shit we'd all like to hear about!
I was born in the late 80s
I was born in the late 80s and did things right. I graduated with savings as I was also a CS major and kept a 20-30/hr job full-time during summers and part-time during school. I immediately paid off all my student debt with interest rates over 5% and left the rest, put money into a separate account which matched the future value of my payments, set up auto-billing, and lost the password to access the account.
I have a decent car (thank my parents for that) and just quit my techie job for a disruptive startup ;). Best of all its risk free. I am 22, have plenty of savings, and the salaries are close but the bonus potential is big. Best of all, I have never had to be a banker, or work a 60+ hour week.
I am not sure if all Gen Y'ers have a debt problem, but I have always thought of it as: somebody makes money off your debt, and its not you.
Victor252 wrote: blong131
I fall right into the millennials category: I was born in 1990, my savings is a low 4 digit number, I have credit cards in my parents names that are the only reason I survive (basically they purchase all my food, gas, etc), my job pays absolute shit (but its a great opportunity! :-/ ), and my parents have me taking $20,000 a year in college loans. I also literally just watch my parents sink deeper and deeper into debt. Granted, I can't know this, maybe they're doing totally fine, but all the signs are there. They've never asked or anything, why would they, but I've always promised to be successful and retire the both of them to a comfortable place in Palm Beach, Beaver Creek, or Scottsdale. This post didn't get me thinking so much about debt, but of the value of my college education and the duties of parents in financing their brats. It's something I'd really like to write a long blog post on, but i don't know if that's appropriate given my age and being such a new member around here.
You bring up a fresh perspective. Most people only think of themselves when they take on college debt but you're the first person I've read who's concerned about their parents' well-being. Write a long post if you want. This is a forum where people of all ages (and evolutions) can discuss what they want.
I tend to have really unique/odd/contrarian perspectives on alot of things. Ive been wanting to blog about it, and really just needed to hear one person say they'd care to read it. so thanks Victor, Ill post it up when I get my thoughts together
_________
John Tabacco's raw, unique market commentary based on real information from real short sellers:
http://www.TheDailyShortReport.com
What if a person has no cash
What if a person has no cash flow?
I just recently started paying the minimum on my credit card because I've run out of savings. It really fucking pains me to do it but what else can I do? I live at home with my parents and I have no assets to sell, my car isn't even mine. While my expenses are not extraordinary I do have to pay for gas to drive 20 miles to an unpaid internship, pay for catastrophic health insurance, and the occasional 40oz so I don't go insane.
I rationalize my soon to be growing debt by telling myself "I'll get a job soon" but I've been saying that for over half a year now. I've applied for part-time BS jobs on the side but those are hard to find as well. Any advice?
It's hard to control how much
It's hard to control how much in student loans one has, especially if you're focused on your education. Yes, some people are smart and efficient enough to be able to work and still get good grades in college, but some need that time to really bear down on the books. I think the payoff of a colllege degree is worth it, in the majority of cases.
I was fortunate enough to have scholarships pay for my undergrad and grants/parents/internship money for grad school, but I still finished school with 2K in credit card debt, because my parents were adamant that I didn't work whle in school. I could have survived with the money I made during the summers, but then I would have missed out on road trips, throwing house parties, and rocking the flyest gear (which is a must if you wanna bag chicks at an HBCU). I paid down the 2K after graduation within 6 months, so it wasn't a big deal.
I've seen debt bring a lot of people down, but when used properly it does provide more financial flexibility. I think people have to prioritize and make wise decisions if they choose to use debt and have a plan for paying it off. Debt is sacrificing tomorrow's money for something today. Some cases it is worth it, in others it's a waste.
Great post Edmundo, I look
Great post Edmundo, I look forward to the rest of this series.
I've been working in the BO of a BB for the last year (during my junior year of school). I actually paid off some of my student debt earlier this year, and my parents told me I should just keep my money in savings so that I can have some liquid assets. They were actually a little upset that I paid down debt, because they think it'd be better if I had cash in the future to pay for rent/food/start up costs after grad. I guess its a different perspective. Either way, I appreciate the insight and advice.
looking for that pick-me-up to power through an all-nighter?
proforma wrote: What if a
What if a person has no cash flow?
Well to put it bluntly, you're in a world of hurt if you never get a paying job. Assuming you will at some point, the best thing for your to do right now is keep paying your minimum and hope you land something. You are in for a at least a little luck since the actual way minimum payments are calculated has changed in the last 2 years. It used to be at a credit cards issuer's discretion as to what exactly a min pay was, it could be 1% of balance or it could be $15. Pretty much whatever they wanted it to be. This was also back when we could "reprice" people with a change in terms based on these we could statistically prove increased risk. So if you had a 10k balance and say took a large cash withdrawal from a casino or went from paying your balance in full to paying only the min. pay then maybe I jack your APR from 12% to 20% since based on your behavior your are now more risky than before. Going forward all your accrued interest, since you just pay $15 min pay, is juiced at 20%. Additionally we allocate payments toward the lower interest balances first because we want to keep all the money at 20% on the books while you pay down the less lucrative 10%.
Most of this usurious shit is actually illegal now and we have a mandated industry wide standard for what a min pay is. Its defined as Fees (late fees, OL fees etc) + Finance Charges (interest) + 1% of your total balance = min pay. So even if you are just paying your min pay now at least you are paying down 1% of principal every month. Yes your amortization sucks but its better than when min pay was designed to put you in a debt spiral.
Your other options are to keep on the lookout for balance transfer offers from another issuer that have a long teaser rate. So if they give you 12% default rate with a 0% 6 month teaser, that's not what you want. You want 18 months at 4% or something of that ilk with a 3% upfront fee. Basically if you just plan to paydown your balances very slowly since you are essentially broke, the best thing to do is try and get the most attractive interest rate possible. However if you credit score is less than stellar this isn't really an option for you and you'll just have to suck it up and keep doing what you can. Even if it means begging from your parents, don't go delinquent or Charge-off (ie default).
LIBOR, it's a great idea to
proforma wrote: What if a
_________
John Tabacco's raw, unique market commentary based on real information from real short sellers:
http://www.TheDailyShortReport.com
blong131 wrote: again, i
Bottles and DCF Models
_________
John Tabacco's raw, unique market commentary based on real information from real short sellers:
http://www.TheDailyShortReport.com
Great post! This is how I
^^^ That's the discipline.
Some of you could learn a
Aggravate - Thanks for the
Well we do live in a society
Well this post made me feel
^ Making 40K at home is like
About two months into my
A lot of you are suggesting
Cars are a steadily
If you dont care about the
Definitely buy used cars, and
Anyone else reminded of
MessedUp wrote: Well this
great posts all around.
Amen brother. It's nice to
Very good article! One tip:
I'm debt averse but I use a
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We are excited to formally extend to you an offer to join Bank of Ameria
Does the President read
I don't know why American
santoshi wrote: MessedUp
Eddie; Monty- did either of
Work hard, play hard.
I totally agree with about
Edmundo Braverman wrote: Does
great post and i agree with
it seems the sentiment here
.
IlliniProgrammer
I'm a millenial but
Edmundo Braverman wrote: ^^^
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man made the money, money never made the man
mr1234 wrote: Edmundo