Sell Your Options Dearly: DEBT

Eddie Braverman's picture
Rank: The Pro | 21,111

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:

  1. Stop spending immediately - cut out all discretionary spending and commit any overage to debt repayment
  2. 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.
  3. Pay cash for everything! - if you can't pay cash for it, don't buy it. PERIOD.
  4. 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 latte 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 (53)

Jun 15, 2010

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.

Jun 15, 2010

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.

Jun 15, 2010

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.

John Tabacco's raw, unique market commentary based on real information from real short sellers:
http://www.TheDailyShortReport.com

Jun 15, 2010
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.

Jun 15, 2010
Victor252:
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

Jun 15, 2010

Informative and entertaining - thanks.

Jun 15, 2010

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.

Jun 15, 2010

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.

Jun 15, 2010

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.

Jun 15, 2010
Aggravate:

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!

Jun 15, 2010

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.

Jun 15, 2010

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?

Jun 15, 2010
proforma:

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).

Jun 15, 2010
proforma:

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?

I dont know your circumstances, but are you doing anything of value at your unpaid internship, or just shadowing? if you present any value to the firm, they will respect you for asking them to pay you, and almost all unpaids will still cover your gas to get there. You need to talk to whoevers in charge and take charge of your own life, youre never going to get paid if you hide in a cubicle all day.

again, i dont know your circumstances. but i do know a few friends who worked unpaid all summer, did something of value for the firm, went to the person in charge and said "look, I did this, this, and this, and i really need some money." and they were quick to cut them a 4 figure check. like i said tho, theyre not going to pay you to just hang around and shadow them.

John Tabacco's raw, unique market commentary based on real information from real short sellers:
http://www.TheDailyShortReport.com

Jun 15, 2010
blong131:

again, i dont know your circumstances. but i do know a few friends who worked unpaid all summer, did something of value for the firm, went to the person in charge and said "look, I did this, this, and this, and i really need some money." and they were quick to cut them a 4 figure check. like i said tho, theyre not going to pay you to just hang around and shadow them.

This is why I'm not going to make it the corporate world. I have a weird sense of what's reasonable. Signing up for an unpaid internship and then asking for money at the end? That's just grimey to me. He knew what the deal was when he accepted the job. I wish I would be a manager in that position and someone tried me like that, I'm a nice guy, but homie would get clowned with the quickness. I would have said "If we wanted to pay people, we would have made it a paid internship".

Jun 15, 2010

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.

Jun 15, 2010

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.

Jun 15, 2010

LIBOR, it's a great idea to have a 3-month emergency fund set aside (6 months is ideal) before you throw everything you've got at your debt, so your folks aren't wrong. But kudos, dude, your head is definitely in the right place. Get that monkey off your back ASAP.

Jun 15, 2010

Great post! This is how I stay out of debt:

-- One credit card in my name. I use it for ALL of my purchases and pay off the entire balance every month. I do this because I get cash back. I've never paid a dime in interest and I've made hundreds off of cash back. I have no idea if the bank will continue to allow this, but I've haven't had any issues thus far.
-- Just graduated from college with ~$4,000 in loans. Tuition and housing was completely paid for through scholarships and grants, and the $4,000 in loans just gave me additional money to live on. Didn't receive any financial assistance from family. I'll have the loans paid off in less than 6 months.
-- I drive a vehicle that was given to me by my grandparents. It's got 150k miles on it. I've never had a single problem with it and I intend to drive it until the wheels fall off.
-- I have over $13,000 in savings--from previous internship and sign-on bonus for my FT job. I honestly don't spend my money.
-- I will be staying with my parents for the first year of my job. By the end of my first year, I intend to have over $60,000 in savings.

    • 1
Jun 15, 2010

^^^ That's the discipline.

Jun 17, 2010
Edmundo Braverman:

^^^ That's the discipline.

edmundo, i dont like you. i have a feeling that if i met you out on the streets, i would want to punch-fuck your face with my fist. but i like this post. wish i would have known this when i was 18.

man made the money, money never made the man

Jun 17, 2010
mr1234:
Edmundo Braverman:

^^^ That's the discipline.

edmundo, i dont like you. i have a feeling that if i met you out on the streets, i would want to punch-fuck your face with my fist. but i like this post. wish i would have known this when i was 18.

Love it.

Just keep in mind that I've stepped over tougher guys than you on my way to a fight.

Jun 15, 2010

Some of you could learn a great deal watching different cultures' approach to debt. The average US consumer may be one of the worst debt-manager in the world, if we are to believe savings rates in various countries. Asians or Germany are probably the most conservative (with situation in Japan and mainland China being sometimes extreme, hindering consumption and economic growth).

I believe debt isn't all bad. Paying for a mortgage roughly the same monthly amount as for a lending, and getting a propriety in the end rather than nothing seems to be a sound choice. It doesn't necessarily reduce your opportunities either: say you want to move to another city, you could just sell the flat, pay back the full mortgage and (if the sale timing isn't too bad) get a nice bonus. Plus, since you're wanting to actually buy a home at some point in your life, you're already short on the housing market. So getting a bit long with a small flat early in your career isn't bad.

But otherwise I just don't see the point of getting debt. Fancy car, bottles, $20 every-day lunch, giant TV, ridiculous $2K fridge... If you can't afford them don't buy them. I don't use a credit card. All my common expenses are paid with a debit card. It has worked perfectly fine until now and I have never paid arrears.

Edmundo's recommendations are elementary (and therefore very truthful) logic of financial management.

Jun 15, 2010

Aggravate - Thanks for the advice. Its not a large amount right now and I intend on paying it all off as soon as a I get a pay check.

blong131 - Thats an interesting idea. I actually plan on having a talk with my boss in the very near future about the need to be paid going forward. I like the idea of saying "I did this, this, and this" pay me for the value I add.

Jun 15, 2010

Well we do live in a society that knows nothing more than television commercials and expensive things. There is a reason 70% of our GDP is based on consumption, while China's in around 36%. Consumption is ingrained in our society and "equity theory" holds that we base our personal consumption on those around us. This delayed gratification is easier said than done!

Jun 15, 2010

Well this post made me feel terrible, but it really is on point.

I'm $13k in debt from financing a new car. It's nothing fancy, and I honestly needed it because my car had just died. After going through my 3rd car, I just said I wanted something new so I wouldn't have to deal with any more problems for a bit. Probably a mistake.

I'm $35k in debt from college. My degree was in Economics, and I'm not even close to the finance field (that pisses me off more than any amount of debt).

I make just under $40k, and I'm living home trying to save money and pay off this debt as quickly as possible. I do have $20k in savings so far though. I'm trying to figure out how to allocate this, and I definitely still want to keep some savings in case of an emergency.

feelsbadman

Jun 16, 2010
MessedUp:

Well this post made me feel terrible, but it really is on point.

I'm $13k in debt from financing a new car. It's nothing fancy, and I honestly needed it because my car had just died. After going through my 3rd car, I just said I wanted something new so I wouldn't have to deal with any more problems for a bit. Probably a mistake.

I'm $35k in debt from college. My degree was in Economics, and I'm not even close to the finance field (that pisses me off more than any amount of debt).

I make just under $40k, and I'm living home trying to save money and pay off this debt as quickly as possible. I do have $20k in savings so far though. I'm trying to figure out how to allocate this, and I definitely still want to keep some savings in case of an emergency.

feelsbadman

Wow, this is just bad financial management right here. Please help me understand this. You have $20k in savings, but $50k in debt. Why aren't you using your savings to pay off some of that debt? You say you want to have some money in case of an emergency. Granted, I don't know the full extent of your situation, but what sorta emergency would you have at your age, staying in your parent's house?

Jun 16, 2010
santoshi:
MessedUp:

Well this post made me feel terrible, but it really is on point.

I'm $13k in debt from financing a new car. It's nothing fancy, and I honestly needed it because my car had just died. After going through my 3rd car, I just said I wanted something new so I wouldn't have to deal with any more problems for a bit. Probably a mistake.

I'm $35k in debt from college. My degree was in Economics, and I'm not even close to the finance field (that pisses me off more than any amount of debt).

I make just under $40k, and I'm living home trying to save money and pay off this debt as quickly as possible. I do have $20k in savings so far though. I'm trying to figure out how to allocate this, and I definitely still want to keep some savings in case of an emergency.

feelsbadman

Wow, this is just bad financial management right here. Please help me understand this. You have $20k in savings, but $50k in debt. Why aren't you using your savings to pay off some of that debt? You say you want to have some money in case of an emergency. Granted, I don't know the full extent of your situation, but what sorta emergency would you have at your age, staying in your parent's house?

I know it is horrible, but to be fair, $15k of my savings was put in a fund by my father who passed away. I didn't even know I had this money until recently and Vanguard is making it very difficult for me to get access to this account since my father was custodian of the account. He set it up while I was in college, and I'm guessing it would be sort of a gift after I graduated for whatever. I'm not really sure what his intentions were with the account to be honest. The other $5k is savings from work, that actually was my emergency fund.

Otherwise, yes my financial management is pretty horrible right now lol.

Jun 15, 2010

^ Making 40K at home is like making $65K on your own. You're in a good situation, because you can continue to stack until you get that high paying job.

Man I wish I could have stayed at home after college. I guess I could have with an open mind to work in any field and accept a smaller paycheck. But I wanted to get the level of job that my career warranted and that meant I had to go wherever the best offer was. Looking back I would have taken 30K at the crib.

Jun 15, 2010

About two months into my first year as an analyst, I financed my first car at ~6.6% which wasn't terrible at the time and at my age. The car purchase was mandatory; I was working in a city you had to drive to get around. When I got my bonus about ten months later, I paid the balance of the car loan and used the remainder to cap my 401k. Many of my analyst peers invested in broad market ETFs, etc. with the notion of return arbitrage in their heads: "Why pay off debt @ 6% when I can make 8% in the market and pocket the 2%." If I had done the same I'd have lost 30% of my principal investment.

Hindsight is 20/20, etc., but the one thing I can attest to is the peace of mind that comes with being debt free. Even if the markets hadn't gone south and my peers had technically "come out on top," the sensation of being 21 years old with a car title and no debt to my name was worth it.

The only thing I might change if I could do it again is not buy a new car, but it was an '08 Wrangler (not exactly baller). I'm interested to hear what you have to say about marriage haha. I'm 24 now and dating my high school girlfriend (not contiguous, spent four years in college apart, got back together afterwards). Probably looking to get married after business school around ~29.

Jun 15, 2010

A lot of you are suggesting not buying a new car when you start. If you have to have one, as in havilape's case, what kind of used card would you buy (year, certified pre-owned or not, brand)?

Thanks.

Jun 15, 2010

Cars are a steadily depreciating asset...as everyone knows. I have been very fortunate to have a rather nice luxury car, which I paid for while working summers in college. I've always knew that the second I start getting a nice paycheck I will be trading-up to get a nicer vehicle. Ive since realized I have a very nice car, and getting a newer car while taking on a car payment just seems ridiculous. The value of those things erode by the day. It is always best to just hold out and pay up-front for it!

Jun 15, 2010

If you dont care about the type of car you drive you cant go wrong with a Honda Civic or Toyota Camry. You can either lease for 199 a month with 2-3k down or buy a pre-owned one with a certified warranty.

I generally buy luxury cars that are 1-2 years old (to get the benefit of the depreciation that occurs as soon as you drive the brand new car off the lot) that come with the full factory warranty and maint. plan.

If you are making decent money there is no reason not to have a nice car esp. if you do a lot of driving and are trying to pick up chicks (which my gf no longer allows me to do).

Jun 15, 2010

Definitely buy used cars, and shoot for reliable brands that aren't going to crap out in years or that have high maintenance fees associated with them.

True love is hard to find, sometimes you think you have true love and then you catch the early flight home from San Diego and a couple of nude people jump out of your bathroom blindfolded like a goddamn magic show ready to double team your girlfriend.

Jun 15, 2010

Anyone else reminded of this:

I don't get it, kid. You borrow money to goto NYU. First year out, you make 35 grand.
You made 50 grand last year, and can'tpay off your loans. Where does it go?!
Dad, 50K does not get youto first base in the Big Apple.
I got 40% in taxes, 15 grand for rent.
I got school loans, car loans, food -that's three bills a month. I need suits...
Come back home and live rent-freeinstead of that roach-infected place.
$50,000! Jesus Christ!The whole world's off its rocker!
I made $47,000 last year. That's before taxes.
That's Queens, Dad! A 5% mortgageand you rent the top room.
I gotta live in Manhattan to be a player.There is no nobility in poverty any more, Dad.

Jun 16, 2010

great posts all around. however most of this shit is second nature to all of us pursuing finance. i'm a junior in college and would bet 80% of kids my age wouldn't have a clue about a car being considered a steadily depreciating asset. the point is, we are all preaching to the choir here (sure, some of us realized the evils of debt later than others, but essentially in our line of business this stuff is evident). the problem is that the idiots that are getting shit degrees are also those most inclined to get into deep debt because their shit degrees dont give them the ability to understand these concepts. how are they supposed to realize/learn???

Jun 16, 2010

Amen brother. It's nice to know there are people out there like me.

I'm completely debt-averse. My credit card collects dust. But I've gone through university and a few years of working trying making sure I was debt free. It meant I had to miss out on stuff (going on drunkin trips to Cancun) and I was usually poked fun at for it because everyone else was using debt to do it. Do I regret those decisions, possibly. This is why I think your message will fall on deaf ears. It has become to ingrained in people's minds that a bit of debt is OK if it means you are having a good time. The peer pressure / mob mentality influence that causes young people to spend like crazy (and take on debt) is too powerful for immature minds to handle. What is worse is that people don't mature as quickly as they used to.

I think that it is definitely worth it to take on debt to go to university IF you are a bright person and can benefit from it. But there are definitely ways to ease that debt load. Only consider schools that give you a scholarship, that are local so you can live at home, or in-state where you have lesser tuition fees. For me, the absolute worst thing is when parents push their kid to go to university and make them pay for it. It is with that group of students that I think the largest amount of debt is likely held. There is no real drive to learn/take advantage of the opportunities that a university provides and so they end up with a mickey mouse degree, an alcohol problem, and the realization that the man that fixed the toilet they clogged with vomit will make more money than they ever do.
.

Jun 16, 2010

Very good article!

One tip: Only use credit card when you have to.
Another tip: Study hard so you can get all kinds of scholarship, blahblah.

Jun 16, 2010

I'm debt averse but I use a credit card for virtually everything I buy, even on $1 value menu snacks so I can keep track of my purchases. I don't get why people some people just pay cash for everything because if you don't live beyond your means (know how much cash u have), you can still pay off that credit card debt every month and accumulate some rewards/build credit. plus if you get mugged by a hobo, you can just cancel your credit card.

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We are excited to formally extend to you an offer to join Bank of Ameria

Jun 16, 2010
Jun 16, 2010
Edmundo Braverman:

Does the President read WSO???

Of course, everybody reads WSO.

Jun 16, 2010

I don't know why American society stresses that kids go to college right after high school. People who work for a few years before college typically do much better and have less financial issues. I would have loved to work 3-4 years and then have gone to college. I would have gotten better grades, had more money, had a car, and would have pulled better quality females.

Jun 16, 2010

Eddie; Monty- did either of you guys run into the problem of complacency about your finances after two or three years of focusing on them? How did you get around it?

Jun 16, 2010
IlliniProgrammer:

Eddie; Monty- did either of you guys run into the problem of complacency about your finances after two or three years of focusing on them? How did you get around it?

Yeah, I think it's only natural. My strategy for dealing with financial complacency was to marry a completely inappropriate woman and have her wipe me out financially every 5 years or so. Starting over from scratch really helps you maintain your focus.

Jun 16, 2010

I totally agree with about 90% of these recommendations, however the bit about college is entirely off-base.

It is true that there are certain colleges/universities that have an extremely high cost of attendance and offer little in the way of financial aid. However, in many cases the opportunity that the school provides is well worth the debt, both economically and for ones own advancement. Look at schools like the top ivies, MIT, CIT, Stanford, & Duke. All these schools cost an arm and a leg to attend, but assuming you do well there, your future earning potential will be much, much higher with these degrees. Even coming out of these schools $40-60K in debt is often a good economic decision if, say, they put you on a career path towards greater future profitability than would otherwise be available to you. In addition, many of the connections you build there will benefit you financially later in life (I know someone made a point earlier about building connections anywhere, but those built at these schools often have much more future economic potential than those built elsewhere). Again, this is assuming that you excel grade-wise and choose a profitable major.

Bringing this closer to home, I am personally delighted that I made the investment in one of these schools as it has certainly increased my forward earning potential. To come out of school earning more than my parents currently do in my first year is an amazing opportunity. And I am entirely certain that this opportunity would not have existed had I taken the full scholarship I received to my state school (still a top-25 school). Further, the career track that my school has allowed me to enter through my grades, achievements, and connections will certainly let me increase my earnings greatly as I move forward (assuming I don't mess anything up).

The bottom line is that when college debt is approached intelligently, an excellent education is one of the best investments that a person can make. I'm not suggesting that people shell out for expensive mid-tier schools (think NYU, Tufts, etc.), but attending (and excelling at) an elite university is worth far more than the cost of tuition.

Jun 16, 2010

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Jun 16, 2010

great post and i agree with most of what everyone has said.

for a lot of the younger guys out there, 4 words sum it all up - work hard, play later.

Jun 16, 2010

it seems the sentiment here is to pay off everything as soon as humanly possible. i see it somewhat differently: if you can afford to pay a minimum payment at low interest (think 2%~3%) and you have a steady job, why pay down the entire chunk? i graduated with ~$15k in student debt and whenever i get a bonus i pay down a portion (not all of it). its down to about $5k but i get the sense of security and can do whatever i want to. if i want to i can pay everything off today with still a decent chunk of savings but i'd rather use it to invest.

agree with used car 1000%. leasing is generally not as good of an idea as one may think. there are many articles about it.

just my two cents

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