If you have zero dollars to your name, on paper you have more money than the US government and millions of Americans - cheers!
The US is the richest country in the history of the world. Why is everyone broke?
If you’re in debt now, you’re not crazy, there’s no shame here, this isn’t a guilt trip. There are strong forces pulling you in this direction, and there is also personal choice. We need to unpack it all and find a way forward.
The story goes way back and debt is as close to home as an I-owe-you.
If we agree that my 50 peaches are worth your 1 blanket right now, done deal. But if it’s winter, I am cold, and peaches aren’t ripe, I may sweeten the deal by promising you 55 peaches in spring to get a blanket right now. Debt exists until I either give you 55 peaches, you take back your (used) blanket, or you decide to call it off and cut your losses.
Let’s reset the trade, bring back our mason with bricks and say 50 peaches = 1 blanket = 20 bricks. I then have a banner year on the farm and more peaches than usual to trade. If there is only one blanket available and I want it badly, maybe I offer 75 peaches for the same blanket. Our mason friend now has to offer more bricks to have any chance of buying the blanket. My newfound excess supply raises the amount others need to offer for the blanket. If you’ve ever played a board game like Catan or Risk, you know as the game goes on certain goods become more valuable in response to people’s needs and resource scarcity.
In the modern world, governments tend to spend more than they take in. We can’t print peaches but the government can in fact create money out of thin air. More dollar bills in the system competing for limited resources means the dollar value of those resources gets pushed up. As loans gradually get paid off more money just gets added into the ballooning system. If money actually grew on trees, it would be harder to create than what we have now.
A society unhinged from a balanced budget relies on money printing and debt to keep it afloat. Money printing makes our dollars worth less over time, so we are pushed to spend now. A $100 bill after 30 years under a mattress will still be $100, but it won’t buy nearly what it could’ve when it got tucked away. So we find ourselves in a predicament. Economic activity is how we rely on each other, but the money system incentivizes us to spend money now and pay it off later.
There’s also infinite desire within us. Desire is part of our design - desires reveal the hole in our hearts that only God can fill. Desire that leads to seeking God is great, but where unchecked desire meets access to money that promises to fill the void, debt is born.
The root of it is how the stories we’re sold appeal so deeply to our desires, and quick access to borrowed money keeps us chasing. We punt on the future for the present trying to live “our best life now” or some version of the American Dream.
We have normalized a system that ravages the earth and our wallets to keep us consuming. Yet the more we have, the less satisfied we are. So much of our broken economy depends on us feeding the emptiness with more, more, more. Every targeted ad, every commercial, every can’t-miss sale is designed to make us feel like we’re missing out and we need just one more thing to be happy.
Access to cheap credit makes everything more expensive even when you want to pay cash. Houses, cars, education - prices seem to be running away from us as the money printing machine just keeps going.
All this leaves us with empty pockets, full landfills, and bitterness. Is this really the way to live? From this larger system we then zoom in to our own lives, the voices that form us, and the tide set against us.
Social media resets our expectations
Social media lets us compare our lives with people in completely different socioeconomic classes. We see the highlights of our friends, celebrities, and influencers at their edited best, and subconsciously it resets our expectations of what normal life looks like. Credit cards let us spend money we don’t actually have to chase a feeling.
Medical Bills
Health care in the US is a disaster. You go in with a bloody nose and walk out bankrupt. Imagine buying a car only to find out the true price a month later! Health insurance will help right? Maybe, but who and where and what is covered is so hidden in obscurity we often end up helpless, caught between hospitals jacking up prices and the insurance companies haggling with them. Medical debt can happen to you so quickly and often through no fault of your own.
Student loans
My former self included, most 18 year olds have no concept of what $100,000 in student loans actually means. The system is predatory. We were told that the path to a well-paying career ran through college campuses and so we didn’t think much of it. When we graduated and found the world didn’t roll out a red carpet for us, we felt disillusioned and lied to. The kicker on student loans is no matter how you feel, they never go away. They are not offloaded in bankruptcy like consumer debt, they follow us until we pay them off or until we die.
Too much house
We got sold the American Dream of owning a house as a symbol of success. Banks got loose with their loans and we bought more house than we could afford. According to the professionals, it is always a good time to buy or sell (for their commissions). Once the phantom costs of home ownership sink in - property taxes, insurance, maintenance costs - you can find yourself in an endless loop of surprise expenses. If your neighbors live large it can make you feel like that is normal and you need to spend to keep up, perpetuating the cycle.
Financing things that lose value
Cars, cameras, boats, RVs, you name it. Things that lose value the second you own them. When we take out a loan on a new car, we’re underwater the moment we drive it off the lot. If we need to sell it, the car is worth less than we still owe. So we’re paying interest for something that’s actively losing value every single day.
Reality Check
Again, there are strong forces pulling you towards debt, and there is also personal choice. Even with the odds and culture against us, we have dominion over our behavior. More money feels like the easy solution, but it’s usually more of a spending issue than an income shortage (though for many income is genuinely the issue). For most people buried in debt, the math is simple: you’re spending more than you’re earning. Making more won’t necessarily fix the problem until expectations realign with reality and behavior changes.
Debt is a prison
The borrower is slave to the lender. Every bit of debt you have is a piece of your future that someone else owns. Every monthly payment is money you can’t use for anything else because the bank has a rightful claim to it.
If you’re living paycheck to paycheck, just trying to make minimum payments, you’re not free. That credit card balance isn’t just sitting there, it’s growing, and every month you don’t pay it off completely, it gets bigger. The longer debt is ignored, the harder it becomes to escape.
How to get out
Getting out of debt requires three things: stop adding more debt, find money to throw at existing debt, and pick a debt-payoff method you’ll stick with.
When things feel tight, it feels impossible to find money. We will talk about reducing expenses and increasing income shortly. But let’s assume you will find some money to pay down your debt.
There are two popular methods for paying off debt: the avalanche method and the snowball method. List all your debts by the amount you owe and the interest rate on each one.
The avalanche method says pay off the highest interest debt first, regardless of the balance. Mathematically this saves you the most money because you’re eliminating the most expensive debt first. Throw every dollar at the highest rate while making minimum payments on everything else. Once that’s gone, move to the next highest rate.
The snowball method says pay off the smallest balance first, regardless of interest rate. Knock out the $1,000 credit card before tackling the $10,000 one, even if the big one has a higher interest rate. This costs you more in the long run (you’re paying more interest), but psychologically it can feel better. You feel quick wins as you see accounts disappear and momentum build.
The best method is the one you will stick to. Most people do a combination of both, getting quick wins to feel a psychological boost that motivates them to then pay off the higher interest rates.
Debt as a tool?
Most of this debt discussion has been about using borrowed money to finance too large of a lifestyle - this remains a hard stop red flag. Credit card debt is an emergency worth addressing immediately. Other debt can be used as a tool. I don’t know anyone who bought their first house all in cash. In reality debt gets more nuanced than just plain avoiding it forever. What about “good debts” like a mortgage? When is debt an urgent crisis and when is it just part of the game in our modern economy?
Some people strategically decide to take on and/or delay attacking debt based on the interest rate and alternate things they could put cash towards. If you have a mortgage with 4% interest and you think over an extremely long period of time you can average 7% investing in index funds, you may take that trade. If my student loans are at 6%, I may pay them off first instead of risking market timing for possible 7% gains. If you are young, entrepreneurial, and cash now could let you start a business or access an investment with great upside, maybe you decide to delay paying off the debt for a short period. If you are going to continue working the same job and you would just spend the extra money you didn’t throw at debt, you’d be better off attacking the debt.
Loans like mortgages can give you access to assets worth large multiples of the money you put in as a down payment. You may put down $10,000 on a $200,000 house and borrow the remaining $190,000. If the house grows 25% in value to $250,000, selling it and paying off the $190k loan would leave you with $60k. You have turned your $10k investment into $60k by borrowing money to “leverage” the cash you had. There are fees and interest that reduce the profit, but you get the point.
Debt-as-a-tool gets dangerous when you borrow to the point where a hiccup in your financial system - a lost job, a vacant rental, an unexpected large expense - can make the whole house of cards collapse as leverage (and margin trading) can work against you just as aggressively. In that same $10,000 down on a $200,000 house, if the home value drops 25% to $150,000, you still owe the full $190,000 that you borrowed. Any number of crises can put you in a position where you can’t pay the mortgage and are forced to sell. You would owe $40k after putting in just $10k! Leverage magnifies both your wins and losses, and is a major way smart people go broke by getting too big for their britches.
So when is debt an urgent crisis? Some people won’t rest with any debt no matter the interest rate, others think it is crazy to pay down cheap debt when you could use that same money to earn higher returns elsewhere. The point is it is all up to you and what helps you sleep at night. If you decide to take on debt strategically, tread lightly and maintain a healthy fear of the downfalls.
For me, anything borrowed over 7% is high interest and should be attacked mercilessly. Anything under the 4% can be attacked more slowly. Anything in between is up to you based on your goals, your alternatives, and your risk tolerance.
Emotion is much stronger than math, so everyone has to decide what is important to them. Some folks can’t rest well and won’t move on to investing until they have zero debt no matter what type, others are comfortable splitting money between debt payoff and investing.
Conclusion
Borrowing is to be done with fear and trembling. Sometimes it is necessary for big purchases, but it is not for floating a lifestyle you can’t afford. Credit card debt is an emergency. I am comfortable with borrowing for a reasonable house that is well under the limit of what the lenders qualify you for (they’ll push the limit). Only take out a car loan if necessary and for the minimum car necessary to meet the need. Don’t make decisions based on the monthly payment - lenders will extend the length of the loan to make the monthly payments lower - eventually they’ll push 50 year mortgages and 10 year car loans on us.
Debt can feel like helplessness, but people are able to get out from under it all the time through discipline and patience. The habits necessary to get out of debt create incredible momentum to swing the other direction into building financial flexibility.
Start today and throw whatever you can at the debt. Build momentum and celebrate the little wins along the way.
You can be free from this.