Most of the blogs I read about personal finance are extremely clear: the first step to become wealthy is to get rid of your debt. This is pretty obvious: in general, the debt is attached to a crazy interest rate. There’s no point in investing your money with a 7% average return, if you have a loan with a 16% interest rate.
Pretty straight forward, really. What still amazes me today, is how many people are in debt.
When I was a kid, and I heard about the concept of debt or loans, to me this sounded like a very bad thing. Banks, as far as I could tell, was a place where one put their money, not a place they would borrow money from. It was extremely weird to me that people would spend money they did not own.
Don’t get me wrong. It turns out I was probably extremely lucky, and that’s all. My parents provided for me whenever I needed money, and spending my childhood in France meant that my education was pretty much free. I didn’t have to take one of those crazy student loans, so frequent in the US. My expenses as a student were basically my tiny studio apartment and food. Again, I was lucky as my parents provided for that.
After graduating from engineering school, I worked for a year and a half. Despite not taking care at all of my finances, I ended up saving a significant amount, thanks to being naturally frugal. I then decided to quit my job and study some more. This time, the school cost money. I used all my savings to pay for it, and my parents, once again, helped with the rent and food.
So far, this sounds like the story of a spoiled child. I think at this point it is worth mentioning that I never owned a credit card (I only ever owned a debit card since I was 16 – that changed when I moved to Japan and was forced to get a credit card… I’ll probably explain that one day), and my car was older than me. I got it when my grandfather died, he himself had received it from my father when my family changed cars. Therefore I don’t think I’d classify myself as the typical spoiled kid, but I was blessed that my parents were able to provide for my education costs.
This new school had a pretty big fee (although nothing compared to the fees of university in the US), and most of my classmates had taken a loan. I remember naively thinking “why did these guys take a loan, and spend money they don’t have? Shouldn’t they have worked a few years in order to pay for this school?”. In hindsight, it was a very easy thing for me to think, since half of my costs were actually covered by my parents. I had it easy. Nevertheless, I was the only one in the classroom who had ever worked a full time job before. It felt backwards: I was the only one who had ever worked for money, despite being one of those who needed it the less in the group.
This was my first “real world” discovery that some people take on some debt to fulfill a goal. The concept of debt felt dirty to me, but in the long run, these classmates (some of whom have become lifelong friends) paid up their debt, and ended up in high paying jobs as expats in Japan. It turned out to be a good investment for most of them.
Nevertheless, I was debt free when I came to Japan, while most of them had up to $50’000 to pay back. Talk of a headstart!
The first time in my life I ever had to take a loan was when I bought a condo in Japan. It was a heavy loan (about $400’000), but the interest rates in Japan are so ridiculous that it didn’t feel like much risk. The interest rate on my loan was 0.9%. This is not a typo. Two years later, I ended up selling the condo as we moved to the US.
I took that loan because it felt like “everybody else was doing it, so it must be ok”. Today, I would think twice about it. I would still probably take the loan, but not because it what everybody else does. I’d take it because I now know that at 0.9%, it’s practically free money.
Today in the US, I rent. I have a credit card that I never used. I’m probably missing on some opportunities here, and it means I don’t have any credit history. So far, this hasn’t hurt me, but what do I know, I’ve been in the US for less than a year.
Looking back, I can say that debt has never been a problem for me, as I never really had any. The small drawback is that I am super afraid of credit cards, and never take advantages of them. The huge positive point however, is that I had a huge headstart to financial independence, compared to most people I know. I would not trade that for the “happiness” of using a credit card.
This debt free life was the result of luck, education, and personal bias. Luck to be born in France where education is pretty much free (with a few exceptions). Education, with my parents instilling in my childhood the idea that debt is a bad idea. Finally personal bias, as I have always been by nature fairly frugal, never believed in using money I don’t own, always felt awkward asking other people for money, decided to work and amass a bit of cash before I’d join a high fee school, etc…
Debt makes sense when you’re making an investment. If you invest for your future with a student loan, in many cases it probably makes sense. It sucks, but statistics show that it will pay for itself in the US. It probably also helps to take a loan for a reasonable amount of money on a house. However a debt on something that will instantly deprecate, such as taking a loan on a car for example, sounds like a very stupid idea.
It’s pretty much a given: you should get rid of your debt as soon as you possibly can
Are you debt free? Did you ever take on a loan that you regretted?