Recently, Ben — a nice-looking fellow who works on an oil rig in the Gulf of Mexico — wrote a detailed story about how he and his wife repaid $90,000 in debt. Their debt didn’t include a mortgage: it consisted of car loans, credit card balances, student loans, and a $10,000 bank loan to pay for their wedding.
Ben’s story included a powerful sentence, which he uttered the day he tallied his debts:
I knew we owed some money, but I assumed this was a normal part of living in the “real world”!
He goes on:
Everybody has car loans, everyone has credit card debt, everyone has student loans, but it wasn’t until I added all these balances up that I knew we had a problem.
Not to harp on Ben — he’s done a great job cleaning up his finances! — but I hear his premise repeated enough that it’s time to put an end to it. Let me be clear:
This mentality — the “everyone has debt” mentality — is dangerous.
There’s an idea that it’s okay to carry debt because everyone else is doing the same. I call this the “normalization” of debt.
Trent Hamm, author of The Simple Dollar, describes this same experience when he spiraled into $20,000 of debt:
We had a gorgeous dining table, but it was stacked full of credit card bills.
Like Ben, he also made a respectable income but spent more than he earned because he believed it was “normal” to do so.
The Normalization of Debt
I’d love to be able to tell you that this normalization is a myth; carrying debt is abnormal. Unfortunately, the statistics say otherwise: the average American household carries $10,700 in credit card debt, according to CNN Money.
This actual figure is in question: WIS-TV in South Carolina says the average household credit-card debt is around $15,000, while television personality Clark Howard cites the average personal debt as $24,775 for residents of the 20 largest U.S. cities.
On the other hand, 46 percent of Americans say they’re suffering from debt-related stress, according to USA Today — which means the majority, 53 percent, are not. (That doesn’t mean they’re not in debt, however: it just means they’re not stressed about it, either because they have a plan in place for dealing with it or because they’re not paying attention!)
The Cost of Missed Opportunity
But just because everyone seems to have personal debt doesn’t make it any less atrocious.
Imagine that you have a credit-card balance of $10,000 (by all accounts, less than the average U.S. household) and an interest rate of a meager 10 percent (good luck finding that rate on a credit card!)
With payments of $200 per month, you’ll need 65 months — almost 5 and a half years — to pay it away. Worse yet, you’ll cough up over $2,990 in interest.
Now, let’s imagine you have $0 debt. You save that same $200 per month in a Roth IRA retirement account, which you invest in a mix of 70 percent stocks and 30 percent bonds. After 5 years, if the market performs on average, you’ll have $16,000.
The debt in the first scenario costs you more than a mere $12,990 (the balance plus interest). Your $10,000 debt costs you $16,000 in lost opportunity.
Look at it another way: for every dollar you spend, you pay $1.60 in missed opportunity. For every $10 you spend, you’re really spending $16.
Who Cares If It’s Normal? Is it Good?
The question people should be asking themselves isn’t “Is it normal to have this debt” but rather, “Is it good to have this debt?”
Sometimes the answer is yes. If you have no way of going to college other than carrying student loans, there’s a chance that those loans will be good debt for you to carry. The average college graduate earns $1 million more than the average person with a high school diploma over the span of his/her lifetime.
That statistic, of course, is skewed upwards by college grads in high-paying professions like neurosurgeons and chemical engineers.
Let’s use some conservative assumptions: you earn half of the average that most college grads get. This means you earn an extra $500,000 over the span of your lifetime as compared to a high-school grad.
Over the span of a 45-year career, that means you earn an extra $11,111 per year, as compared to a high-school grad. That’s like the high-school grad making $30,000 while you make $41,111. It’s reasonable.
Let’s also assume you paid $50,000 in student loans and interest. For every $1 you borrow and invest in your college education, you’ll earn $10. In this case, debt can be a good thing.
But when buying consumer items — like a car or a wedding — the answer to “Is it good?” is almost universally a resounding “no!”
You and your soulmate will be together forever regardless of whether or not you have a gorgeous wedding. You can just as safely leave the house in an 8-year-old car or a brand-new car.
Unfortunately, most people haven’t figured this out, which is why you should stop listening to most people.
Reject the normalization of debt: focus on making good choices, not common ones.