This article is part of our 52 week journey through Bill’s latest book, The Graduate’s Guide to Life and Money. Each week, a full excerpt from his book will be presented from beginning to end. To get your copy of his book, visit www.TheGraduatesGuide.com.
Okay, for those of you who are already over thirty (or almost there) this is still relevant, but just tack on about five years or so from your current age. For those of you under the age of twenty-five, including the recent grads, you really can be debt free by age thirty. It starts with plugging the leaks. Your first priority (after you get a job, place to stay and so on) is to manage your spending so you are spending no more than you earn.
If you are still single, this may actually be more difficult than you first imagined. You will be tempted to continue to live the college lifestyle… but with money. When you start meeting new people, or hanging out with old friends, you will be tempted to spend your money since it seems like you are just making so much. After all, spend about five hours out one Friday night with a group of friends and see if you can spend less than $50. Now, if you are paying for a date, you’ll be lucky to get away with spending less than $100 on a weekend night. I have also observed that when one or two people among a group of friends earn more than the others, they tend to subsidize their income-challenged friends. I am not against spending money for your friends, but just make sure you are not going into debt to do it. If you can manage to financially breakeven your first year after college, I’m not going to complain.
Once you get a year of spending (but not going into debt) under your belt, it is time to start thinking about your future. No, not your retirement in 40 years, I’m talking about your late twenties and early thirties. You know, when you will be getting married, taking a honeymoon, buying a home, purchasing a new car, and so on. Perhaps before I talk about how to get out of debt so quickly, I should explain why you would want to. It’s about choices. Our society is all about choices. Do you want the small, grande, or super size? Would you like cream or sugar? Tomatoes? White or wheat? Would you like a sunroof? I think you see where I am going. We like choices. Debt takes choices away from us. Let’s look at the following scenario:
You graduate from law school with $90,000 in student loans. You have just decided you no longer want to practice law, or you want to open a clinic to help the underprivileged. Guess what? You can’t. You see, that $90,000 is now hanging over your head. Having such a large debt has limited your choices. You now have to take a job that pays a higher salary, even if it is not doing what you want, because of your debt.
Here is another scenario:
You get a job that pays $60,000 per year (perhaps in an expensive area). You accumulate debt that costs about $700 per month ($300 car payment, $200 in student loans and $200 in credit card debt). You are bringing home over $3,000 per month, so even if rent is $1,000 per month you are doing okay. Now, let’s assume something in your life changes. Maybe you want to join the Peace Corps, or go on a mission trip, or perhaps move to a small town or change careers. Guess what? You can’t. You are now stuck because of all of that debt. Suddenly, your money controls you, instead of you controlling your money. You have just limited your choices by getting into debt.
Having debt simply eliminates many of your choices, or at least makes them more difficult to pursue. By paying off your debt early in life, you can open up so many new choices for yourself. In fact, one of the greatest things about not having any debt is that you can use all of that money to save towards a future goal, even if you do not yet have a goal. Perhaps when you are ready to get married you will be able to take a nice honeymoon or make a nice down payment on a house (a mortgage is still debt, but we will pay that off very quickly also). If nothing else, you could eventually have more money for your retirement, or perhaps you will even retire early. I know I enjoy looking for those cheap last minute travel fares (Nassau for $250 roundtrip or Belize for $299). If you do not have any debt, but you have been saving money each month, there is no telling what you could be doing with your life.
Using the strategy mentioned earlier in this chapter, you could really be debt free in less than five years. If you buy a home during that time, you could still be debt free by age thirty. Most people just assume they will always have a mortgage and a house payment, but that is just not true. Once you have paid off your home and your car (as well as all of your other debt), almost all of your paycheck will be “play money.” Besides taxes, utilities and a few other things, none of your dollars will already be accounted for.
Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit Debt & Ca$h and The Graduate’s Guide to Life and Money. Bill speaks at colleges to educate and entertain students about real-life issues in money, leadership, and success. His goal is to help students succeed personally and financially so they can improve the lives of those around them. You can learn more at www.ExtraCreditBook.comor www.TheGraduatesGuide.com.