5 Lessons on Debt You Won’t Learn in School

​In the opening scene of the Netflix original series, Ozark (S1, Ep1), Jason Bateman talks about money. My favorite part of his monologue is where he says, “...money, at its essence, is a measure of a man’s choices.”

Had I heard this 4 years ago, I would have thought that statement was bananas. But after paying off my debt, making it through a 100-day spending ban, and saving up a substantial emergency fund that saved my ass when I lost my job, it really dawned on me that money - when used properly - is a tool that offers up opportunities for you to make more choices in life.

When we misuse money - and go into too much debt - we take away opportunities/choices. 

Savings = Opportunities/Choices

Debt = Obligations

How much personal debt does the average American have?

According to the New York Federal Reserve, overall US consumer household debt was reported to be around 13 trillion in the 3rd quarter of 2019. This amount is spread out among housing, student loan, medical, auto and credit card debt.

Here’s something to think about...most of the debt we get ourselves into (housing, auto, credit cards, and student loans) can be planned, minimized, or even avoided altogether with the right research, planning, and patience. Medical bills usually can’t be avoided.

This means, we made the choice to put ourselves into debt in the first place.

Debt = Opt-in slavery

In the age of consumerism, we are taught to be buyers instead of savers, check writers instead of investors; we are not taught to use money as a tool to create choices for our future.

Instead we are inadvertently taught to use money to create an illusion of wealth; a means to support our emotional habits; a way to support a lifestyle we think others would approve of. 

Just sit and watch television ads for 5 minutes and tell me I’m wrong.

It’s hard for me to say what schools are teaching children about money and debt today, I’m obviously far removed from what children are learning, but I do remember what I was taught (definitely not this stuff). 

And college finance did not teach the day-to day important personal finance and investing points one needs to survive the daily grind.

So I’ve put together five lessons about debt that I had ​learned the hard way. It wasn't easy, I'm still learning. But these came long after paying off my debt, making it through a 100-day spending ban and losing a job. I realize that managing money properly is a constant thing.

1.  ​Debt can keep you tied to a job you hate

Too much debt keeps you tied to a job you hate.

Things start out simple. A long time ago, you only needed the small stuff to be happy - food, clothing, shelter, and a new CD every now and then (yeah, that was a long time ago).

But then came the car, the credit cards, the better job, better clothes. Soon enough we were comfortable with our job and comfortable with our debt.

But wait a minute, more debt means more reliance on our current employer.

Don’t let your debt own you; debt = missed opportunities to find other jobs easily

What if you hate your job? What if you can’t rely on that employer to keep you for as long as you need to pay off that debt?

Many companies are still downsizing and it’s rare to find a full-time job that you can rely on to employ you for the next 10, 20, 30 years. In fact, most people only stay at a job for an average of 5 years. Yet, the average car loan is 7 years.

It’s not hard to jump to another job while you’re still in debt, it’s just riskier and more difficult to find a good paying job in certain industries. Even if you’re highly skilled and well educated.

In my industry it’s very hard to do. In fact, I was super lucky to get 10 years; most contracts only last 6-months to 2 years.

If you have a lot of debt, and you’re like most people, you’re either:

  • Worried you might lose your job in the next few years but hope you don’t because you have debt you still need to pay off
  • You hate your job and wish you could move to a better one but can’t because you have too much debt.

Advice: Start paying off your debt - the long term plan is so you no longer have to rely on an employer to be there for you.

2. Having debt costs ​extra money

You read that right. Being in debt actually costs you ​more money in the form of interest and extra taxes.

You pay extra to be in debt. That's missed opportunity to save money.

If you carry over a balance on your credit card each month, you’ll pay interest on that balance.

The average credit card interest rate is 19% and the average credit card balance is about $6000, according to Experian. This means, if you carry a balance of $6000 each month, you’re going to be charged about an extra $90 a month in interest charges.

And if you think you were smart by leasing a car (like I was in 2014 - *sigh*), think again. With a car lease, you’re paying an interest rate that the dealer doesn’t have to disclose, so in the end you’re always paying more with nothing to show for it.

If you financed your car loan with a 7-year deal just so you can manage the payments, you’re spending more on the car than you would with a 4-year loan (obviously). But the dealership may have tacked on a higher interest rate in order to give you the 7-year deal.

And depending where your credit score is, you may be paying more in interest rates just for having a low credit score.

And since we’re talking about financing cars, let’s not forget the sales taxes you pay to the state in which you purchased that vehicle, as well as registration and license fees if you purchased from a dealer (if applicable to that state).

Advice: There’s nothing wrong with planning, saving and driving a perfectly good used car. No one needs automobile debt!

You need more of your taxable income to pay debt

Here’s another thing that blew my mind - and it didn’t dawn on me until I got debt free.

Since you need the money coming in from your job to pay off debt, you can’t put that money away into a tax-advantaged (pre-tax) savings like a Traditional IRA; employer-sponsored 401k or 403b; or an HSA account; thus reducing your taxable income.

In essence, you’re paying more in taxes because you need to keep that money to pay off debt.

So you end up paying more taxes to the government throughout the year because you need the money for debt. I bet the fed is happy to know that.

Depending on where you fall on that year’s tax bracket, keeping that money as taxable income could put you into the next bracket - as it did for me with my old job.

As soon as I paid off my debt, I shoveled as much as I could into my 401k and an HSA. I reduced my taxable income by $11,000 that first year.

3. There's less money for savings & retirement

​Debt steals the money that could go into your savings and retirement. So that again means debt equals more missed opportunities to save money.

Along the same lines as #2, if all your money is going toward paying off debt then you’re not able to put money way into an emergency fund or retirement account.

I can attest that an emergency account is the second most important thing for your household, the first is being debt free.

Or have the least amount of debt to where you don’t have to rely on an a job to be there for you. Not all debt is bad. If your debt outweighs your savings then it’s bad. Get on a plan to turn that to where savings outweighs your debt obligations.

If you don’t know where your money is going or how much debt you have, it’s time to get on a budget

If you’re looking for a budget app, I suggest you start with YNAB. I’ve tried a ton of different apps, including doing my own Excel sheet, and I still ended up going with YNAB because they were the most intuitive and helpful. (affiliate link)

You need a budget

Advice: Use a budget to get expenses and income categories in order so you can start paying off debt. Once your debt is manageable/paid off you can start to save money into an emergency fund and/or retirement.

Paying off debt vs. just paying debt each month to survive are two different things. One is paying debt with a plan to get out of it - this gets you out of a hole. The other is paying debt as a part of life - this keeps you in a hole forever.

4. ​It keeps you from owning assets

For every debt you owe, you won't own an asset. That means someone, or some entity owns you through that debt.

The bank owns you; the car owns you; your job owns you; the debt owns you.

A lot of people talk about credit scores but in the long-run, what’s more important really is your net worth.

If you have more debt (liabilities) than assets then you have a negative net worth. 

Do you know your net worth?

If you haven’t already, keep track of everything you owe and everything you own to manage your net worth. You can use a free tool like Personal Capital to track it all for you (affiliate link).

Personal Capital

As you pay off your debt and put money toward savings, you can watch your net worth number go from negative to positive. It took mine a year after I paid off my debt to reach positive numbers.

Why is a positive net worth important?

A positive net worth means your assets exceed your liabilities, this will reflect positively on your credit score and as I implied in the beginning of this article (and throughout the post) the more money you have (assets in this case), the more choices/opportunities you’ll have.

5. Damages ​your credit score

​Too much debt can hurt your credit score.

While having a variety of debt (loans, mortgages, credit cards) on your report can be good for your credit score, too much of one debt can be detrimental to your score.

This is especially true if you have maxed out all of your credit cards, have late payments on record, and have multiple inquiries on your report.

According to myfico.com, your overall credit score is calculated using these 5 categories:

  • Amounts owed
  • Payment history
  • Length of credit history
  • Credit mix
  • New credit
Credit utilization and whether you pay on time are the biggest factors of calculating your score (30% and 35% respectively).

Advice: If you have high credit card debt stop using your credit cards and maximize your payments until you can pay them off. But don’t close your credit cards. Your goal is to pay on time and get your debt paid down as soon as possible.

Bottom Line...

No matter what you were taught in school about money and debt, life will teach you how it really works.

Money is just a tool - use it to increase your chance for opportunities. Not all debt is bad, but when your debt is more than your savings, your obligations will outweigh your choices. You’ll have to rely more on an employer and hope the economy and job market can support you, and worry about catching up with savings and retirement later. 

There’s substantially more worry and obligation in your life than there are choices when you have a lot of debt, you can feel it. When you start paying off debt and are able to save money, you can start to see the choices coalesce in front of you.

Even Though it’s a concept that can’t be understood fully until you do it, it’s something that should be taught early in school. But better late than never.

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I’ve been writing for clients professionally since 2017. I started this blog and freelance writing as a side-hustle in 2015, the same time I started my debt-payoff journey (that ended in 2018, with around $65,000 in my rear-view mirror!). In late 2019, after finally saving up a modest emergency fund, I quit my job of 10 years. Now, I write full-time as a freelancer writer Let's talk about working together!