Debt Slave

One of the most important and critical parts of Financial Judo is to limit the amount of debt you have.

A person that chooses to spend more than they earn will inherit a lifetime of unhappiness, stress and anxiety. A person that chooses to spend less than they earn will inherit a lifetime of abundance, confidence and peace of mind.

The simple fact is that our entire economic system is based on debt and the accumulation of more debt. Think about how easy it is to get into debt. Let's say you want to to buy a new Plasma TV that costs $1,999. After we include 7% sales tax, your total bill is $2,139. No problem though, you just whip out your trusty credit card and put it all on there. Think about that, you want to spend $2,000 on something and you can borrow and spend 100% of that money instantaneously!

Now, the tricky part is paying it back. You have to pay back every penny plus interest (lets say you put this on your credit card at 15% interest). If you pay $100/month to your credit card, the debt will be paid off in 25 months. The total amount you have now spent including interest charges has increased to $2,500.

Hold on! It gets worse. You have to earn the money to pay that debt! You can't just go and earn $2,500 and pay that money back, you have to pay taxes on your income! So, in order to pay that $2,500 back, you have to pay 7.5% in FICA taxes (Social Security and Medicare), and I will assume 15% for Federal Taxes and 3% for state taxes.

All of a sudden, this $1,999 TV is going to require you to earn $3,400 in income in order to pay it off! If you're in a high tax bracket or a high tax state (like California), that number is even higher! In this case, you would pay a 70% premium on this TV when everything is factored in.

Realizing the true costs of these items will make you think twice before slapping down that plastic or filling out another credit application.

The system is set up to allow you to fall easily into debt - to voluntarily place yourself in debt bondage for some short term benefit that harms your long term options. Think about those kids graduating from college with $10,000 in credit card debt and $50,000 in student loans. They have a weight around their necks which will last most of their adult working lives as they struggle to make those payments while paying all the other bills. I sure hope that spring break in Daytona Beach was worth it, because they'll be paying for it for years and years to come!

The other day an aquantance of mine was discussing looking at colleges with her teenage daughter. They went to an Ivy League school (I think it was Vasser) and were informed that the total cost of a 4 year education was $250,000! Are you F***ing kidding me? That's a mortgage! What's the cost benefit analysis on that? Even if she gets a job paying $100,000/year (which we all know there are millions of in this country - sarcasm off), a student loan with a 30 year term and a 7% interest rate, that child will commit herself to paying $20,000/year in loan payments just for her education! You add in the taxes she'll have to pay on a $100,000/year job and she'll be paying 1/2 her income on these two items and we haven't included anything like paying rent, making a car payment, buying food, insurance - anything!

This is what a debt slave is. A lifetime of servitude to her bank and her employer (god help her if she becomes unemployed or can only find a job at Starbucks after she graduates).

Freedom is having choices. The more debt you have, the less freedom you have. The less freedom you have, the more of a slave you are!

Don't be a debt slave! Limit the amount of debt you have at all costs! I will talk about strategies for getting yourself out of debt in future posts.

Thanks for reading!