We need to “re-learn” to hate debt.

Screen Shot 2013-09-03 at 8.13.21 AMThis isn’t your typical anti-debt rant. In fact, I hope it’s not a rant at all. Over the weekend I watched a Tedx talk (embedded below) that offered one of the freshest, most practical perspectives on borrowing I’ve ever heard:

When you borrow to buy anything that depreciates, you’re negotiating a paycut with your future self. The problem is, you’re not giving your future self a place at the negotiating table. So you’re saying to your future self “I choose to take some of your income to buy this thing I’ve decided is more important than anything you might need.”

I know the blog has been on a debt kick lately, and it’s not intentional. It just happens that debt is the story of the last several budgets I’ve reviewed.

Last week featured Mike on Monday and Amy on Friday. Mike was already throwing an extra 17% of his take-home income at his debt. I told him I thought he could ramp it up more, but at least he was accelerating things. Amy had buried herself in student loans, credit cards, back taxes and a car loan, but she’d created a five-year debt freedom plan and resolved never to borrow again.

In the next couple of weeks, you’ll see me feature three budgets where my major concern is the budgeters’ willingness to continue borrowing:

Jane and her husband, in spite of having (stressful) variable income, credit card debt, and a car loan, borrowed nearly $10,000 last year to increase their time-share credits.

Jenny and her husband Aaron, having run out of room on the credit cards, borrowed several thousand dollars against Aaron’s 401k to buy furniture for a new home (when they already had functional furniture in the old home).

Chase and his wife, Beth, have added $5,000 to their credit card balances since February. Were they borrowing to cover emergencies? No; the debt paid for a tropical vacation, braces, and a $600 per month restaurant habit.

I cringe to think about these families reading this and feeling judged or criticized. They didn’t share their budgets with me so I could trash them on the YNAB blog.

What they (and you) need to realize is that I’m not criticizing or judging – I’m simply observing the reality that none of these families hate debt. None of them have resolved to create more – not less – income for their future selves. And apparently none of them have fully acknowledged the financial, emotional, mental, and relationship consequences of borrowing.

We’ll work through each of these budgets individually, but their stories offer us all a reminder to take stock of the cost of borrowing to our current and future happiness. Many of us (me included) need to admit to ourselves that borrowing is almost always the result of an incorrect definition of “necessary.”

Take 14 minutes to watch this talk, and see if his comments change your mind about borrowing money:

36 Responses to “We need to “re-learn” to hate debt.”

  1. Jordan

    While some loans are frivolous I very much dislike the aversion to a simple car loan from a lot of financial advisers and blogs (Dave Ramsey is a big one). There needs to be more understanding and tolerance in the community if we wish to help people move towards financial freedom and a life without debt as sometimes debt is a necessary evil. I can understand the desire to avoid debt but for a lot of people that is NOT possible when it comes to transportation, at least when starting out. Now the size of the loan that is another issues but I really hate the condescension that comes after a person states that they have a car loan. I am sorry but what other options does that person have (if public transportation is not readily available)? Reliable transportation is a must if a person wants to keep their job and their income alive and this whole buying a POS car till you can save up to buy a newer one is just insulting. I have experienced and witnessed what a drain on resources a old crappy car can be and the stress that it can cause is far greater than paying a $200 a month car payment, and its even greater if the owner knows nothing about fixing cars mechanics get very expensive very quickly. Personally I have a car loan and after I pay it off I plan on making that same payment to my savings so I can afford to fix it if need be, or to buy a new one with as large of a down payment as possible in the future.

    • erin

      Hey Jordan, I hear you on this. I went through a similar thing years ago. I bought a car and financed it thinking that was the only option. At that time it really was my best option because I did need reliable transportation. Since then I’ve managed to turn that around and I now have enough money to buy a good second hand car when the times comes. How did I turn that corner? First, I changed my thinking and decided that I would make it a priority to pay for the next car with cash. I think this part is actually the hardest – convincing yourself that it’s possible. Nothing changed for me until this mindset changed.

      I take good care of my current vehicle and I actually save (via Rule Two) for the next car. I wasn’t able to save as much when I was still paying off the last car, but as soon as the payments were done, I put that money toward the new car.

      I also think that budgeting in general helped me focus on what was really important. It helped me cut back in areas that were less important so I could save in areas that mattered more to me.

      I think most people understand that car loans are pretty common and certainly not a big financial sin, but I think the main point of this post is that we need to learn to hate that mindset of accepting debt so easily as the only option, and strive for a different and better way.

      • Jordan

        I am not saying that a car loan is the only way all of the time, like I said after my car is paid off I will drive it into the ground and continue making the payments to myself so that when I do need a new car or another car I can pay as much cash (hopefully all) as possible. What I am referring to is the obvious demonization of car loans that people exhibit. For example, the last budget that was posted on here contained so many comments about selling her car and getting a cheaper “beater” when the current loan was small as was the payment. This raises so many concerns with getting to work due to mechanical failure it makes me sick. I’ve lived the nightmare of driving a car like that and staring at a $2,000 repair estimate on a car that is worth maybe $600, and let me tell you even today I would take another car loan over that stress of not knowing when your car will randomly shut off at stops and praying it turns on and stays on this time just this time.

        I did however find a way to make due with a single car for our family for the time being, but I know I will once again have to take out another car loan in the future. I just am trying to keep it small and pay off my current one asap so I can turn those payments into savings. I know that it is possible to buy a car without a loan and this is my goal and I for sure will shop around to find the best deal but if I must take out a loan for peace of mind I will not hesitate.

        This is just my opinion and I know that comments claiming that I am “clinging” to the mindset that debt is a way of life will follow, but whatever I have my feet on the ground and understand that sometimes debt is required to live and function. That sometimes your current needs cannot wait till you have enough of your Rule 2 savings.

      • Scott Bowles

        You can get a great, reliable car for $5000. Why not buy a nice used car with lower miles and let someone else take the new car price tag hit and not to mention value that drops like a rock on a new car. I have a 1995, 1998 and 1999 car. All are very reliable and I spend about $1000 per year on maintenance and repairs on all three put together. Much cheaper than a car payment. All the while putting money away for a “newer” car in the future. Maybe I’ll jump up to a 2007 someday.

      • archerzzmotovlogger

        My post has nothing to do with how much you can get a car nor anywhere did I say that only new were reliable and that you should only buy a new car. I simply point out the fact that the aversion to a loan is so great people refuse to see that sometimes someone literally cannot afford to buy a car for even something as cheap as $5000, and that maybe a $5000 car loan is their only option at the time.

        My point has been made over and over in this thread at how easy people misunderstand and misread “car loan” as “new car”. And all that follows are posts from people trying to be helpful but end up coming across as condescending saying things like this is what I can do and why not you, knowing NOTHING about the situation that the person is in.

        Beyond the initial loan your advice is the same as everyone else and is spot on for breaking the debt cycle but sometimes, someone may not have a choice. I merely want to open the eyes of some people on this blog to this fact that from what I can tell almost always missed.

    • DeAnna

      I totally agree with you on this topic 100%. Not every cities have great transportation system. Some cities are spread far apart from each others. A reliable transportation is a must. A car loan should not be looked upon with disdain and snottiness that I have witnessed here. I am one of those who thinks that if the car loan is less than 5% of your debt spending, go get a car and pay it off as fast as you can so you can relax and not worry about making it to school or work.

      Having zero debt does not help with your credit score at all. In fact, incurring no debt will harm your credit score. There is a reason why expert financial person will say to charge something small every now and then and pay it off the next month – it HELPS with your credit score.

      I, myself, have a car loan, no credit cards debt and a house loan and my credit score is in the “excellent” range. How did I get there? I paid off all of my credit cards debt (from college and 20’s) and got a house and paid off 3 car loans. It was a very hard work to get to the excellent rating and you still have to work at it to maintain it in that category. I have held that rating for 10 years now. Does having a car loan hurt my rating? No, it had helped to keep my rating at the high end of excellent. Do I like having debt? No! I sure don’t. However, I am not going to avoid having a car loan. I will not sacrifice having no debt for a safe and reliable car!

      • Lisa

        I would just like to comment that hubby and I have been debt free for one year, including the mortgage. I do a lot of online shopping and use a credit card for online purchases ONLY (and I use paypal when I can) and pay it off every month as soon as the bill is issued. All other debt (cars, etc) has been paid off for at least 3-4 years. In the last year, my credit score has bounced between 815-825. So, please, don’t let the idea of no debt harming your credit score hold you back from thinking you should still finance some things. If you have been responsible with your debt to date, you may not see a downward change. And now my plan is to never need that credit score again anyway… :)

    • Jodie

      I completely agree! Saving up doesn’t always allow someone to buy a car outright, and so a car loan is the only option. That person probably doesn’t WANT to acquire more debt but while trying to get to a debt-free stable part of life, sometimes you have to take on more.

    • Brian Mangan

      “Safe and reliable” doesn’t have to mean new when it comes to a car. And a new car doesn’t mean no expensive repairs. And both a used and new car will require frequent maintenance that can be costly.

      The point is that transportation is expensive no matter which way you go. And I believe what the video and as well as YNAB’s rule #2 is trying to do is to help you think of the hidden cost of debt and plan in such a way so that you control your financial destiny.

      It’s easy to feel the pain of paying for a car repair. The mechanic want’s his $300 right then. But paying $1200 in interest on a new car loan in a year can feel painless, because you don’t see it. Even though the interest on the loan cost you over four times as much as the car repair.

      The point I took away form the video is that when considering debt, make sure you understand the full cost of the debt. Don’t allow the bank to tell you how much you can borrow, because their job is to get you to borrow as much as possible. And don’t just focus on the monthly payment — because if you pay that payment out for 6, 7 or even 10 years, you may be in a car that is no longer reliable and yet trapped in monthly payments.

      The truth is I make a monthly car payment every month. It’s just that I no longer make it to a bank or credit union.

      The last time I borrowed money for a car, I decided in advance what I wanted for a monthly payment and that I was only going to pay that for 36 months (3 years). I knew how much I could make in my down payment and had a good estimate on the trade-in value of my current car. I also did some shopping around for interest rates and went ahead and got pre-approved for a loan at my credit union (which offered the best rate) so I also knew what my interest rate was going to be. So with all that pre-work and information in hand, I knew exactly the price of the used vehicle I was looking for.

      It took me a couple of weeks to find that vehicle at that price, but I did. But I didn’t stop there. After the 3 years was up on the loan, I continued to pay myself (and not the credit union now) the monthly car payment. This was earmarked in my budget for major repairs or car replacement (YNAB Rule #2). I knew that as the car aged, it was going to need a new timing belt (a regularly scheduled maintenance item that costs about $900) and eventually I would need to replace it.

      Since that time, I have purchased three reliable used cars and have had cash to negotiate the price. A very effective tool to get you the best deal. And when I have needed a mechanic, I have had the cash to pay him as well.

      And so I can agree that a monthly car payment is a necessary thing. It’s just that if you plan ahead, you can pay it to yourself instead of to the bank.

      • Jordan

        That’s what my plan is: “Personally I have a car loan and after I pay it off I plan on making that same payment to my savings so I can afford to fix it if need be, or to buy a new one with as large of a down payment as possible in the future.”

        I also never said reliable meant “new”. Personally, unless I have cash I would never buy a new car. My main objection is the attitude conveyed in many of the posts and the comments regarding these type of loans; especially considering the fact that no one knowing what the situation the person was in that led to them.

        I agree 100% with your process on buying with a loan, I went in for my car got the car I wanted at the monthly payment I wanted and could afford (which I knew before going to the dealer).

      • Lisa

        Agreed on the “safe and reliable” part. I have a 10 year old minivan with 240k miles on it. I have kept it well-maintained over the years and I have no qualms about shuttling my family around in it for fear that it will leave me stranded somewhere. At 192k miles, it needed a new transmission for $3500. I did it. People thought I was nuts to do this on a car with 192k miles. I looked at it as $3500 = about 9 months of car payments, and I believed that the van would last at least another 9 months. My goal was to give it another 50k miles. I’m approaching that now. We joke with our 14 yr old that this van will be theirs when they start to drive in 2years! :)

      • kjvonly

        I agree as well. I bought a 1999 Ford Taurus in 2007. Paid it off 18 months later and owned it free and clear for 4.5 years. Every day I drove that was better than driving a newer, “better” car with car payments. I wasn’t savvy enough to save up the payments toward the next car but was able to put almost half down on the next car when the Taurus was totaled.

        Also, not to be a DR apologist but his plan is not to buy a beater, drive the wheels off it then buy another beater, always endangering your safety for the sake of saving money. He encourages “trading up” every couple years by fully paying off the first car, saving up the payments then using the first car’s value and savings to fully purchase another car. You can keep doing this and drive a “new” car every couple years and never have a payment again!

      • Linda

        Agreed. That’s how my dad did it. The last car he bought was the demo instead of new. And with the money left over, he bought my mom a 2yr old corolla that was in the dealer’s underground lot. They had a few older models that did not sell. This one was a lease traded in as the manufacturer changed the style and the owner wanted the new one…they owner leased…AGAIN.

      • danelady

        While I agree that “young” used cars can be just as safe and reliable, I think there can be certain advantages to buying new. Our (quite reasonably-priced) car came with a dealer perk that means every other scheduled service is free. This has actually saved us quite a bit over time, and it’s something we wouldn’t get with a used car….one that we still would have had to finance because at the time we bought the car we simply didn’t have cash on hand. Not saying it’s the right answer for everyone, but it definitely helped us out.

      • danelady

        Can’t edit, so also: We got our car on a 0% interest loan, which seems to be a common gimmick at the dealers around here…sure, they’re trying to sucker you into a car you probably don’t really need, but if you use it to your advantage, it’s pretty nice knowing we’re paying no more than the price of the car.

    • softwaremonkey

      I think his closing statement is key, “maybe you should consider that you shouldn’t be looking at a $35,000 car yet”. Basically, we Americans have simply habituated living beyond our means by treating everything as a “payment” (with future dollars) instead of a “purchase” (with today’s dollars).

  2. Susan C.

    About car loans, although I’ve been lucky enough to avoid them: I think what is a problem with many people is that they take on unnecessary loaded options, pay the note, and then when the note is done, they trade in the car, only to repeat the entire process. Why not just drive the car into the ground; certainly it could last a good ten years with proper maintenance. I bought a 2003 Saturn in August 2002 with cash. My intention was to have that car for 15 years. Despite having flood repair in July 2003 to the tune of $6800 (insurance covered it), I still properly maintained the car, and kept full insurance on it. The car was totaled by a cell phone texting driver running a red light in September 2011. I got $6200 for it from the insurance copy. I guess not bad for a 9 year old car. As a part of inheritance, I was able to get the father’s 2007 Malibu, in July 2012. Had about 11,000 miles on it. It now has just over 16,000 miles on it. I get calls from the Chevy dealer several times a year saying, “Your car has only 16,000 miles on it; would you consider trading it in for a newer one.” I tell them, “I’m not interested; I don’t like car payments and will drive this car into the ground.”

    As for restaurant purchases and buying furniture on credit when the original is still largely functional, I would say folks in this category like to impress their neighbors with new stuff. I watched a Dateline show at a friend’s place (I don’t own a TV) recently about a home foreclosure spotlighting one California couple. He made $160K/year. So, the home shot up in perceived value to 800K. And, obviously they were using that so-called perceived equity as an ATM machine: buying ATVs, mobile home campers, big screen TVs, etc. Of course, the kids went to public school, too. No money out of their pockets there. You know the rest of the story – “values” plummeted, they lost their jobs, and are now living in a one bedroom rented apartment. You can’t afford all that stuff on $160K/year. Am I supposed to feel sorry for these people?

  3. Sunflower

    Interesting talk, debt is different to loans. Debt is when a loan becomes unmanageable. Credit cards are fine as long as the money has been budgeted for in advance and its simply a vehicle for payment. I have huge admiration for those people who have agreed to allow their budgets to be put under the microscope – they have taken the first step by asking someone else to review their finances. Well done.

    • pronoya

      Um…”debt” is an obligation owed from one party to another – a creditor. The obligation is the amount borrowed PLUS a fee, in the form of interest.

      Whether a loan payment is manageable or not, it’s still debt, right?

      My aversion to debt was low until I started on YNAB. Now I actually “see” how much my $193,000+ in unsecured debt is costing me.


  4. Jessica

    This is awesome! As a college student who has made it through thus far loan and debt-free, this is a great reminder to stay that way!! Instant gratification isn’t really worth it in the long run.

  5. Mark

    This was a great post and video. I have had lots of debt in the past and am waking up to the reality of what it costs me now. A few months ago I added up how much I was paying per month in interest across all of my various payments. It was astounding!! I was paying far more than I ever realized, it just added up slowly. Now, I’m taking drastic measures and am cutting back on everything. Feels good.

  6. Kay

    As I hear in a lot of rooms I hang out in — you can’t get out of debt by taking on more debt.

    Thanks for this post.

  7. Lissa

    “Borrowing money is negotiating a pay cut with your future self.” I love that line. You just never know how circumstances will change & whether you will be able to afford those payments down the road, and by the time you get to the end of the payoff period, it’s unlikely that you’ll still love whatever it is your former self had to borrow in order to have! On the contrary, if you have to save up for it & pay cash, most people will do the homework that Brian describes above & therefore have a better chance of still loving whatever it is come 3, 5, 7 years down the road.

    My husband & I set a guideline for ourselves when our cars were going on 10 years old & we started to get the new car itch. We decided that when the average cost of repairs on our current vehicles over the previous 5 years totaled more than $3500 (what we figured our car payments would be to obtain a reliable new/er/ car would be,) then we had our own permission to trade up. If we’d gone out & replaced them at 10 years, we’d have purchased 3 cars since then, which probably would have meant borrowing some money for the most recent one. Instead, we have only traded up once, and by choosing one for the Consumer Reports rating of Reliability over what we think looks cool, factoring in the size of vehicle we need for our lifestyle, we never have issues associated with driving an older, “beater” car. Affordable is not necessarily synonymous with “unreliable!!”

    Oh, and even without having had any car loans in the last 18+ years for my husband or ever for me, our credit is rated “excellent!” We do keep credit cards for the good payment history they add to our credit report, but with another guideline that if we are ever unable to pay the balance off in full, we will immediately cut them up & never go back. We only spend on the cards what YNAB says we have in the budget! It is completely a myth that you have to pay interest to have excellent credit. If debt weren’t so accepted & commonplace, you wouldn’t see the tragedy of people paying over 50% of income to pay down debts. I don’t see that as a failure of the individual, but of our society that has both downplayed the importance of healthy financial education early in life and simultaneously incorporated taking on debt as a milestone of early adulthood! Let’s relearn hating debt and start talking more about money with the next generation so they will too!

  8. Christine

    I liked the video, and I agree with him. While I understand those who insist that car loans are OK, his point is that any debt for a depreciable asset is not a good idea and you should try to avoid it. A new car loses value the second it leaves the dealer. So you pay a premium for a brand new car, and if you are taking out a 5 or 7 year loan with interest, you’re paying even more for a car that loses value very quickly. The real issue comes in when something goes wrong (i.e. lose a job, get a divorce, etc.) and you find yourself not able to keep up with payments, but also find that you can’t afford to sell the car, because it’s worth less than what you owe. I watched this happen to an acquaintance and it really sucked.

    Moral of the story – if having a car is part of your life (i.e. you don’t have an alternative), then try to save as much as possible so you aren’t borrowing too much for something that will quickly lose its value.

    I totally get not wanting a beater (I did that, and it wasn’t worth it), but consider getting a barely used car – there are a ton of 1-2 year old models that don’t have many miles, but are cheaper than new. Pay it off as quickly as possible, and then keep banking that monthly payment away to cover the cost of repairs and/or the next car.

  9. cmm

    There is a lot of room between a 1-2 year old car and a beater. A five year old car that is well maintained will mean you take out a loan for half of what that 1-2 year old car cost you. You can use the payment difference to first, set up an emergency fund for car repairs, and secondly, to start saving for the next car. Its possible that the next car will require a loan as well, but you’ll have saved enough that the next car loan for the same sort of five year old car will be less than half the size of the last one, the next car you can buy for cash. Cars drive for ten or fifteen years, pretty easily, if they are cared for. Find one from someone who recently died or moved into a nursing home if you can – older people don’t tend to drive much and do tend to do regular maintenance on their cars. When you can buy that 1-2 year old car for cash, its a deal, until then, buy the cheapest car that will work for you and won’t need to be rebuilt in year one – that’s usually five or six years old – not 1 -2.

  10. Minda

    I wish our cities weren’t built so car dependent. I’d love to ditch one of our cars. I know some cities are getting better but not mine unfortunately. The first bus in my town wouldn’t get me to work on time and there are few bike lanes and paths. If fewer people considered car’s a necessity it would really help with our countries debt addiction.

    • Micro

      I feel the same way. I would love to be able to use public transportation to go to work even if it took me a little longer. I might spend more time during the commute but I can use that time to read books. Instead I get to deal with staring at cars for a good chunk of my day.

  11. chosenbyjesus

    I drive because my city’s public transportation is a little ridiculous, unless you live fairly close to a train line that goes downtown, and you work downtown. 1 way commute for me would be 1.5 hours. I can drive it in 25 mins. I might not be saving money (considering a parking pass is the same as a bus pass in a month) but I am saving a lot of time, and sanity!

    I was also able to get a $23,000 car NEW for $5500 used at 4 years old. At the car auction. A little high on the kms though, but not too bad (25k kms per year). My parents loaned me the money so I’m good there. That was 3 years ago. I have one more year to pay on the car, then I will start paying myself for the next one. (other debts are priority so I plan to only save my current payment)

  12. Bean52

    I wonder how many of the audience in the TED video actually went home and did something about their finances. You could just hear that awkward, uncomfortable silence the moment the speaker said he was going to talk about ‘debt’, and then the embarrassed groans when he went on to credit cards.

  13. Ellen Keim

    I’d like to get off the topic of car loans, if I may. My question has to do going into debt for necessities when you don’t have your buffer yet and hardly any emergency savings. I recently had to have three teeth pulled and the thermostat went out on the only car we own. We have dental insurance but it only pays $1200 a year and now I have to have dental implants, which I’m putting off because of the money. I know you can’t tell much without seeing our total budget but trust me, our financial situation is tight and our expenses aren’t out of line.

    I know part of the answer is to bring in more income, and I’m working on that. But for now we really have no choice but to rely on credit cards. How do I keep from feeling like a failure and what things can I do optimize our finances in the meantime?

    • KJUU

      I know my answer isn’t for everyone, but this is how I’ve had to roll.

      I have had teeth pulled in the last few years, and we’ve been very limited on income. I have yet to replace them. I’m probably losing out on the “pretty” options, and I’m not exactly sure about what I will be able to do (dental appointment at the end of this month, finally). But it is what it is, and sure, implants would have been nice, but I did not have the money and debting is the wrong choice for me. Period. So we’ll see what can be done when the time comes and save up for any procedures.

      Several years ago my car’s engine blew and we had zero money to do anything about it. So I was car-less for four months, until I saved up enough for a downpayment on a used one. I did that with money from the paper route we had *just* started prior to losing the car. I walked and biked that route all summer (bless you, small town living). We got the car about a week before the snow flew (thank goodness).

      Again, not the answer for everyone, but I did not go into unsecured debt over these problems. There are always options, it’s just that some of them we don’t want to hear and society doesn’t “like”. Our choice, though.

  14. Wendy

    I find it strange that most of the comments are focussed on the example of the car loan, instead of the gist of the presentation, that all debt is readily accepted, and lets face it that is how banks make their money and can pass on dividends to share holders. But just because a bank or financial institution can lend you money doesnt always mean you should take it (or all that they offer). When I went for a home loan to buy my first house, I went through a mortgage broker to get the best deal and see what I could afford to borrow, most banks said I could borrow $320,000 without a problem, but when I did the maths myself the payments were crazy, and thats when I learnt – people lending the money do an affordability on your gross income, I however did all my calculations on my nett income. In the end I requested a $250,000 loan approval. I managed to negotiate on a property and got down to $242,000 and it felt great not to use the entire loan amount. And thats not to say I havent succumbed to the lovely letters offering to increase my credit card limit because I am pretty good at paying of my card regularly, still working on saying no more often to them.

    • Jodie

      I didn’t go through a mortgage broker but when I was house shopping I got pre-approved for a ridiculous amount at the bank–something I knew was way out of my comfort zone. I asked the woman how much it worked out to for $X per month, including average taxes in my neighborhood and insurance escrow, and that’s what I went looking for. The house I bought was around $50K less than what they told me I could afford, but I can easily make the monthly payment.

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