The Best Strategies To Get Out Of Debt And Become Happier In The Process

Out of debt with not a care in the worldI graduated from business school in 2006 with roughly $55,000 in student loans. Although $55,000 is a lot to pay off, I was already a “debt veteran” by then. What’s another $55,000 in student loans when I was already leveraged over $1 million dollars to buy my first properties in 2003 and early 2005?

I didn’t need to take out student loans, but I decided to conduct some financial arbitrage. The maximum amount one could borrow through a Stafford Loan at the time was $18,500 a school year at an interest rate of 2.75%-4%. I took out the maximum amount at the beginning of each school year to pay for tuition while I received 100% tuition and books reimbursement at the end of each year from my company to reinvest in the markets. 2003-2006 was a time of recovery in the financial markets and I figured I could beat a 2.75%-4% annual return.

Even though the financial services industry was going through retrenchment during the time I attended business school, the S&P 500 was doing quite well (2003 +28%, 2004 +11%, 2005 +5%, 2006 +16%). Even long term CDs were yielding roughly 4% risk-free. The extra $18,500 invested in the stock markets each year did end up growing faster than the cost of debt until a year after I graduated.

I was feeling proud of myself for the financial arbitrage until the 2008-2009 massacre hit. Originally, I was planning to continue holding on to my 2.75% consolidated loans to reinvest in the market. But when the markets got rocked, the loans started feeling like a burden instead of a gift so I wrote a check and paid everything off instead. I was overly focused on making an extra $3,000-$10,000 a year on my arbitrage rather than focus on the big picture of my overall net worth. It feels better to have less debt during times of crisis, however in retrospect, it would been better to lever up even more to buy more stocks!

Debt is the opposite of generating passive income for financial independence. Debtors are helping make someone else’s financial goals a reality while digging themselves further down a dark hole. The only type of debt I like is primary mortgage debt given there’s a good chance the underlying property will appreciate in value over a long enough period and you’ve got to live somewhere. There’s never a financial return for renting. Furthermore, the tax benefits of mortgage debt under $1.1 million dollars is also a nice bonus to have.

In this article I’d like to provide a debt framework that will help you get motivated to get out of debt. But first let’s understand the why.

WHY WE GET INTO DEBT

The Reality Of How People Get Into Debt – It Just Creeps Up!

Clown From Movie IT I am an opponent of consumer debt because the interest rates that credit cards charge are usurious when compared to the government bond yield of ~2.8%. If you are going to use a credit card, please pay it off in full every month or you’re just lighting your money on fire. This ain’t Vegas where everybody is making it rain in the clubs you know!

We probably shouldn’t be living it up while still deep in consumer debt if we want to achieve financial freedom. But it’s just so hard when we’ve got our parents, government bailouts, rich friends, and wealthy spouses who will take care of us if we go overboard. Paying $4 an hour for parking with my credit card doesn’t feel so bad. But when I’ve got to load up the meter with 16 quarters, damn, what a ripoff! It’s only natural to want what other people with means have, so we spend since it’s so easy.

One of my readers called me out on my assumption that indebted consumers consciously spend beyond their means. Is it so bad for me to assume a mugger isn’t threatening to chop off your pinky if you don’t buy yourself $1,000 Christian Loubotin pumps or a $8,000 Panerai Submersible watch? I think so, but here’s a fantastic perspective by “GetAGrip” which I thoroughly appreciate.

DEBT CREEPS UP ON YOU LIKE A CLOWN IN THE GUTTER 

Should We Still Be Spending Money And Having Fun While Deep In Consumer Debt?

Anthony Weiner Speaking At Rally In NYC

Anthony Weiner too stubborn to quit. NYC 2013.

During the depths of the financial crisis, one of the proposals I sent to the Obama administration was to institute spending curbs based on high school or college grade point averages. It didn’t matter whether you went to Community College or UC Berkeley since everybody’s circumstances are different. What matters is how well you did in school to justify want based spending as opposed to need based spending.

For example, if you were a D+ student (sub 2.0 GPA out of 4.0) you are only allowed to buy generic clothing and ride public transportation to work for the rest of your life. No car or lollipops for you. If you were a B student, then suddenly that new $20,000 Honda Civic is available to you after the dealer scans your ID to check the government GPA database. If you are an A student, then you are free to buy whatever you want because logic dictates that if you are smart enough to study hard in school then you are smart enough to practice good financial habits.

I was shocked Obama never acknowledged my letter because my proposal would only help the government expand their authority (think PRISM) over the people of this great nation. We voted for Big Government and I wanted to support the cause as much as possible as I figured out a way to go John Galt. Although Washington DC stayed silent, fellow patriotic Americans voiced their opinions in the comments section of the post, Tax Rates Based On Work Ethic Shall Fix The World. It’s all about creating incentives.

Just imagine a world where everything is rational. Imagine everybody reading their mortgage contracts before signing so that they are aware of their financial obligations instead of blaming others when they can’t pay. Imagine if everybody adopted the attitude of not deserving something until worked for? Now imagine a country where everybody is middle class and pitches in to support our country. There would be no socioeconomic warfare, just equality. We can always dream right?

DO WHAT YOU WANT WITH YOUR FINANCES, JUST DON’T HURT OTHERS

Gambling Your Way To Prosperity At Lucky Chances Casino

Lucky Chances Casino Poker RoomOn the way home from dropping my friend off at the airport, I took a 10 minute detour to Lucky Chances Casino.  Lucky Chances Casino is located in the foggy city of Colma in South San Francisco.  If you love to play poker, blackjack, and paigow, this place is for you.

I go about once a quarter on average to play $1-2 no-limit poker.  I used to be hooked on the game three years ago, but after one too many bad beats on the river, and the launch of Financial Samurai, I no longer crave playing.  In fact, before this visit, I hadn’t been in over 18 months.

The one thing that always piqued my curiosity was how every time I went, no matter what time during the day, I would always see the same 10-15 people there!  At first, I thought that perhaps they were all gambling addicts who just couldn’t stay away.  Sometimes I’d go in the morning.  Other times I’d go at 1:30pm like this time, and other times I’d head over at midnight and they’d always be there!  What gives?!

MONEY FLOWS FREELY

The Irresponsibility Of Borrowing Money To Borrow More Money

Swans With Their Babies In San FranciscoIf you want to know what’s wrong with people’s personal finances, just observe those who are willing to borrow money in order to borrow more money!  One example is using a credit card you can’t pay off in full each month, for a downpayment on a car.  Since the limit for credit card use for buying at the car dealership is usually $3,000, and given most downpayments on vehicles range from $0 to $3,000 to buy or lease, using the credit card is a tantalizing proposition.

Forget the fact that these car buyers don’t make 10X the value of the car in annual salary.  They can’t even pay cash for the car or come up with even 10% of the value of the car as a downpayment!  Look, I know more than anyone how alluring it is to buy a nice car.  I used to be a car addict with 7 different cars in as many years.  It’s just irresponsibile of consumers to use their credit card for a downpayment when they don’t have a healthy savings account balance to match the entire value of the car before purchase.

BANK OF MOM AND DAD FOR REAL ESTATE

Corporate Greed By PG&E Killed My Friend’s Family And My Credit Score

PG&E San Bruno Gas Explosion

Pacific Gas & Electric (PG&E), your San Bruno gas pipeline blast killed my friend’s wife of over 20 years and his daughter in 2010.  Thousands of people depend on you for energy to heat their homes and cook their food.  How can you let this negligence happen?  Is this a case of profits before safety?  What the hell.

We have been silently grieving for the past two years, and we were healing until I get a notification from my refinance bank that you guys screwed me on my credit score due to a $7 late payment from 2009 which was never sent to my correct address.

The $7 late payment, as later explained to me was due to a “landlord service continuation fee” where I take over all PG&E charges between the time my tenants vacate the property and when a new tenant arrives.  News to me guys.

PG&E TOO LAZY TO DO THE RIGHT THING