Shortly after graduating from the University of Colorado, I was invited to speak at a dinner honoring the recipients of a large scholarship I earned and thanking the man who donated $4 million to make the scholarship fund possible.
In my speech, I thanked Mr. Madden for making it possible for me to graduate from college debt free. In his comments after, he said, “Eric is really onto something. He is living debt free, and I owe $400 million. For some reason, people think I’m the rich one.”
Free Yourself of Bad Debt
John Madden was making a funny joke at that dinner, but there is a serious lesson that can be learned from that short comment. Wealthy people are not afraid of debt, and they use it to their advantage when it makes sense to do so, but they are not going around with credit card and student loan balances. They are not making car loan payments and they are certainly not taking any loan with a high interest rate.
Wealthy businessmen and investors like Mr. Madden are smart about debt. The $400 million Mr. Madden was referring to was debt incurred for a commercial development called Palazo Verdi, a 15 story, 422,000 square foot office building in the booming Denver Tech Center. While Mr. Madden’s company is private and the financials are not public, it is clear that someone who is able to donate $4 million has done well for himself.
Pay off Your Credit Cards
The worst kind of debt most of us will ever deal with is credit card debt. At interest rates that can top 20%, impulse purchases often end up costing us hundreds more than we thought about when swiping to take home that cool new Xbox, giant TV, or whatever else gets us excited.
From this point forward, make a pact with yourself. You will never buy anything with a credit card that you can’t pay off in full at the end of the month. Ever. Period.
When used the right way, credit cards are awesome. I put every single possible purchase on a credit card to get lots of points and miles. Last year, I took my fiancé on a round-trip flight to Israel for $140 each. That is 100% thanks to credit cards.
But credit card interest is very bad and very expensive. According to CreditCards.com, the average US adult has nearly $5,000 in credit card debt. At a 15% interest rate, that is $750 in annual interest costs on top of the purchase price.
Save yourself the $750 and pay off your cards once and for good.
Pay off Your Student Loans
I have a love-hate relationship with student loans. On one hand, student loans allow millions of people to get a college education which can be used to earn more money and build a great career. On the other hand, it is just more debt.
The real, long-term solution for the student debt crisis is to make college affordable for today’s student. Right now, however, the class of 2013 graduated with an average debt load of $35,200.
My MBA program cost an estimated $90,000 according to my school. Throughout my time there, I accumulated over $40,000 in student loan debt. That is more than many Americans earn each year!
I paid off my education quickly with a strategy of early payments, extra payments, and working while in school. I worked full-time while going to school full-time to avoid racking up even more debt. I paid for my room and board, books, and a portion of my tuition from my own savings and paid for the remaining $40,000 with loans.
After graduating, I made double payments every payday to knock out my debt quickly. I used the “debt snowball” to pay off the lowest balance loan first. All of my loans had the same 6.8% interest rate, so I didn’t have to prioritize based on cost.
736 days after graduation, I made my last payment. That was just over two years of student loan payments after graduating from my MBA program.
Pay Off Your Car
Secured loans, loans tied to an asset like a car or home, usually have a lower interest rate because the bank has a way to get some money back if you stop paying.
Because the interest rate is lower, this should be a lower priority debt to pay off compared to credit cards and student loans. However, like all debt, it costs you money to keep your loan so you should always try to pay it off early.
While working at my first job after college at a bank, my hand-me-down Volvo station wagon died one afternoon and I needed a new car quick. I bought a new Toyota Corolla, which I still drive today. I had enough cash on hand for a big down payment, but had to finance $12,000 to get the car.
This was before grad school, and I was living with my parents at the time so expenses were low. I paid about $500 per month into the loan despite the minimum monthly payment of $226. I paid about $250 each payday and was able to pay off the loan in less than half of the 60 months of the life of the loan.
Real Estate Debt May Be Okay
The one type of debt that isn’t as bad as the rest is real estate. Like Mr. Madden used $400 million in loans to make many millions more, sometimes debt is worthwhile if the situation makes sense.
Most of us will not become real estate tycoons with billion dollar buildings, but we will almost all be faced with the opportunity to buy a home. Few of us have the savings to buy a home in cash, but we will have the opportunity to make a down-payment and get a mortgage loan.
I bought my first home in September, 2011. I negotiated a great deal and left with a mortgage payment lower than my old monthly rent, which was an awesome deal. I refinanced the loan in January, 2013 with a 15 year fixed loan with a 2.875% and a $100,000 balance.
I have since moved out and I’m a renter again, but I’ve kept the property to rent out.
After paying a property manager, I should be able to bring home over $400 per month in cash flow from the property.
Maybe We Could Be Like Mr. Madden
Maybe we could follow the example of one of the most influential people in my life. Even if we don’t build a multi-billion dollar real estate empire, we can live a life free of bad debt while using less bad debt to build a small empire.
I have one rental property today, but there could be more in the future. Who knows, maybe someday I’ll be able to donate $4 million for young people to get a free college education.
Image source: StockMonkeys.com on Flickr