The Beauty of No Debt
The Beauty of No Debt
I am a big fan of second generation FI. I believe the knowledge and financial savvy we develop should be passed on to our children. The major method to accomplish this feat is good financial modeling. Our children will one day mimic what we do (not always what we say). You can leave your child a pile of money, but true riches come from the knowledge of being a good financial steward. There is one case, however, where directly giving your children cash makes sense. I’m talking about education. I can not overestimate the beauty of no debt in propelling my early economic success.
I graduated medical school with a positive net worth thanks to my parents.
I have never looked back since.
My Story
As I have written before, the cost of my debt free upbringing was expensive. My siblings and I had our educational expenses paid through my father’s life insurance policy. While I would have much rather had my father back during childhood, his insurance was a gift that gave for decades.
His policy of $200K invested in the early eighties paid for several college educations, two doctorates, and still had money left over to distribute after we all finished schooling.
The beauty of no debt was that I could start saving and investing from day one. The power of compounding tells the rest of the story.
Compounding
Most of the people reading this blog understand compounding. Money invested in your twenties will grow exponentially over the years, and will be worth far more than if you invest the same amount of money a decade later. The earlier you are debt free and can start saving, the bigger the pot of gold at the end of the rainbow.
Although positive compounding is quite familiar, many fail to consider negative compounding. Loans tend to compound, and interest adds up over the years. The faster you pay off debts, the less negative compounding occurs.
If you never have any loans in the first place, you avoid this phenomenon altogether.
And this is truly a big part of the beauty of no debt.
Hopelessness and the Hedonic Treadmill
We have all heard of the hedonic treadmill. Increasing spending leads not to more happiness, but instead more spending. A problem that is magnified by debt.
Why?
People in debt, especially large amounts, tend to become hopeless. They fear that they will never make a dent in what they owe. So why not splurge just this once?
When splurging starts to feel good, it makes an otherwise powerless person feel powerful. And the hedonic treadmill kicks in in such a way that the only good feelings surrounding money are when it is spent.
The beauty of no debt is that this hopelessness never exists in the first place. People with loans start their economic life in a pit and have to climb mercilessly just to make it to level ground.
I didn’t have to do that.
Final thoughts
I believe my children should work towards their own financial success. I think they should make their own way in life. So I will financially provide for them when they are children, and teach through good financial modeling and mentorship.
And I will pay for education.
One of the bests gifts I can give is to share the beauty of no debt.
The rest is up to them.
I choose to give my kids a debt free education. I think that is a great start in life. They learned about being debt free so I think they will do well in life. My 26 year old (the oldest) already has a rental house and his own house. The rental should be free and clear by the end of this year. Then he will work on paying off his own home. I like that they are following the example of avoiding debt and never racked up any credit card debt or car debt. Debt free is a great way to start out life.
Dr. Cory S Fawcett
Prescription for Financial Success
I think it’s a powerful way to start the journey.
On the one hand I fully expect to pay my kids education. On the other to play devils advocate here: Is exposure to moderate debt early on important for educational purposes on debt?
I actually don’t think so. Besides Home debt, I’m not sure young people gain from experiencing it.
We’ve co-signed on my son’s student loan. Our plan was to pay for this loan after his college though we never told him of our intention. I think simply knowing that he has a student loan to pay after college will make him a more responsible student.
Many take this path. They plan to pay but only tell the kids afterwards.
I went to medical school when educational loans were 18% and started accruing interest immediately. Before that explosion I had worked long enough as an engineer and saved enough to pay for med school. When I accepted the slot tuition was $6800 in 1980 dollars before I matriculated 6 mos later it had gone up 30% and doubled the next year. It was the time Jimmy Carter had deregulated the Saving and Loan industry which had always relied on a link to prime to control interest so educational loans suddenly were equivalent to credit card loans. By 2 years my 4 year educational fund had pretty much dried up, so I trotted up to NAS Glenview raised my Right hand and swore to defend the constitution and the country and became an ensign in the USN MC. I was the last crop of year for year. They paid a year, and I paid a year back as a physician once I graduated. I postponed my payback while I completed residency so the Navy got a fully trained Anesthesiologist for the cost of a $30,000 a year Lieutenant. I did get to moonlight as a gaspasser so I made more than $30K. I also came out of the ordeal cash flow positive with no debt. I stepped out of the Navy one day and into Locums work the next. I traveled with my wife on longer jobs 3-6 months to beach communities and made the hospital get me condo’s on the beach to live in. Locums paid a stipend for living allowance so we lived on the stipend and banked the Locum pay. We had a blast. Took about 4 years till I had my first million in the bank, no debt, I had acquired a house and owned 2 FL beach front condo’s which were rented seasonally. No debt is NO JOKE. It positions you to supercharge your life.
My kids are adopted and the year I adopted them I bought a fully paid college education (120 credit hours fees etc) for each of them at any state school in FL. I also put $20K for each in a UGTM which grew to something like $60k over time. (compounding). The UGTM paid all the incidentals like semester abroad, wardrobe, electronics, vacations monthly allowance during college. My kids have been to Europe twice on that money and after my oldest graduated I bought her a car out of that money to get her life started. The youngest is still in school. Neither of them has any debt and they are absolutely remarkable on budgeting and money management because they had to manage their allowance. Because of this setup I never had to say no when they came for something special or had a need. For example my kid is a concert pianist and no way was she getting there except for a grand piano. So I got her a Kawai. I trained myself in what makes a good grand pianos before we bought, so I got an excellent value. Of course she went to an all Steinway school and immediately became a snob, but she could make that Kawai get up and do the boog-a-loo. Her practice room was directly below my bedroom so I had many hours of private concert time as I listened to her progress. Their education except for the initial cost of 43K for the education and ugtm cost me nothing. All of my “college education” funding was done in the space of 2 years, and if I died they were covered, no need for extra life insurance. I effectively self insured. I retired with 2 kids in college and never noticed a burden on my retirement cash flow. Compounding and no debt is the reason this worked.
I like how you paid for college. Not many people do the prepayment plan.
I funded my own engineering education by first becoming an x-ray tech. Then I worked the weekend graveyard shifts until my senior year, when I had saved up enough money to pay for the rest of my university time. I came out of college with $10,000 because I invested in a 2 and half year CD at 16.25%. Like Gasem, I went through school in the Jimmy Carter era. College was so much cheaper in those days.
You are so right about the boost it gave me to never have debt. I was investing when I was in college.
Investing in college. Now that’s a head start.
I hope to have my daughter clear college debt free (with the way tuition costs are exponentially rising and she’s only in the 8th grade, who knows what kind of financial hit that will be). She has expressed interest in going to medical school. It will likely be more onus on her financially if she takes that route depending on what is left over from the 529 plans, etc that I will have built for her education.
I got out of an expensive college (Johns Hopkins) debt free thanks to my fathers insurance money, etc as well and it was a huge leg up. I had to fund my medical school education on my own which I made a bunch of mistakes handling it but in the end the income from being a physician did make this something I could handle on my own (which is the sentiment I would have for my daughter if she chose this path).
Hopefully scholarships etc can reduce the burden even further and perhaps the 529 can be used for her children (have to have a lot of things go my way for that to happen I think though).
I think educational debt will actually decrease in the next few decades.
I’m with you that nothing of real value is gained from going into hundreds of thousands in debt for an education. What ever “lessons” we could theoretically conjure up can be taught much more efficiently and cheaply than a crazy student loan burden.
Student Loans are a specter that have their aweful influence on every career decision.
To be debt free would be a great gift and any of us that can do that for our kids is really setting them up to succeed financially. We just need to teach them the rest! 🙂
I think it is a gift that i will do my best to give to my kids.
I think student debt will eventually be a thing of the past as future kids will all be learning for free online/virtually. Or so I hope.
I hope your right!