When I had nearly $40,000 in student loans, every purchase felt like an impediment to conquering my debt. It was debt on debt. A tragic snowball effect, each item cost more than the sticker price — every time. I didn’t think I could leave this cyclical world — doomed to mistakes for decades to come.
I was dissatisfied with my spending choices. For instance, after my first installment of student loans, I promptly bought new furniture for my apartment and splurged for a nice car (made possible by another loan). Oh, the humanity! I was making some horrible decisions.
I had entered the world of debt without an escape plan. And I just kept spending. Then, a major wakeup call hit me: debt could prevent me from living the life I want to lead. Excessive student loans would nearly force me into certain career trajectories, as well. I wanted to make a change, but still saw little hope of reducing my debt (while in graduate school).
With greater financial literacy and competency, I developed an eagerness to make some sort of change. One of the largest lessons in the personal finance world is compounding your gains via interest, dividends, and other regular income. Essentially, you earn a regular income from your investments, which can then build even more wealth. By using this method of saving and building income, your money will work for you. It’s a brilliantly simple way of making sure you continue to amass wealth. I wanted to make this happen.
Unfortunately, I was filled with dread, as I realized I was on the wrong side of compounded interest. My $40,000 in loans were actively earning interest for banks and the federal government — ranging from 3.5 to 6.8% APR. Money was working for someone else. I was fighting against a sinking ship of debt, which compounded every day. Every day, I ended with less money than I started — even if I didn’t swipe or spend a dime.
When compounded interest is working against you, it feels like the Pacific Ocean’s undertow. You step into that warm water (spend a little bit of money you don’t have), and it slowly takes you out to sea. At first, you don’t notice the gradual loss of sand beneath your feet (the bills beginning to add up). It can be pleasant — relaxing even — to swim (and spend). And as you swim, you lose sight of the shoreline. Suddenly, you’ve been sucked out to sea and it can be hard to see how you get back to square one.
A fluke — one-off — happened to me over the last year-and-a-half. I started Frugaling.org, recreated a rock-solid budget, made more money than ever, and began to invest. The debt was handily defeated. It was at a precipice in my budget — my net worth reached zero, again — when I realized the powerful hold that compounded interest had over me. I was now free from the undertow of debt, and I ran away as fast as I could.
We have a horrific, metastasizing problem in America today: student loan debt. What happens is that people in their late teens and early twenties begin to rack up massive figures before they see their future paychecks. It’s a recipe for disaster, and the country will suffer from this.
Unfortunately, there’s an even bigger problem from delayed income and growing debt: we delay saving and building for retirement. We eschew the benefits of compounded interest — in our favor — and suffer under the debt. This restricts our ability to become entrepreneurial, live healthily, take risks, and build a better future (for ourselves and future generations).
Today, I’m standing on the other side of compounded interest — the one where I steer and control my finances. I feel empowered by it. I don’t necessarily want more and more wealth, but I don’t want to be back in debt ever again.
I’m done with that undertow.
