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.
Meanwhile, I’m being carried away by the current, but I can’t wait to be free of it, like you! We are barely saving for retirement. That makes me panic. Compounding interest is totally working against us.
But we will likely get it figure out and we do earn good salaries. We just will never enjoy them as we spend our later years saving every single penny to attempt to catch up on where we should have been. I shudder to think wha the economy will be like – likely no social security, no safety nets for those who borrowed and are like us – except with lower earning potentials.
Kirsten,
I really appreciate you sharing this.
Being free of it is one of the most amazing feelings!
Gonna send you some positive energy,
Sam
Look to the future when compound returns will be what you’re watching instead of compound interest on debt!
I’m with you Sam. I never want to be in debt ever again. I paid too dearly for it but the lessons are forever seared in my memory.
If you’re on the wrong side of the balance sheet it’s definitely not good. Thankfully lower interest rates have helped to minimize the damage a bit. I can’t imagine being in double digit rates like in the seventies.
Awesome post. Debt certainly is like a cancer on your personal finances. Seeing compound interest work for you is so so empowering while seeing it work against you can be very demoralizing. It really takes a strong effort to reduce expenses, increase income and attack that debt with all of your might.
I think this is a powerful way to illustrate the benefit of compound interest on investments to those in debt. Once they wake up to how much their debt is accumulating based on compound interest, they can easily grasp how it can work in their favor on the other side of 0, as you said. It’s amazing that it’s the same principle! My sister strove to pay off her student loan debt quickly because she hated seeing the interest accumulate, and now she is a big champion of retirement saving because of the time value of money.
Emily, this is exceptionally inspiring! That’s amazing to hear that your sister was able to overcome the debt and get on the right side of compounded interest. When you do, it’s an amazing feeling! 🙂
Glad you’re on the right side of compounding interest now–feels much better, I’m sure. Congrats to you for getting and staying out of debt!
You have a real gift for teaching 20-somethings how to stay out of (or in some cases, climb out of) debt and accumulate wealth in a truly comprehensive way. Wish I’d had someone like you to teach me these lessons when I was starting out. But life’s a journey and it’s never too late to keep on learning. Thanks for sharing, Sam! You do a LOT of good for so many! 🙂
I hate that undertow… I did about the same thing, got some student loan debt, then added a car loan. Not the smartest way to do things, but working on killing that all with no plans to add more in the future.