My last post, Retirement advice for young folks, received a good response and I think I should expand more on it. We have more young readers now and I would love to share what I did right and wrong in my early years. We all made some financial mistakes and it’s best to learn from others rather than experiencing those mistakes.
Avoiding debt is crucial to healthy personal finance, but Americans are terrible at this. We take on student loans, credit card debt, mortgages, and much more. Let’s take a look at these debts one at a time and see how I did.
I went to a University of California and graduated with a Bachelors and a Master of Science in 5 years. I worked part time on campus, but my parent paid the bulk of the tuition and living expenses. Mrs. RB40 went to the same in-state university and also worked part time on campus. I realize that most kids don’t have that option and I owe my parents big for that. A college education costs more and more every day and it will be much more difficult to pay the whole bill in the future. We plan to help out baby RB40 as much as possible and are contributing to the 529 plan for that.
A college education is essential for future employment so I think it is worth going into debt for. For young folks about to enter a university and thinking about taking on a six figure debt, I suggest they consider some alternatives. You can save a lot of money by going to a community college for two years and then transfer. A public college is usually much more affordable than a private college and it won’t make a huge difference when you look for a job, so consider that as well.
- Community college
- Live at home
- Work part time
- Choose a public university over private
- Apply for Financial Aid and scholarships
I drove an old Toyota Cressida for about a year when I started my first job. Driving a junky car is the pits for a single guy so I decided to buy a new car. It was easy to get a car loan with a good stable job and I did. I purchased a ’98 Ford Escort ZX2 and I loved it. I think it cost around $10,000 and we ended up getting a lot of use out of it. I gave it to my brother in 2003 and he just sold it in 2011.
My advice to my younger self would be to pay for a vehicle with cash. If it is too difficult to save up for a new car, then consider a used car instead. I would avoid a car loan even with today’s low interest. I hated making those car payments and it’s a slippery slope. A luxury car might seem affordable with a $500 monthly payment, but the cost of driving really adds up over time. We don’t have any car payments now and it feels great.
Credit card and other consumer debts
I got a credit card when I was in college, but I don’t think I ever used it. I added a few more cards after I graduated, but the habit stuck. I always made sure to pay off the cards every month and never carried a balance. I never carried a balance on a store card either and stopped using them a few years ago. Some of my friends liked to take advantage of the 0% interest offers from furniture stores, but I think that’s a bad idea.
A credit card debt is of the worst debts you can have. The interest rate is very high and it is best to avoid building up a big balance on your credit cards. I would make it a priority to pay off the credit card debts first before investing.
This one is difficult to avoid. How many people can pay cash for a house? We purchased a house in 2001 and took out a mortgage loan. Luckily, we decided to go with a 15-year Fixed Rate mortgage. This enabled us to build equity quickly. We refinanced a few times to take advantage of the lower rates and this home is now a rental with positive cash flow. We still owe about $80,000 on this house, but our tenant is paying the bank for us so we are not making extra payments at the moment.
If I could go back, I would consider a duplex or triplex instead of a single family home. It would have jump started my part time landlord career and made more sense in the long run. It can be difficult to find a duplex in a good neighborhood though. I guess it really depends on where you live. Another alternative is to rent out the rooms in your house. We did this periodically and it helped with the mortgage.
Say No to Debt
I made some mistakes when I first started out, but I think I did OK overall. The best thing I did was to avoid credit card debt. The average household has over $15,000 of credit card debt. The interest alone will take up a big chunk of their paycheck. The car loan wasn’t a good move, but at least we got a lot of value out of that car. It’s important to avoid consumer debt when you are young so you can start building your net worth right away.
How about you? Did you hesitate to take on debt when you were young? What would you have done differently? If you are in your 20s, do you have a lot of debts?
Update: This is just the first post in the series – Retirement advice to young folks. So keep coming back for more posts over the next few weeks.