Forbes magazine published an article in February that is instructive about the state of financial awareness among young people. Almost 70% Of Gen Z Know ‘Literally Nothing’ About Student Loans
70% is a striking number and we are still left with a concern about the depth of knowledge of the other 30%. It is not hard to beat the “literally nothing” standard. Presumably most young people were away the day their schools taught them about how debt works, what it is, and why you must be careful using it. Or maybe the schools did not teach it. I am sure the same absence of knowledge extends to other kinds of debt like credit cards.
Here is a quick rundown of debt and what it means.
Debt is like a time machine. It takes money you will earn in the future and makes it available to you today. Debt is a way to “get money.” Getting money is not the same as earning money although both make money available to you. Getting money always has a price. Part of the price is the interest the lender gets for using their time machine to move the money to you, and the other is the choice reduction you will have when you earn money in the future. You can’t spend a given dollar more than once.
Earning money means exchanging some value you possess for money. Could be time or skill or knowledge or the use of your money. All of the exchanges have a personal cost to you and you will notice them more than you notice the exchange to get money by way of a loan.
Earning money always involves giving up something for something else.
Suppose you have a job this summer working as a landscape gardener. While the outdoors and the sunshine is a terrific lifestyle, the work is not especially stimulating and it is physically demanding. The hours are long and the pay is modest. The trick is to assess how you earn money compared to how you spend it. Would you ever say to yourself, “A concert ticket costs $70 and that is 7 hours of my work in the sun, carrying sod and digging flowerbeds.” Not many do, but I will write the guarantee that among those who do, fewer concert tickets are purchased.
The story is the same for student loans. The difference is that the earning money part is far in the future. The exchange of effort then may be in a different job, but the trade is as real.
Suppose at the end of your post-secondary education, you owe $20,000. It is repayable at 6% over 10 years. About $220 per month. After taxes! Probably about $300 before taxes. If your efforts at school have created a career that earns $300 more per month than you could have earned without the education, you are ahead and your investment in education was worth the loan. But that is only intellectually true.
You will notice that the loan payment is some number of days of work per month. Probably more than two when you start. Are you sure you want to get up on time, commute to work, do your job, and commute home every other Friday for a bank?
Could you have acquired the education advantage less expensively? If so maybe only one Friday a month would be needed.
Getting money is never free. It just looks that way and the lenders promote the ease of getting the money and never, as in not ever, discuss the pain to pay it back. If you want to make the problem even more difficult, assume a loan five times bigger and no job advantage.
Choose your program wisely.
It is a “Distant Elephants” situation. A bull elephant 1,000 meters away looks quite small and is not very threatening. Move him 980 meters closer and the situation changes. Same elephant, but the proximity makes him look bigger and more dangerous. A loan payment due some time after graduation is like the elephant at 1,000 meters. The month after you graduate it is bigger and more of a problem.
Never forget you are moving closer to the payment each day. That party, or the designer jeans may not provide all the value you will pay back. Know what the debt means to you before you incur it.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772