“Lost in oblivion, dark and silent and complete, I found freedom. Losing all hope was freedom. It’s OK.” – Fight Club
Alia S. Wilder, showing her prowess at falling into debt holes.
My daughter, Alia S. Wilder, texted me today.
“How much money should I be saving? Is 20% enough?”
My response?
“Depends. I’m going to try to end a World War. Are two bombs enough?”
Oh, sure, the question sounds simple, but the answer is more complicated. Unless you’re Japan.
“Is 20% enough?”
Certainly, and certainly not.
Savings is good. I’m throwing that out there as an absolute. Saving money represents potential. If I use my money to buy a pile of PEZ® today, well, when they come out next week with the President™Millard Fillmore® Commemorative MegaPEZ© dispenser? I won’t be able to buy it.
If ever there was a head that was made to be a PEZ® dispenser it’s Millard Fillmore, who looks exactly like Alec Baldwin. Fillmore, when running for reelection (he became President when Taylor died) won only . . . Maryland, which is the only State to be named after Mary Poppins©.
I won’t go too much into detail, but Alia S. Wilder has debt. Mountains of it. Not the Himalayas. Maybe more like smaller mountains, like the Alps.
Should you save money when you’re in debt, or pay off the debt? Yes, save money. Save money until you have at least six months’ worth of living expenses in cash available to you.
Why six months? Given six months’ worth of time and space, you can make miracles happen. You’ll be able to work your way through the emergency. Oh, and the emergency? Yeah, you’ll have one. You’ll get a flat tire and accidently run into the town statue of Tom Petty and then it won’t back down, but will be freefallin’ over onto your 1972 VW® Bug™. And then? You’ll have to pay, or they won’t allow you to come ‘round here no more.
So, emergencies happen. Even Petty ones.
And if I were young and had debt, the first thing I would do is build that emergency fund. There’s nothing worse than having no money and no options when an emergency strikes. Not if. When.
After that, I’d save money in my 401K, if the company offered a match.
401k’s are awesome – generally you can save 6% or so of your salary, and the company will match some percentage of that – say, 50%. And there is no place on Earth where you can get an immediate 50% return on investment, unless you’ve managed to marry into the royal family of England. Then? Yeah, that lip gloss and the Pilates class paid off.
So, you’ve got an emergency fund. You’re taking full advantage of 401k matching. Next?
Get rid of the debt.
Debt is perhaps the most evil thing we allow in society today except for Harry Potter© themed AR-15s. I mean, I like guns, but Harry Potter™ guns? But back to debt – it allows stupid current you to sell future you into slavery. You have to pay the debt. Mortgages and car loans are bad, but the worst? Student loans.
You can declare bankruptcy and get rid of mortgage and car debt. But in order to get rid of student loan debt? You have to pay it off or die. I’m not kidding – that part isn’t a joke. Student loan debt is not dischargeable in bankruptcy. Like herpes, it’s almost forever. Unlike herpes, you can pay it off.
Why is debt so very bad? Well, for every dollar you have in debt, you have to pay interest. So, if you have $100 in debt, and are paying 5% interest, you have to pay off $5 every year. No problem, right?
Actually, that interest is insidious. Let’s pretend it’s a house, and you owe $200,000. At 5% interest, that’s $10,000 a year. That $10,000, divided by 12? In year one that’s most of your mortgage payment. Your debt remains – you only pay a little bit off in the first year.
Interest on debt destroys your happiness.
In a logical world, you’d pay off the highest interest rate debt first. That gets rid of the most interest, right?
Nah. Pay the one that you can pay off first. The smallest one. That allows you to feel good about digging yourself out of the debt hell you dug yourself into. Then? The next biggest one.
And this works. How do I know that? I’ve been there.
When my first wife and I decided that a mixed marriage wouldn’t work (I was human, she was a demon from hell) we mutually decided that she should move out. Nice!
She handed me a plastic grocery sack. In the grocery sack was a half a cubic foot of bills. She then handed me a checkbook.
“I don’t know how much money is in there.” Meaning the checking account.
She walked out the door.
I pulled the first bill off the stack. It was a credit card statement from a gasoline station.
It was over $700. And my soon-to-be ex-wife hadn’t paid them anything in months. Sadly, this story kept repeating as I went down the pile. I had massive debt.
I started paying them down. One at a time.
Seven years later? The only debt left was my mortgage. I remember the day – it was January 15th. I remember writing the check. I felt like I was Batman™ Kirk©. Like if Batman® had a starship, or if Kirk™ could fight anyone in a realistic way. Yay! But paying down those first few cards and bills was huge. It gave me a sense of control. It was saying that I could take small bites and make them matter.
But one day you sign the last check to pay off the last debt, and you realize that you’re no longer working for someone else – every dollar you’re making is going to you or things you want.
And at that moment you’re free.
So, is saving 20% enough?
I have no idea. How soon do you want to be free?
