You Have A Debt Problem


If you have debt, you have a debt problem.

Most people don’t believe this. They feel even if they have debt, so long as they are managing it appropriately, it’s not a problem. I’m not talking about careless people that only make the minimum payments on everything they owe, I mean the dedicated, want-to-get-debt-free people that are diligently putting 15%+ of their net income towards their balance owing. They have a debt problem. Why? Because all debt is a problem.

If you don’t think debt is a problem, you’re in denial or you’re not in debt.

Having debt should feel like your hair is on fire. Mr. Money Mustache even says your debt is an emergency. Most people don’t think of debt as an urgent issue, because they only think of it in the context of its balance and interest rate. This means the conversation in their head kind of goes something like,

“I owe $X at Y%, which isn’t too bad, it could definitely be worse.”

Um, no. It could not be worse. This is already the worst thing that’s ever happened to you. Now, I’m about to make you really sad. Grab a box of tissues if you need, because this is some heart-wrenching math that will make you wonder if there’s any good left in this wicked world. I want you to think of your debt in the context of how long you need to work, and how much you need to earn, in order to pay it back.

“That’s easy,” you think, “I owe $50,000 so therefore I need to earn $50,000 to pay it off.”


If you earn a salary of $50,000 per year before taxes and are diligently putting 15% of your net income (over $500 per month, good job) towards your debt, you’re actually going to need to earn over $450,000 to pay off your debt. Oh shit! That’s a lot of money to wrangle out of your employer just so you can take of your not-a-real-problem debt.

So is it a problem now? 

If you’re wondering how I came up with an absurd figure of nearly a half-million dollars, let me explain. If your debt is $50K and being serviced by 15% of your net income, then you’ll need to net a total of

$50,000 / 0.15 = $333,333

This is after taxes, so assuming you’re paying an average tax rate of 27%, you’ll actually need to gross:

$333,333 / (1 – 0.27) = $456,621

How long does it take for you to gross $456,621? On a $60,000 salary that’s: 

$456,621 / $60,000 = 7.61 years.

Oh, this is bleak. Bet you thought it would somehow pay itself in 3 years or less. Eight years is a long time to be stuck in indentured servitude to your education, car, home, or credit cards.

  1. Indentured servitude was a labor system whereby young people paid for their passage to the New World by working for an employer for a certain number of years. It was widely employed in the 18th century in the British colonies in North America and elsewhere. (Wikipedia)

Does that sound familiar? That’s what your life is.

Every time you buy something with debt, you are giving your employer years of your life to pay for it.

This is less horrible if it’s for something that will also make your employer give you something back, ie. taking out student loans in order to earn a higher salary, but even that can descend to a dark place pretty fast. We are so comfortable with borrowing and making payments, we hardly think about how the exchange is really affecting our life.

Now, I’m not one to sing about financial freedom or financial independence, there’s a lot of dedicated early-retirement blogs that do just that, but I will tell you that one of keys to being in charge of your own life is to be in charge of your own money. If you owe someone else, your money isn’t yours. And if your money isn’t yours, then the time and effort it takes you to earn it aren’t either — they belong to your boss.

Just once I want someone to drive up to their office in the shiny new car they just financed and shout,

“Hi, boss! Check out the car I just bought, I am soooo excited to be working for you for at least the next 7 years!”

Then buff the hood with a grin.

I’ve been thinking a lot about the time-value of money, and the money value of my time. This is why I figured out the cost of my MBA would take 3 years to recoup. Before I started the program, I thought, “3 years isn’t so bad for a lifetime of oodles of money” and now you can find me staring wistfully at my account balance in my online banking, wishing my savings account could be returned to its former glory. It’s not debt, but the cost put me behind. I graduated three months ago; only 2.75 more years to go before my degree pays off. Not quite golden handcuffs, but certainly a fine shiny shade of brass. My employer owns me. They’re nice about it, so it’s alright, but I’m still here out of need. It’s ok to hate that.

A longer debt sentence, say 8 or 9 years, is no joke. Assuming you’re going to work for 40 years, then 8 years represents 20% of your working lifetime tied to your creditor of choice. Most people can’t even get their marriage to last that long, and yet here you are signing up for nearly a decade of misery with someone you don’t even like. Try to tell your bank that the private loan you share just isn’t working out and you want to start seeing other people. It’s not going to go over well.

How’s your debt looking now? Is it still not a problem?

I wish everyone that bought a house they couldn’t afford sent out Christmas cards with tidings of, “Seasons Greetings! This year we committed to paying the bank interest for 25 years!”. That’s like a really bad prison sentence, the kind you get when you’re a serious menace to society not just a happy couple looking to start a family in suburbia. What’s the real difference between 25-to-life and a mortgage with a HELOC, except that in one you get to choose the decor? “We couldn’t afford it any other way!” is everyone’s answer. Yeah, that’s what they said about catching a ride to the New World in the whole indentured servitude example.

If you rearrange the letters in the word “slavery” it can almost start to look like “leverage”.

Ok, ok. I’m being a tad over-dramatic, but I know you like my theatrics. That’s why you’re here. And because you don’t want to be stuck in indentured servitude that hasn’t matured since the 18th century, with the exception that this time around maybe you get a corporate smartphone with unlimited data. But I would wager you want your money to belong to you, every red cent of it. Somewhere deep inside there is a part of you that understands this game is being played with loaded dice, and you can’t win. Throw down your cards, friend, you can’t afford this buy-in. Fold.

You are not paying with your money, you are paying with your life.

I bet you didn’t think about a mortgage or a car loan or a student loan as a way of pledging a portion of your future earnings for upwards of 1/5th of your working lifetime. I bet you didn’t think of your future earnings as your future time, the years of your life that you could be doing whatever the hell you want, like reading lazily on a beach or backpacking through Nicaragua. I don’t know what you’d do with freedom, it’s your life. You do whatever you want.

No one wants to earn money more than me. Six- (seven-?) figure sums give me the warm & fuzzies. But want is not the same as need. I never want to need to sell my time and energy to keep up with my lifestyle, let alone a lifestyle I borrowed to afford.

And thus repaying your debt becomes an act of reclamation. Not merely of your money, but of the time and talents and skills you sold piecemeal to every creditor that offered you a “no-payment grace period!”. When you pay your debt, you take back yourself. Each extra payments is one that releases you from future work. Every single dollar gives you back minutes, hours, days, and months of your life.

Your life is worth it, pay up.

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23 Comments. Leave new

  • Damn… you got me. My debt isn’t nearly a bad as it was (about 80% from where I started) but after this really crappy week at work, I’m feeling it. I am feeling it in the requirements of needing my job to pay for my dbt, and also the lack of liquid savings because that money has been funneled toward my debt. I’d love to have 50k sitting there so I could just say “I’m done with this BS” but I’m locked into a situation I’m very unhappy with. Screw debt!

    • Debt is the worst. It really is a trap, and the weight of it crushes you constantly….

      I feel you on the lack of liquid savings. The bulk of my wealth is tied up in RRSPs and now I’m like, “what good is that” haha

  • I am lucky not to have debt, but I almost went into debt for my MBA. I did a similar TVM calculation and decided that the cost of a full-time program just wasn’t worth it for my particular goals. I ended up getting my MBA part-time, which obviously doesn’t provide the same experience of a full-time MBA, but does confer the same degree for a lot less money!

  • There’s nothing like the complete sense of freedom that comes with knowing that all your money is yours.
    My car loan is literally sucking the life out of me & I cannot wait to be rid of it. I’m trying to double up my payments but things got a bit to tight so I had to let that brilliant plan subside for now. I’m going to give it another go in a few months. A friend asked why I’m so desperate to get it paid off that much sooner. Well, that’s $444.17/month plus gas I want to be putting somewhere else. I don’t have public transit in my community but I desperately wish I lived somewhere that did so I could be rid of the money pit. I made the decision to finance it so it’s my responsibility to do that and drive it into the ground. As much as I want to upgrade, there’s not need until mine stops working.

    • Oy… $444/mo is not small! But even an extra $100 can make a big difference in the lifetime of the loan.

      You’ll be rid of it soon enough — and then drive it until it dies and you can get the car of your dreams!

  • What I’ve learned is that people focus on the carrying cost (monthly payments) on the debt, not on the final dollar amount (principal + interest). This helps justify the frivolous portion of their spending.

    • Amen to that!

      Carrying costs are SO LOW — especially with current interest rates where they are. Debt is so cheap, and it’s easy to get. There’s hardly any incentive to pay it off, especially if you don’t think about it weighing you down.

      • Food 4 Thought
        March 18, 2016 2:00 pm

        Ok I’m forced to reply here. I completely understand that debt can be bad for most people (the average person). But when people talk about having ZERO debt, that is just dumb. Sorry…

        Let me explain, I now have a $500 car payment. Dang that’s high, but the interest rate is 0.49%. Well with that rate I’m only paying about $375 in interest over 5 YEARS. Since inflation alone is more than 0.49% each year, this is a no brainer. But I can also put the money that I was saving for the new car into a savings account ( offers 1% savings accounts). Now I’m making more than I’m spending in interest.
        I realize not everyone can get those rates but if you research you can get some pretty low ones. And there are options that make more than 1% interest on your savings.

        As for a mortgage, my rate is 3%, most can still get this. My 401k earns an average of at least 5% (less recently). So by paying off my mortgage, I’m actually hurting my Net Worth by missing out on the 2%+ extra I’d be earning in my 401k. Plus there are some tax differences but we’ve already made our point.

        Point is, not all debt is bad.

        Cheers and Keep saving!

        • My friend, you are terrible at math. Truly.

          Typically you can only get interest rates <1% (and I've seen as low as 0%) on new cars. Cars are never an "investment", but new cars are a special kind of money pit, because they depreciate so rapidly. Your car will actually lose ~20% of its value in the first year of ownership, so even if you pay off 20% of the loan balance (5 year loan, as you said), on paper, you'll be almost exactly break-even. This is best case scenario, of course. It assumes the new car didn't cost you more to insure.

          After 5 years you may have only spent $375 on interest, but you will have lost over $14,000 to depreciation. So... yeah that is not good debt, sorry.

          Your mortgage rate of 3% doesn't seem bad, but surely you understand that your mortgage is hundreds of thousands of dollars and your investments maybe aren't yet -- so they're not equal. Let's say you put 10% down to buy your house, so in the first year of ownership, you'll spend just over $8,000 on mortgage interest. If you have $25,000 in investments (maybe you have more or less, I don't know), you're only going to earn $1,250 in interest. -$8,000 + $1,250 is a net loss of -$6,750. You're not winning. Particularly if your investments are earning less than 5%, then you're really not doing that great. You'd be better off increasing your mortgage payments.
          The tax thing is different in Canada, so I can't really speak to that. Mortgage interest is not tax deductible here.

          The value of borrowing for your home only works if it continues to increase in value. If it stagnates or decreases in value (you know that can happen, right? 2008?), it loses money. This doesn't mean getting a mortgage isn't a good decision (after all, the decision to purchase a home is usually an emotional one, not a financial one), it just means it's not a fool-proof money making plan.

          So yes, all debt is bad, especially car loans and sometimes mortgages.

  • Lindsay Tithecott
    July 16, 2015 10:07 am

    When I bought my condo several years ago, the first thing my boss said was “Excellent, now we know you’ll be working here for 20 years.” ugh. Thank goodness I A)bought well within my means. B)have a flexible/rentable property. C)quit that job.

    • That’s a horrible thing the boss could say to anyone, glad that you quit that job. 🙂

    • That is crazy!! What a rude boss. Congrats on making a sound financial decision (and on leaving that bad boss!)

    • No one else sees that this was a joke?

      Your employer knows this as well, because if they meant what they said you should be rejoicing in your job security because they literally said you’d be working there for 20 years.

      The only truth in this situation is you’ll have to work SOMEWHERE for 20 years, or until the mortgage is paid off.

  • I appreciate the underlying mindset on avoiding debt, but your example is misleading.

    Why did you use an interest rate of 15% when you’re trying to show someone spending 15% of their net income of $50k? Your interest rate isn’t proportional to your payment amount. Sort of misleading to typical readers, since neither the payment amount nor the interest rate was ever mentioned, but the “15%” gets moved around to another part of the equation.

    Also, why are you changing the salary to come up with a payoff time frame?

    Every loan type you specifically mentioned isn’t as expensive as your example – the only type of debt that works in your 15% interest rate model is 100% credit card debt.

    For the record, I don’t have any debt other than a 4% mortgage, which isn’t worth paying off early due to the tax-benefits and opportunity cost. Sorry for pointing out the flaws, but I think it would be beneficial to everyone to have an accurate representation of debt.

    • Interest rate was left out of this for simplicity sake. Add it in and it gets even more bleak. The 15% is the amount of your net income you put towards your debt (thought I made that clear?) — you’re obviously better off choosing more, but 15% is commonly suggested. I can see you misunderstood the math in this post, the 15% is not referring to the interest rate. Maybe give it another read through and we can go from there.

      I originally did the math with a $60K salary but then changed to $50K since I think more people earn closer to that in their 20’s. $60K was a tad high. I can go back and fix it if it bothers you a lot, just let me know.

      • Sorry I appreciate your article but your example is just wrong. The percentage of your income you put toward paying off your debt has nothing to do with how much you actually pay for your debt. Let’s say you have a $10,000 loan at 1% interest. Let’s say you make $1,000,000 per year and you put 0.1% of your income toward your debt. Using your formula, it cost you $10,000,000, or ten working years, to pay off the $10,000 of debt. But the true cost was just the principal, $10,000, plus minimal interest. That is less than four days for Mr. $1,000,000 salary. But regardless of that, this is a good article because you are right that debt is bad for people who use it to consume and spend, and it is true that debt can make you a slave to your job. The true cost of debt depends on the interest rate, your financial flexibility and liquidity, and what investments you make with the debt you incur.

        • I never said cost, I said how much you would need to earn.

          If you are making $1 million per year and only allocating 0.1% of your income towards your debt, it WOULD take you 10 years and $10,000,000 to pay off the debt unless you change your mind and begin making extra debt payments.

    • Your 4% will be 18% + and you’re going to be one of the many financial geniuses in this country with no real education in or understanding of finance.
      Her model may be flawed but your logic is asinine. There’s no such thing as 15%? You do know your mortgage is front loaded right?
      Credit card debt rates start around 23% now and can hit almost 30% if you don’t pay.
      Any perceived tax benefits are you off setting other debt with debts. I expect…HELOC maybe?
      The accurate representation of debt is myopic, uninformed Canadians now think they’re all rich and money experts because they borrowed a lot. And every Canadian is also a real estate expert.
      Is stupid were rocket fuel Canadian “home owners” could fly us all to Pluto and back.

  • I am down to my last 3,063 on my student loan and I’m so ready for that to be gone, I treat it like a huge emergency. I started out with 33,000 last May so I know I’ve made way faster progress than most people but it sucks using all my savings and living on the bare minimum for so long. My consolation is that I got lots of free money from OSAP too, a lot more than I ended up paying in interest, so overall I’m still ahead, and if I can keep up the debt payment momentum in savings, I should have a healthy balance again in not too long.

    • That is AMAZING! Congrats on all your progress — I imagine $3,063 seems like pennies after tackling $33K.

      I’m confident you will absolutely have a healthy savings balance in no time =)

  • Awesome article, I love it. I love the direction you’ve been heading the last few years and seeing what you’re doing next, awesome! 🙂


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