Debt is a Time Travel Device

I've talked before about three different versions of myself: Yester Me, Today Me, and Future Me. When you use debt, you're actually letting Today Me travel into the future and take money from Future Me.

You see, when you enter a contract, any contract, you're obligating a part of your future to that agreement. I think this is why debt problems can be so frustrating. It was Yester You who made the decision to spend Today You's time, money, and attention on fulfilling the contract you signed.

True But Useless Excuses

If you went back in time to talk to the earlier version of you, they would probably have an excuse for why they maxed out the credit card and financed more vehicles than you want to pay for today.

However, none of that is useful today. The fact remains that debt is definite (a legally binding contract). Thinking of debt this way can help us filter our decisions through the lens of what Future Me might think and feel about them.

Type and Cost of Debt

Debt isn't necessarily good or bad. It's simply a tool that's been used for millennia to get something you can't afford today. You're using someone else's money to buy something, then paying a fee (interest) for the ability to do so. The interest is the cost of your cosmic Uber ride to the future to take money from Future You.

High-Interest Debt

High-interest debt is one of the most dangerous forms of debt and, surprisingly, also the easiest to get. These include payday loans, credit cards, store or dealer financing, buy-now-pay-later, and rent-to-own options. As long as you have a pulse or an okay-ish credit score, you're good to go.

Low-Interest Debt

Other lower-interest debt is often a little harder to get. These include personal loans, vehicle loans, and home loans from banks. The interesting part about these types of loans is that you're not necessarily better off.

Because of the way flat monthly payments are structured (amortized), you pay more interest up front. So, if you don't keep the car or house for the full term, you'll pay most of the interest, build little or no equity, and then start over.

So, if you just look at the payment, you'll always have a payment to someone else.

Can't I Pay it Off Early?

A common thing I hear is, "I'll just pay it off early." This sounds nice, but did you read your contract? Many loans don't actually allow you to save on interest this way. They'll characterize extra payments as "prepaying" future payments. You'll still pay the exact same amount over the course of the loan.

This varies by the type of debt and the contract's specifics. Be sure you read and understand how extra payments work first.

Convert Everything to Dollars First

The first thing you need to do before trying to decide on whether to take on debt is to convert everything to actual dollar amounts. Companies try to trick you by talking in percentages and payments.

You can't use a percentage to buy groceries. You need real dollars. The payment doesn't tell the whole story either.

Look at the current cost and the financing cost (in dollars) to get your true cost. It's pretty likely that the numbers will shock you. Seeing this on my truck loan back in 2011 is what changed my whole perspective on borrowing money. I was like, "You mean, I'm paying $7,000 just for the privilege of using my own money early? That's crazy!"

A Quick Example

As a quick example, a $40k loan at 6% interest for 6 years would cost over $7,000.

In other words, you're raising the purchase price to $47,729.92 instead of $40,000. Understanding the actual costs in dollars is much different than just being able to make the payment.

Locking in Losses

If you're buying vehicles, consumer goods, or other depreciating assets with debt, you just locked yourself into a loss. You can't even sell what you bought for the same price you paid. If you're buying appreciating assets, like real estate, you might be okay, but only in the long-term, and only after you factor in the cost of selling (which is usually all on the seller).

Simple Checks on Debt

I have a few simple checks to keep me out of debt. I definitely screwed this up before, but my wife and I turned things around, became debt-free, and moved past it.

Needs Versus Wants

The first check I make when deciding whether to take on debt is whether it is a need or a want. The catch is that in the moment, Yester Me would probably try to convince me that everything he swiped a credit card for was a need.

• I need a laptop to take on deployment (Best Buy credit card maxed)
• We need a family-friendly vehicle (for kids we didn't have yet) and a truck (for occasional hauling)
• I need to travel back home (even though they rarely travel to see me)
• I need beer/cigarettes/entertainment to relax from a stressful job (ever maxed out your Star Card? I have!)
  • Btw, I quit smoking years ago and mostly drink NA beer now.

Today, I can clearly look back and see the errors in thinking that those were all needs. They weren't. I had cheaper alternatives or could have done without. However, it's really hard to see it when you're "in the moment."

The Regret Test

The easiest way for me to combat getting caught up in the moment and spending money I'm stealing from the future is to use the Regret Test. Simply ask, will an older, wiser version of me regret overpaying for this?

If the odds are more than zero that Future Me will regret it, I take a pause. This was actually how I convinced myself to finally quit smoking. I simply asked, "Would you trade this smoke for one more healthy day with your son?" The answer was no, and everything went in the trash. That was nine years ago, and I don't regret it at all. I do regret starting in the first place, but it is what it is.

Similarly, when I get itchy to buy a new truck now versus saving up for it, I think about the future costs.

The Smile Test

On the other hand, imagine you're analyzing this decision 5, 10, or 20 years from now. Is Future You smiling? If there's a frown instead, the decision just failed the smile test.

There are some decisions I've made with debt that worked out well. Buying our first house was a good decision overall. I did spend a lot of time and energy on that house for a very small profit (only because our timing was lucky). If I'd used the regret test and smile test, I think I would have been shocked by the total cost in dollars, but I would still have felt it was worth the trade-off in the long run.