Seth Godin Hates Consumer Debt

If you're in the marketing business, a must read is Seth Godin's blog. His daily postings are always like taking a drink from a fire hydrant (too much for anyone to absorb) and he ALWAYS makes you think. As a 20-year marketing veteran, I learn something new from him (or are at least challenged by him in some way) with every post.

Recently he posted on the fact that consumer debt is not your friend. A few key thoughts:

Dave [Ramsey] has spent his career teaching people a lesson that many marketers are afraid of: debt is expensive, it compounds, it punishes you. Stuff now is rarely better than stuff later, because stuff now costs you forever if you go into debt to purchase it. He's persistent and persuasive.

It takes discipline to forego pleasure now to avoid a lifetime of pain and fees. Many people, especially when confronted with a blizzard of debt marketing, can't resist.

Resist. Smart people work at keeping their monthly consumer debt burden to zero. Borrow only for things that go up in value. Easy to say, hard to do. Worth it.

A few thoughts on Seth's comments and the whole subject of debt:

1. Yes, there's a very high cost associated with debt. Whether or not you believe the Morningstar estimate that the average American spends $600k on interest in his lifetime, I think we can all agree that the cost of interest paid by most people in their lifetimes is likely in the hundreds of thousands of dollars. So if you make $2 million in the course of your career ($50k per year for 40 years), you're spending 15% of it on interest alone if you pay $300k in interest in your lifetime. If it's $600k, a whopping 30% of your lifetime income goes to interest. It's hard to become wealthy with either of those big expenses dragging your finances down.

2. Consumer debt is an especially ruthless killer. Just ask the people who make minimum payments on their credit cards.

3. Ah yes, discipline. Simple to talk about and understand, not easy to implement. Let's face it, discipline used to be rather common in America (and I'd say one of the characteristics that made our country great.) Today, not so much.

4. "Borrow only for things that go up in value." It's hard to find things that are guaranteed to go up in value. A house? I think we've seen that they aren't guaranteed to go up in value. An education? Probably ok, as long as you borrow smartly. A business? It's hard to know if a business will go up in value or not. So what's the lesson in all of this? Borrow RARELY and with great caution.

5. If you want to escape the debt trap, here are seven steps to get out of debt. As Seth says, it's worth it.

6. Once you get out of debt, you'll want to stay that way. Here are some tips for how to remain debt free.

Comments

[Marc]

"Borrow only for things that go up in value." - I think this is reasonable - any investment involves risk, but if you're comfortable with and aware of the risk and the return - borrow the money

[Moneymonk]

This is nothing new, everyones knows that debt can bar you from life options.

I am happy that I am consumer debt free. Not sure if we will sell the house yet. I can say that being without credit card and car debt makes it better to plan vacations, dining out and celebrations.

[Old Limey]

On this blog, Seth Godin is preaching to the choir.
Everything he says is right of course but well educated, sensible, and mature adults usually figure these things out for themselves.
I have always had two mottos:
"Don't Lose Money" and
"Understand the Power of Compounding".

If you understand the second one then you learned years ago that compounding debt is great for the lender and that compounding savings is great for the saver. When I was a small boy in England and used to visit my grandparents every week for Sunday dinner I can still hear my grandfather lecturing his large family, "Don't buy things on the Never, Never! Wait until you have saved up the money! His generation seems a lot wiser in this regard compared with today's younger generation which I call "the Want All Right Now generation".
I saw a personalized license plate a few years ago on a new BMW that read WANT ALL.

In the spirit of this topic I love my credit cards. The card companies are giving me 2% cash rewards to borrow money which I pay off the day before it's due. Of course, it's the merchants that supply the 2% which is built into the prices they charge everyone.

[Monevator]

I haven't paid a penny in interest since I closed my student loans in the 1990s.

That said, I don't have a mortgage. I'd take on debt for that (or to buy assets for a rock solid business plan, and that's very unlikely to be something I'll find!) but I'd never consume through debt.

You're paying for it twice, and making yourself poor if you do. It's a no brainer once the lightbulb goes on.

[Dar]

I saw earlier this week on MSNBC's site that the banks are taking advantage of a "minimum payment loophole" in the CARD act, so they can continue to put cardholders' payments towards the low interest balances first.

http://www.msnbc.msn.com/id/37231299

Basically, only the money *above* the minimum payment needs to be applied directly to higher interest balances, so they're still doing their best to keep people in debt longer. Further motivation to get out of consumer debt ASAP and stay out!

[Budgeting in the Fun Stuff]

I don't think Seth hit on anything new since almost every pf blog I know sings the praises of a debt free lifestyle and the importance of compounding interest. Woot for compound interest for savings and not-woot for compund interest for debt, lol.

[BillV]

I am in complete agreement with what is stead here; as I suspect every regular read here is as well. Sometimes, though, debt is unavoidable. few can save up to pay for a house, or medium size family car, or an unepectable medical bill cost and probably a few other things as well ar relates to raising a family.

I know this is obvious but I felt like saying it anyway.
> ;-}

[Eric]

This is an interesting post because it made me think how much I would love reading more about your thoughts on Seth Godin's post and on marketing in general. I know it's not related to personal finance really but it's an interesting field to me nonetheless.

[Squirrelers]

Borrowing smartly is very important, yet I think its one of the key things that gets people in trouble. If you can pay cash for most things - or use a credit card that you pay off in full every month - you'll be much better off.

Borrowing for a home is necessary for most people, but it needs to be manageable, within a reasonable budget, and not interfere with the concept that you need an income to expense gap in order to accumulate savings.

Borrowing for something that will have a good NPV makes sense - such as an education. Now, where you get your education is something that again, one should assess the investment. Basically, if you borrow for something that will pay off in spades down the road, it can be an example of smart borrowing.

I like that blog by the way - I have heard much about it but haven't spent any time on it. Thanks for sharing the link.

[BD]

Wow, thankfully I'm not like "most people". There is no way my interest payments have EVER been in the "hundreds of thousands of dollars". I doubt the interest I've paid over my lifetime has even gotten near the "tens of thousands" of dollars. Of course, the downside to this is that I earn way less than most people too. But the upside is that earning very little keeps my lifestyle in check.