Most professionals are quite familiar with debt. The average Canadian medical student debt is north of $100K, and over $200K is not uncommon. We can become numb to debt and just figure that we will deal with it someday. Later. Ignoring debt can lead to debtabetic neuropathy (as described by Dr. Fawcett) and financial amputation without treatment. Others become so overwhelmed by their debt that it hijacks their mental and emotional energy.
We are also naturally wired to think about debt in illogical ways. Hence, we must learn how to consciously think about debt logically to manage it. I am not talking about the math of debt. It is our relationship with debt that ultimately decides who will come out on top.
Learn how to think about and proactively manage your debt like a Vulcan boss. Don’t let it manage you by ignoring it, letting it overwhelm you, or being an illogical human.
What is debt?
Debt is spending. It is not just spending the money that you use for monthly payments. That is the worst way to think about debt. Unfortunately, it is also popular and promoted by those pedaling debt-fueled spending. Don’t follow the pack, like a Pakled.
The whole debt (principal and interest) is spent money that Future-You must earn. Concretely, you may be borrowing from a bank, but conceptually you are borrowing from your future-self. Thinking this way helps us to avoid some of the pitfalls associated with debt.
Don’t compartmentalize your debt.
One of the ways that we mentally and emotionally deal with debt is that we compartmentalize it. This is human. We were wired that way to be able to focus while being bombarded by information. Humans naturally think of debt, income, spending, and investing as individual issues to address. Particularly, when under stress. While that helps us to focus, it is actually a form of mental accounting. Suboptimal and illogical.
Debt, Income, Investments, and “Stuff” are all part of your net worth.
Logically, these components are all part of our net worth and interdependent. When we change one aspect, it affects the others. It is illogical to consider them in isolation. A Vulcan child naturally understands this, and adult humans do too, when they stop and consider it.
For example, if you earn more than you spend, then you need to decide how to spend that surplus. Will you use that extra money to pay back future-you (reduce debt), invest for future-you, or spend more on current-you? Each dollar that you direct towards one, also means directing that dollar away from the others. If you want to be able to earn less, then you need to reduce the amount you spend on these options. If you want to spend more, then you need to earn more. Either by working more now or by investing to earn more in the future.
Debt is a variation of income.
Your current income from working is what most people think of as “income”.
However, current spending is also done to generate income. Income to our human or social capital. We buy comfort, security, and goods or services provided by other people to build and maintain human capital. Spending helps us to be able to work and live.
Debt is also income. Income that Future-You must earn that you have already spent. Plus, interest along the way.
Investing is money that you spend now to provide income for Future-You. Plus, interest along the way. The inverse of debt.
Thinking logically about debt can help you.
To live long and prosper, like a Vulcan, you must use your newly found logical approach to debt to your advantage. Here are a couple of practical ways that framework may help with current spending decisions.
Logical spending while in debt
Spending money on something while in debt is logically equivalent to taking out a loan for that purchase. Re-framing your thought process this way may help to trigger sober second thought about spending. That pause and consideration is needed to spend deliberately and effectively.
Ask yourself: Would you take out a loan to:
- Buy expensive clothes?
- Eat at an expensive restaurant?
- Buy a luxury car?
- Take a luxury vacation?
That is what you are logically doing, if you spend on those things while in debt.
Your answer may be yes, or it may be no.
The best answer depends on how much you value the item or experience in question. Hopefully, this exercise gives you enough pause to actually consider that.
Better yet, consider whether you are spending or giving in ways most likely to give you lasting happiness and satisfaction. Are you just taking the bait of the earning-spending trap?
We are wired to spend, but a pause using this exercise may act as a bio-break to overcome doing that irrationally.
Logically consider taking on debt (or spending while in debt).
Spending money that you don’t currently have or choosing to spend instead of paying down debt is spending future income. Future-You must actually earn that income, pay tax, and then pay for your spending. Blanket statements about debt often fall flat with individuals (particularly indebted ones) because we all have different values when it comes to spending money. So, consulting yourself may help.
Ask Future-You if they agree with how you are spending their income.
Asking this question may help you to distinguish between “good debt” and “bad debt”. While we would all prefer to avoid debt altogether, the reality is that sometimes we need it. Before I built up some financial reserve, I needed my line of credit to bridge me through some emergencies.
Sometimes, you don’t “need it” but debt can still help you. Medical school debt is a good example. A doctor could likely have found other good careers that would put food on the table without going to medical school. Hopefully, using some debt to become a doctor ultimately put them in an even better position.
Other times, you don’t need to use debt, but you want something now instead of later. That may please you now but then make it worse for you, when “Future-You” becomes “Current-You”. Barring some tragedy, Future-You will eventually become Current-You. Best to consult yourself in advance.
Proactively Manage Your Debt Like a Vulcan Boss
Don’t let debt manage you by ignoring it, letting it overwhelm you, or being an illogical human.
- Debt is spending the income of Future-You, plus interest.
- Spending while in debt is logically equivalent to taking a loan for that spending.
- Ask yourself whether you would take out a loan for a discretionary spend. Consider whether it is likely to buy lasting happiness or increase the risk of kissing the rubber of the hedonic treadmill.
- Ask whether Future-You would approve of your spending. They may, if it helps them. They might not, if you are going to put them into a bad position.
One of the challenges is that it may be hard to know what Future-You will think. While the future is uncertain and we will change as we age, we can take a guess. We’ll consider some major talking points in the next couple of posts on debt usage to help inform your discussions with Future-You.
Love the Star Trek theme and will add it to my Fawcett’s Favorites tomorrow. If you have not seen it, here is my Start Trek debt discussion.
Dr. Cory S. Fawcett
Financial Success MD
Thanks Dr. Fawcett. I hadn’t seen that, but it is great. I think you captured Kirk & Spock’s typical banter really well!