In the preceding post, you morphed your mind from mere human to mature Vulcan to logically think about debt. Debt is spending the income of “Future-You” in the present. Future-You must pay back the principal plus interest. Logically, spending while in debt and taking on new debt are equivalent. One mental check to use when taking on a debt or deciding to spend while already in debt, is to ask what Future-You thinks about the spend.
We can’t really predict the future and we will also change as we age. Hopefully, we will retain our logical faculties. So, let’s take a logical approach to consider what “Future-You” might say about your use of debt.
Future-You may thank you for some debt-fueled spending. Or you may get an ear-full.
Future-You Thanks You for Surviving & Thriving
Basic Needs
If the spending is for basic needs, then it is necessary for Current-You, without which there is no Future-You. Your basic food and shelter needs must be taken care of regardless of your debt level. While there are still members of our society that struggle with that, it is totally doable for most professionals at any stage in their career.
Opportunities for Advancement
While you must spend carefully while in debt, also be careful to avoid a scarcity mindset. If you are obsessed with all of the minor unavoidable basic costs of living, then you have less mental energy to focus on the big stuff. The big stuff that will improve your situation long-term, like developing your career.
You may even need to spend some money on courses or electives to network. However, you are also likely to have an abundance of opportunities right where you are. If you keep your eyes open. Opportunities are easier to see and take advantage of when you have an abundance mindset.
Don’t risk Future-You’s high income for a low income now.
Professionals are most likely to take on debt to cover basic needs during their early training when they have little or no income. One solution to reduce current debt accrual from spending on basic needs is to earn more. So, it may be tempting to pick up a job during professional school. That may be necessary if you don’t have access to enough credit to bridge you through training. However, most banks are tripping over themselves to extend lines of credit to medical students.
For most, the decision to moonlight while in training is a balance between what you are giving up and gaining in the moment. Since most jobs pay much less than a professional wage, the most important gain is often from a non-financial perspective.
“Future-Professional” will be to make more income quite readily with less time investment. So, if the time spent moonlighting risks the development of “Future-Professional”, then don’t do it. Conversely, you may find opportunities to work that help you to develop or maintain skills that are important to you. If you are fortunate, you may even find work that helps build towards your future income potential too.
Basic may be different for Future-You. That is not you, yet.
Don’t confuse credit with cash in hand.
Even if you are on the path to a higher income, don’t overdo it and spend like you have that income already. You don’t, and it may not work out like you hope. Furthermore, your future after-tax hourly income rate is likely not nearly as much as you think it is.
Be careful, because as the banks sell you credit, they also emphasize how much money you will someday make. That fluffing of your ego to sell you debt may even accelerate when you actually start to earn.
It is just credit, not income, let alone after-tax cash in hand. It is also important for your family and friends to understand this.
Don’t prematurely turn your social debt into financial debt.
Some of the medical students and young doctors that I have seen in the largest financial trouble get there because they are now the “doctor in the family”. There are often cultural and social expectations that put pressure to spend like an established doctor to support family who have also sacrificed for your success. Plus, it feels good to flex your success.
However, many family members that want or expect that support also don’t really understand that an intern or fledgling staff may be a doctor, but they are not wealthy. They also may not understand that a line of credit is not current income to spend. Be careful that the financial illiteracy of others does not become your own. You will be in a stronger position to help more in the long run if you manage your debt well first.
Basic fun need not be expensive. Especially with your spouse.
There are usually plenty of options within the grey area between wants and needs that actually don’t cost much. When I Googled “inexpensive fun physician finance” while looking for relevant articles for this post, guess what came up first… That’s right, my interview on Rational Reminder podcast. And it didn’t even have missing – fun on the search return!!! I am the ultimate cheap date.
The only more fiscally responsible date would be financial date night with your spouse. Pull the blinds and dim the lights. Your partner is the most important person to understand and share your spending and debt balancing act with. The other person to bring into the conversation with Future-You.
Discretionary Spending: YOLO vs SALO
YOLO = You Only Live Once. But, is it a once in a lifetime opportunity?
Discretionary spending on time-limited opportunities may benefit Future-You. For example, spending on an experience, with friends or family, that you cannot do later due to physical ability or other life-commitments. That ticks multiple boxes for synergistic spending. Future-You can also re-experience happiness by reliving the memories created. That is particularly powerful when reminiscing with the involved friends or family.
If it is not a time-limited opportunity, then you are making Future-You work more because you want something now. Not later, when you actually have earned the money. Ironically, most really physically active travel is less expense. I can also tell you from experience that Future-You is more likely to appreciate the soft beds that come with luxury travel. Younger bodies can tolerate economy travel better. So, consider the wants and critical needs of the experience carefully. Will Future-You still be able to have the experience instead? They are paying for it.
Find a way to avoid passing up time-limited opportunities while preserving the critical elements for lasting happiness. Without breaking the bank or Future-You’s back.
SALO = Still Alive Later. Older.
For clearly discretionary spending, ask yourself whether Future-You is likely to agree with your spending. They are the one who is ultimately paying for it – plus interest. Bear in mind whether Future-You is likely to find it easier or harder than Current-You to earn the income needed for the current spend. That becomes an increasingly important issue as you age and your human capital wanes.
You only live once, but the chances are that you will still be alive later to pay back your debt. Even if you are tired and burnt-out. Even worse, a poor financial position actually feeds burn-out.
Debt to Increase Your Earning Power
The most common way that most professionals have used leveraged investing is by taking on loans to train in their profession. Debt accrual now, for a higher income later. Provided that the debt is not disproportionately larger than the earning-power boost, Future-You will likely be grateful.
Beyond basic training, we may also take on debt for further training, personnel, or equipment to grow our business in a new direction. Again, careful consideration of the potential costs and benefits using a business plan is vital. Even more so when using debt to cover the start-up costs. Used well, this is how debt has helped benefit the world.
Debt to Preserve Your Human Capital
Some spending is a mix between investing in your human capital and discretionary spending. While discretionary spending beyond the basics of food and shelter is a choice, it may improve your health, skills, and ability to earn. If done while in debt, or using debt, then it is logically still leveraged investing.
Work and eliminate debt vs spend and recharge
You could work more hours/week to pay your debt down faster. A vacation may be discretionary, but it helps you to recharge. You may spend money to take a course or develop a skill that does not result in more income. However, it keeps you mentally or physically stimulated. You must pace yourself, and may need to tolerate some debt, if it is helping you to preserve your human capital.
Some discretionary spending to prevent burn-out and stay healthy may mean more income over the long-run. Even, if that means some debt along the way. “Future-You” will definitely thank you if you don’t burn them out prematurely and shorten their career. You can tolerate the same workload better if you are also spending the time and money required to recharge your human capital. You may not see the impact of neglecting your human capital until the distant future. Like when Future-You has a heart attack or a relationship breakdown. Think ahead.
It will be okay. If you are reasonable and responsive.
The good news is, as a high-income professional, you should be able to eliminate your debt in a timely fashion. Well before flame-out. However, there are two major pitfalls to be aware of.
First, be reasonable about the cost and benefit of spending. If the long-term benefit that you get from the spending is dwarfed by the amount of future work required to pay for it, then that is not a good investment. Don’t kid yourself. You might rationalize it to Current-You, but Future-You won’t be fooled.
Second, when you do have more discretionary income, you must switch gears from debt accrual to elimination. Because it is discretionary, be careful not to stick your finger into the earning-spending trap. Extraction can become more difficult if it is Future-You that has to do the earning, plus interest. They will not be impressed.
Will Future-You Say “Thank-You” or “@!#?@!-You”?
Spending while in debt, or accruing debt to spend, is not always bad. It is spending Future-You’s income and when that becomes Current You, you must earn the money to pay it back. So, consider whether there is a lasting benefit to your future self. That will make it more palatable for them (you) when the bill is due. Spending for basic needs is required for there to be a future for you. Further, allowing debt to put you into a scarcity mindset may be detrimental to your future.
Don’t miss a once in a lifetime opportunity to build your future earning power, important relationships, maintain your health, or adhere to other core values. As long as the cost does not put Future-You into a bad spot. That could happen if the spending outweighs the lasting benefit, or the debt is more than you can safely handle. Spend deliberately in ways that yield dividends persistent enough that Future-You can still appreciate it. Preferably, even at the end of the road. Yes, YOLO, but you will also likely be SALO.
Many decisions are in the grey zone between basic need vs discretionary and human-capital investment vs bad investment. Quantifying the benefit may be difficult. However, you can try to quantify the true cost of debt to help determine whether Future-You will say “Thank-You”. Or something else.
This is a really good way to think about it. I am thanking my former self for going to medical school, even though I had to work off $250k of debt to do it. What a great investment!