As I recently drove myself to a high school graduation party, I came to a startling realization. I’ve now been out of school just as long as I was in school. It’s pretty miraculous how quick the time has flown by, especially considering how the years in a classroom felt like they dragged on for several lifetimes.
I can still remember what an exciting time high school graduation was. A whirlwind of emotions, hopes, fears, and plenty of unsolicited advice from those who had tossed their caps in jubilation before me. Most people were, of course, trying to be helpful and prepare me for my impeding adulthood, and some of the advice was actually pretty sound. Some tidbits, however, were probably best left unsaid. Especially when it came to some of the financial advice I received.
Student Loans are Good Debt
This is an utter and complete fallacy, in my humble, broke-ass opinion. Don’t get me wrong, having an education is undoubtedly one of the greatest gifts you can give yourself. But you’re kidding yourself if you think dragging around five or six figures of debt for the next ten to thirty years is a good problem to have.
I was fortunate enough to pay for my time at a community college out of pocket (but unlucky enough for it to be funded by a drunk driver that almost took my life). I took out student loans to pay for my remaining two years of college, but didn’t really understand them or how they would continue to impact my daily life several years later. Despite paying hundreds of dollars toward them each month for the past three years, I now owe more on them than when I started paying!
Repeat after me… no debt is good debt!!!
Always Carry a Balance on Your Credit Card
Remember a second ago when I made you repeat that mantra? Let’s say it again… No debt is good debt! Carrying a balance on your credit card is debt, plain and simple. Carrying a balance on your credit card is not better for your credit score. Paying your credit cards on time each month (and in full, so you don’t end up paying any interest) is better for your credit score.
There are several components to a credit score. I won’t go over all of them today, but for the sake of my argument there’s two that you need to understand.
35% of your credit score is based upon payment history. In other words, making all of your payments on time on all of your credit accounts (such as credit cards, car payments, and mortgage payments).
30% of your credit score is based on your credit utilization. In other words, out of all available lines of credit you have, how much are you using? For example, let’s say you have two credit cards: one with an available credit limit of $4,000 and the other with an available credit limit of $6,000, for a total of $10,000 available to you. Card A carries a balance of $2,000 while card B carries a balance of $1,000. Because you currently have $3,000 out of $10,000 borrowed, your credit utilization is 30%. 30% and below is considered good, although the lower your credit utilization, the higher your credit score.
If You Can Afford the Payments, You Can Afford It
This commonly-gifted bad advice is a great way to get yourself under the dark, burdensome cloud of debt. Sure you make enough money now to pay your monthly payments, but what if you lost or job or suddenly found yourself unable to work? It’s better to save the money and buy whatever it is you want (a car, TV, Christian Louboutin pumps) outright. You won’t have to worry about defaulting on a loan if you find yourself lacking in the income department. Plus you’ll have extra money every month to put toward saving for a rainy day or other items you like.
You’re Young. You Don’t Need Insurance.
Anything can happen to anyone at any time. I mentioned earlier that I was hit by a drunk driver in a head-on collision, which is how I had the money to pay for my first two years of college. What I didn’t mention is that I was only nineteen years old and suddenly found myself unable to work, with medical bills stacking up for eleven months.
Thankfully I worked for a coffee company with excellent benefits, including short-term disability. For the duration of my medical leave, I was paid 66% of my income, which was enough to pay for my car insurance, car payment, and phone bill. Luckily I lived with my parents and didn’t have to worry about keeping a roof over my head at the time. I now have both short-term and long-term disability policies through an insurance company instead of my employer so that I don’t have to worry about lapses in coverage if I switch jobs or work for a company that doesn’t offer plans.
As you walk across that stage and head straight toward your adult life, keep in mind that with your newfound freedom comes plenty of advice on what to do with your new life (and with that huge wad of cash to be found in your cards of congratulations). Just remember that while your relatives and friends mean well, not all advice is good advice.