Updated: Feb 6
The current civil rights protests in the US (and the many before it) highlight years of frustration and anger caused by the drastic disparity between those who are born into opportunity, and those who are born into poverty.
Compare my upbringing, fortunate to be raised and taught by two college graduates in a house full of books, which on average raises literacy to the equivalent of a university degree, to someone born into the disadvantage of poverty to a single-parent high school dropout living in a low-rated school district.
Warren Buffett, one-time world's richest man, describes advantage this way: "I was lucky. I was born in the United States. The odds were 40-to-1 against that. I had some lucky genes. I was born at the right time. If I'd been born thousands of years ago I'd be some animal's lunch because I can't run very fast or climb trees." He's pointed out that winning the "ovarian lottery" by being born male and white made the odds even better for him, because society has always reinforced that the sky is the limit, while even his own sisters didn't have the same opportunities.
One of the shows on UK television that I've been surprised to discover as an American is the reality repossession series ‘Can’t Pay? We’ll Take it Away!’ The show depicts what happens when a squad of High Court Enforcement Officers descends on a delinquent rent or debt payers’ house and tries to settle outstanding debts, after everything else has failed.
In one episode, a large family with young children is evicted from their apartment in the middle of winter. The father, the main income earner in the family, is bewildered but accepts the officer's decision. The bailiff decides that he can't put children out on the street late at night, so he gives them an extra day to give them time to seek council housing (government-subsidized). I often wonder what happens to them. How does the story end? Do they find a way out, or does it repeat itself somewhere else?
The debtors often fight back, but when confronted with proof, they find that their adversary has prepared with the court on their side. The problem for the debtors is that once a contract with the owners is broken, legally, courts are going to give the owners what is theirs.
The officers only negotiate if it means getting part of the debt paid, but usually not more than by half (however, remember that everything is negotiable, even unpaid debt). The officers ask them if there is someone they can call, and occasionally, a family member or friend bails them out. In the extreme, people barricade themselves in their home and the door is forced open. If the debtors don’t pay, goods in their house are seized or the occupants are evicted into council housing (government-subsidized).
It's frustrating and heartbreaking to watch, as this happens not only in more wealthy countries with safety nets like the UK, but in other countries where the outcome is even more uncertain. If you don't own a building, but live in a slum in a third-world country, for example, it can be bulldozed by the property owners to make way for development. Talk about making a bad situation worse.
Ownership Is the Key
The common misconception is ownership. Unless you buy it with cash, you don’t own anything. People on the show (and in everyday life) often say, “I bought a new car,” when the reality is that they didn’t buy the car, they borrowed a car using money which must be paid back with interest.
This is why I made Ownership Golden Rule #1 when I first started writing for The Golden Goose Guide. Anyone can understand it, rich or poor. Debt is the opposite of ownership for you, because it's ownership for someone else. Whether they know it or not, debtors permit owners to 'own' them, by promising their future wages.
In a world where ownership is the only way to create value, not paying for something not owned eventually causes it to be taken away. Where does it go? Back to the owner. If you can’t afford the new car to begin with, buying a $5,000 used car in cash is financially a better decision than financing a $20,000 new car, because ownership of the $5,000 car means it can’t be taken from you.
To take a Zen approach to visualize this more clearly, see my article, the The Waterwheel of Money and Happiness.
Debt is a market, and you can shop around or negotiate directly with your lender to get the cheapest interest rate. Always pay down the most expensive debt first, because if a swimming pool was your bank account, the interest rate is the size of a drain hole in your pool.
If you have credit card debt, but a good credit score, do a balance transfer to a card with a long intro APR of zero, then find out how much of a fixed amount you need to pay each month to get the balance to zero by the end of the zero interest period.
If you have debt which can’t be transferred, but have assets, like a house, consider using the house to secure a low interest rate home equity loan to pay off other high interest rate debts. Only use this if you have the means to pay the loan, otherwise you'll end up in a "Can't Pay? We'll Take it Away!" episode of your own when the bank tries to foreclose.
A debt consolidation loan can simplify your debt to a single payment and a lower interest rate, but shop carefully to make sure it’s better in the end. A line of credit from a bank can also be used to pay off worse (high interest) debt and replace with better (lower interest) debt if you have a good credit score.
With any debt, find out the Total Cost of the loan if you make the minimum payments. After all, you wouldn't buy anything else without knowing the sticker price. This also helps to compare one loan to another. We tend to focus on the balance (the payoff amount), but that doesn't include interest.
Total Cost = Balance + Interest
Credit card debt is deceptive because unlike a home or auto loan, the "minimum payment" actually extends the loan's life and increases the Total Cost. If you can't change out bad credit card debt to better debt, you'll want to prioritize paying off your debt with the highest (worst) interest rate first.
Credit Card Debt Example
Let's see how credit card debt can "balloon" if we only pay the minimum payment. If you only paid the minimum payment on $6,000 and you're paying the highest penalty interest rate of 30%, this can inflate your loan by an incredible 33.5 years and $11,981.
Barclays offers a very handy credit card repayment calculator (and it works for dollars or pounds) to find the Total Cost. Here's what happens if we only make the minimum payment:
Total Cost is $19,030, taking 34 years and 9 months! Some of us might be grandparents before paying off their credit card.
Credit Card Debt as a Treadmill
Because minimum payments are a small percentage of your total balance and interest, (usually 1-3%), only paying the minimum is like running on a treadmill for 10 minutes for Month 1 when you still have another 1,000 minutes to burn. Those 1,000 extra minutes are added at the beginning of Month 2.
After Month 2, if you spend at the same rate, now you're up to 2,000 minutes and have to run for 20 minutes just to keep from having penalty minutes added. Except that it's actually 2,300 minutes due to 30% interest on Month 1. How do we escape this? See below.
If we paid a fixed amount of $500 per month, we change the situation drastically:
Total Cost drops to $7,049 and a much more manageable 1 year and 3 months.
The Last Resort
The last resort is bankruptcy. Bankruptcy does not clear all debts, such as taxes or student loans, so it’s not a quick, simple, or easy fix. It’s public information and dents your credit score in a big way for years afterward. If your goal is to work in banking or finance, bankruptcy might make you ineligible to hire. Unless you’re falling so far into debt that you’re in danger of being evicted or losing your house after trying all of the options, including a credit counselor, bankruptcy should always be an absolute last resort.
Location, Location, Location
Housing, being universally the biggest cost, should be strategically located close to your most frequently needed resources, such as your job, family, shopping (especially groceries), health (such as a gym or park), and within a high-rated school district. Ideally, you want to be within walking and easy biking distance both for the option of a healthy commute and in the event your transportation does break down. If you're married, this allows you to live with one car instead of two, saving both on the environment and the extra expense.
Renting is the clear winner if you're living with a low level of income, as flexibility to move closer to the above resources if something changes always wins in a low-income situation. Also, you can avoid unexpected and surprisingly large expenses houses can generate such as a roof replacement or sewer line replacement, both of which happened to me when I owned a house and cost thousands of dollars.
Otherwise, living in poverty is one car crash away from being unable to drive to work, which puts your livelihood at stake. In much of the US and other developed countries, having a car is a basic requirement for earning a living, but cars are on average the second-largest expense at this level of income after housing.
Saving on these two largest expenses (housing and transportation) generates cash, which in turn creates ownership opportunities and prevents a cash crunch if, for example, your car breaks down beyond repair. You can get away with an old car that breaks down if you're able to walk anywhere of importance. That’s why an emergency fund is much more than what is typically advertised, especially if it's invested to earn income.
Soon after graduating college, I found myself gratefully employed by my university as a flight instructor, but with the irony of a below poverty-level wage which required deferring my $57K in student loans from the same university for repayment.
We calculated that we’d make better wages at Burger King than teaching future aviators ($10/hr at Burger King versus about $6/hr flight instructing). We told ourselves that it’s only a stepping stone for a year or two, until we met the minimum number of flight hours for a commercial job.
It showed me how difficult it is to get started when you’re starting in the hole, dragging around a debt anchor everywhere you go. Some flight instructors applied for Section 8 (government-subsidized) housing, but I chose to room with two friends and split the rent three ways. This wasn’t without its share of money drama.
We each had a mattress on the floor and no furniture, so I wanted to buy a $200 sofa set just for a place us to crash at the end of a 12-hour flight schedule, but my roommates didn’t want to put any money toward it. I bought it myself, and it took me six months to earn enough for my bank account to recover. The whole time I thought, this is what living paycheck to paycheck is like.
One roommate moved everything out during three months in the summer and decided not to contribute toward rent while he was temporarily away, so we scrambled for summer roomates while splitting the rent and utilities two ways instead of three. It’s easy for tempers to get fired up about money when everything seems to be at stake and depending on roommates can be frustrating, so pick your roommates very carefully, especially if you're the one with your name on the lease.
Starting Below Zero
Despite the slow start of not earning more than $20K until the fourth year of my flying career, by living with multiple roommates, or in pilot crashpads or basements, I managed to save money. Year 2, I had $3K saved up thanks to a 50% employer contribution match on a 403(b). Year 4, I made my airline employer's top rate as a First Officer at $34K per year and saved $10K into a Roth IRA, but started paying back $57K in student loan debt which was deferred due to my previously low income.
Year 6, my pay more than doubled to $70K per year when I made Captain and I took out a mortgage for a house in Year 7 (notice that I didn't say I "bought" the house). Year 8, I started paying for my graduate degree in cash. After leaving the airlines and taking a pay cut for government contracting in Year 10, I started to feel the pressure of my tuition bills mounting in my last year of graduate school and ran out of cash, then started carrying a balance on my credit card for the first time.
This is the temptation to keep yourself afloat the easy way, but paying 30% monthly interest is like throwing a steak-flavored paycheck to the debt wolves. Borrowing from your retirement accounts is almost as bad because you're killing the Golden Goose to pay off debt and it can't lay golden eggs for you anymore.
Instead, I applied for a $5,000 personal line of credit from my local credit union and financed over 5 years. This kind of opportunity is only available if you have strong credit, which opens more doors to make your debt cheaper. This added another annoying payment to my schedule, but it was consistent and it paid off the credit cards without taking 30+ years of minimum payments.
The year I graduated with my master’s degree in finance, I was paying $363 per month in student loan payments, plus $190 in grad school payments, giving me $553 of financial drag per month. It’s a huge drag on your savings, because how can you save when you’re in debt? How do you bootstrap yourself out of debt?
Bootstrapping out of Debt
The first priority is to get out of debt. While Ownership is the solution to debt, Education is the antidote to stay out. Education can't be taken from you because it's a part of you. It's crucial to know that education in the form of financial literacy must come first to prevent big mistakes like taking on large student loan debt for a trade job, as I did.
What if you have no money for the internet, no money for school, and no money for a laptop or a latte for Starbucks Wifi? Someone has to pay for an education. Fortunately, someone has in the form of taxpayers.
Public libraries are generally free, funded by taxpayers, and offer all kinds of helpful resources to get started. If you have a low income, there are also more likely government grants available to help fund your education. Alternatively, if you don’t have the means to fund your education, an employer like Starbucks or UPS who does have the means might be willing to employ you and invest in you at the same time.
Used books are cheap, widely available, and offer solutions to education hurdles such as exam prep. Even a high school dropout can study and pass the GED to get back on track. Blogs like this one are available to offer guidance on a wide variety of topics and you can find free guidance from many who have gone before you.
Low-income applicants can also be eligible for a variety of government-subsidized tuition aid in the form of grants, which don't have to paid back.
As I showed in my article about how I changed industries, starting over in any form takes time, but it's possible if you focus on the language, practical knowledge, and discipline required for your dream job, so you can start building a track record and a credit score right away. As Warren Buffett once said: “Some things take time. You can‘t have a baby in one month by getting nine women pregnant.”
One of the most resilient sectors for job opportunities has been technology. While national unemployment rose to double digits during the coronavirus pandemic, IT unemployment remains well under the national average at 4.3%. There are many free opportunities to learn how to code on the web, apps, books, or buying a cheap computer to get started. My last article shows how something as fun as learning to code through games can be an entry point for the industry.
Importance of Mentors and Community
Along the way, find a mentor that is willing to show you how to move up to the next level. I searched everywhere to find people with career changes, and found people who had succeeded in multiple careers and industries, which inspired me to realize that it is not only possible, but potentially a very good career move.
In fact, some of my business heroes, like Warren Buffet, have tackled multiple industries and succeeded in more than one with increasing success, using their own determination and despite many obstacles and difficulties along the way.
Even if you're being mentored by an author of a book (or a blog like this one), you can get plugged into a community of like-minded individuals who are all striving to find the way and can give you a fair warning of what lies ahead.
I found that forums online were an invaluable resource when trying to find a better quality of life. Like airline captains, people in prestigious jobs like investment banking were notorious for burning out within a few years and I had vowed not to jump out of the airline frying pan into a new fire. The most important advice is to ask around and research before you make the leap.
Finally, there are a multitude of resources available through non-profit organizations in your local area, with volunteers willing to train those who want to move up the ladder. Many commercial organizations have goals for diversity which they can't meet due to a lack of applicants (see this example from The PGA of America).
These are just a matter of spreading awareness of these opportunities, but the opportunities are out there!
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