Dishes, Debt, School, and Financial Independence

My parents had a dream: build a lodge, run it for 10 years, and then retire. They are now on year 15. My dad is 65, and he still washes dishes until 10 p.m everyday. My parents, like many other Americans, pursued a dream to build a business but instead got locked into interest payments on loans they couldn’t afford for a business that may eventually consume them.

My dad and my mom are the reasons that financial literacy is so important to me. I’ve seen financial illiteracy and I know what its consequences are. I’ve seen it destroy marriages, businesses, and most importantly families. I will not let that happen to myself and to those around me. As a student, I believe being financially literate is important for two reasons: (1) it helps to avoid the pain of not having enough money and (2) it helps to build a plan to achieve your life goals — namely financial independence.

As students, financial literacy can only be important if being financially illiterate causes us pain. It turns out the pain point for most of us is student debt. I’d like to preface this by saying that it’s possible to achieve success without education, but generally we require it. Now considering the 5% YOY rise in education costs along with the under-pacing 2.2% YOY growth in income, it then becomes clear that we need to finance our educations through debt. (the capital structure of human beings is fairly straight-forward in this regard)

Unfortunately, most students do not understand debt and consequently, they don’t understand compound interest. The problem with debt is its tendency to compound and capitalize on itself. Unchecked, this ensures that students are continually locked into a endless number of payments to their service provider. This implies, both financially and philosophically, that:

If you have debt, you’re not a free person. You’re a slave to your creditor.

Which bring me to my next point: the future benefits of becoming financially literate is inversely related to your age. As students we are in the opportune position to benefit from financial literacy. If a student understands their financial position, their income, and what they need to do to achieve their goals, then they have the ability to design whatever life they wish for themselves. Through financial knowledge students can:

Live a life of their own design instead of a life according to their next interest payment.

Going back to education, most students students go to school to achieve a higher income and achieve upward mobility. Many achieve a higher income; usually a $1.2 million increase in lifelong earnings. Since there are three basic foundations of wealth — (1) increase income, (2) decrease expenses, and (3) invest the difference wisely — students have a particular advantage in terms of lifelong savings.

If a twenty-two year old college graduate can achieve a savings rate of 50% and pay off their debt in five years, it is possible to retire in 17 to 25 years. This means they will have the ability to choose to work by the time they are 39 to 59. Then again, this is not possible without a fundamental understanding of your own personal finances.

Borrowed from Jacob Lund Fisker’s: Early Retirement Extreme. This graph compares your number of working years to your savings rate. The various lines show the comparative, although constant, investing returns of your money saved.

Let me pose a different question. What if we can become debt-free what it is the next step? Debt freedom doesn’t necessary mean financial freedom, but that’s an aspect of it. It’s financial independence — which I define as the ability to live off your investments and savings, thus giving you the ability to choose to work. Financial independence is a worthy goal because it changes the concept of work and grants us to spend time (our only truly finite resource) in the ways that we desire. The key point is that after we escape debt we can then achieve financial freedom through financial competency.

Ultimately financial literacy is more than a matter of financial competency. It’s a matter of navigating our lives. Just as we can’t expect to be able to navigate New York without knowing how to use a map we cannot expect to navigate our lives without first understanding how to navigate our finances. Without it, we’re going to be washing dishes at 65. With it, we can do whatever it is we wish. We’re students and we can be the masters of our own destiny.

Thank you for taking the time to read this article.

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