“Probably the biggest cost that can wreak havoc on your financial future is to allow yourself to get saddled with credit card debt. There is no way you can get ahead of the game if you are paying 18 percent a year interest on your credit card… There are few “never” rules in personal finance, but the one I recommend is: Never allow yourself to build up credit card debt. And if you do have credit card debt, your first step to financial security should be to get rid of that debt as soon as possible.” –Burton Malkiel, Princeton University economics professor, author, and investor
Advice from the Warren Buffett
In 1999 Warren Buffett, one of the richest people in the world and perhaps the most successful investor of all time, had the opportunity to speak to a group of high school students in his home state of Nebraska. He spoke to the students for about 10 minutes before taking questions.
After sharing some general guidance Buffett offered the students just one piece of financial advice. What financial wisdom do you think the “Oracle of Omaha” shared with the students? Did Buffett give the students a stock tip or a complicated investment strategy?
No. Buffett’s advice to the students was much more practical. He counseled them to “Avoid credit cards. Just forget about them.” He told them it was impossible to make financial progress while paying 18 percent interest on debt, but that you can make spectacular progress earning 18 percent on investments. The problem with credit card debt is that it tends to trap you so that you never have anything to invest.
Credit Card Debt is Where Financial Dreams Die
Buffett then told a wonderful story about his partner, Charlie Munger, who says “all I want to know is where I am going to die, so I will never go there.” Financially speaking we have the knowledge that Munger craves. We know that credit card debt kills more financial dreams than anything else, so we need to “never go there.”
Buffett closed by giving advice we would all be wise to live by, simply stating, “If you can’t pay for it, don’t buy it.” Here is a link to Buffett’s speech. The part about credit cards starts at 7:20 and goes to 10:30 but the entire first ten minutes is excellent.
What if You Already Have Credit Card Debt
If you are already in credit card debt the single most important thing you can do for your financial future is to pay it off. You should do this before saving or investing. In fact, if you have savings or investments in taxable accounts (not tax deferred retirement accounts) you should use that money to pay off the credit card debt. It doesn’t make financial sense to keep money in a savings account earning less than 1 percent while paying 18 percent on a credit card.
Getting out of credit card debt is important enough that you should consider trying to get extra hours in your current job or taking on an extra part-time job until the debt is paid off. Once you have your credit card debt paid off commit to the “never” rule suggested by Burton Malkiel in the quote I started this post with, and never again allow yourself to build up credit card debt. Remember, credit card debt is where financial dreams go to die, so stay as far away from it as possible.