Joe Mihalic is a graduate of Harvard Business School, and an employee at Dell Inc in Austin, Texas. Recently he made the news when he paid off his student loans of about $90,000 in 7 months. He blogged about his journey at NoMoreHarvardDebt.com which has been viewed by hundreds of thousands of people based on news coverage by The Huffington Post, The Wall Street Journal, and other media outlets. This is good right? He’s debt-free and smiling…
I’ll be the bearer of bad news. Joe Mihalic might have a problem.
More than anything, this story is a perfect illustration of the average person’s fear of money and the resulting aversion to debt. Most of us have an emotional relationship with money, which is an emotionless tool. We get tremendous highs and lows from it, although it shouldn’t weigh on our happiness. From looking at the news, there are two types of common emotional (fearful) responses to debt: freak out and pay it all off, or become overwhelmed, feel helpless and cry. Joe Mihalic might seem impressive, but in my opinion, he’s just a famous member of the first group.
Joe Mihalic’s stats:
- Harvard MBA making over $100K per year at a major company. His student loan balance of $90K cost $1057 per month, and did not prevent him from contributing 10% to his 401K each year, living in a nice house, or having a good life.
- To pay off the loans, he made many cuts to his life such as selling unused property on Craigslist, renting out rooms in his house, and even started a weekend landscaping business with a friend.
- He was “emotional” and took extreme measures (he admits this). He stopped contributing to his 401K even though his employer provided a match and he was capable of maintaining his lifestyle without passing it up. He took his own liquor to bars (often illegal), and even withdrew money from is IRAs, incurring the tax penalty that comes with it.
- He was lucky (he also acknowledges this); in addition to his higher income, he had no major disasters, he is single and childless and lives in a city with a relatively low cost of living. He also never went on a single date in those 10 months, so he’s not itching for marriage and family like many others his age.
Joe has paid off his student loans, but in my opinion he could still be nurturing a negative emotional response to money and debt. For my part as a finance professional, I always knew what my student loans were when I signed up – nobody fooled me. However, only during repayment did I learn to be emotionless when dealing with money (including debt). It was hard, because folks like Dave Ramsey, Suze Orman, and others sometimes make debt out to be evil. Still, I got over it by being rational and realizing what my debt was for.
My student loans paid for an enviable education. They facilitated my entrance into a profession I have always wanted to be a part of, and to which I have committed my entire life. Other debt I have facilitates my passions – like my piano – or supports my income e.g. the car that drives me to work everyday. Many people also rely on debt for the home that keeps them safe from the elements (and crime). The bottom line is that as long as you are rational, it is impossible to disappointed with debt that is used for things that matter to you.
We are not always rational however, so the key is to recognize this and create good habits around it. For example, I never pay more than the minimum payment on any debt – or make large purchases – based on the cash in my bank account. Instead, I go through the following painstaking process:
- I check the balances on the credit cards that pay my monthly bills
- I check my monthly budget for bills I’ll pay in the next 30 days
- I check my complete annual budget for large bills coming up such as trips and car repairs
- If I decide that there is still money to burn, making a purchase is easy because I would have already decided that I need the item. If it’s a technology product, I would have already analyzed it. However, if I’m looking to pay down debts there is a completely separate process of reading my personal financial strategy documentation to see where that money should go next. This is where I have written how I will make money, what I will do with the money, and which debts I rationally decided should be paid down first.
Am I over-thinking it?
“Only when you combine sound intellect with emotional discipline, you get rational behavior” ~ Warren Buffet
“Thinking” is by definition a rational process – even when it is emotionally influenced. To save me from myself, I previously defined for myself what are the criteria for spending (for me). I have it on Microsoft Excel, so no matter my emotional state, I go through this process EVERYTIME before I spend. What happens is that I don’t like going through it, so I won’t do it often, and definitely not for less than a $500 surplus in my accounts.
The bottom line:
Unlike Joe Mihalic you likely don’t make enough money to pay off any major debts (car, mortgage, student loans) in 10 months. That extra payment could bring you closer to financial disaster if something happens.
Even if you do make a lot of money, please spend it rationally because the ongoing fear of money will only hurt you later on in life. Nobody can afford to be emotional (fearful) about money; not you, not me, and not Joe Mihalic.