All right, I said I wouldn’t get political on this blog (and I still won’t), but today’s headlines had another political figure (this time, the current Democratic candidate for Governor of Georgia, Stacey Abrams) in massive debt. The figure given was $200,000, which is unsecured debt only (it does not reflect her mortgage debt or her car loan). Of note, that figure also includes unpaid back taxes, which I find to be rather problematic for anyone who is running for public office, but I digress.
Let me just state, again, that this is not a political blog. This is a personal finance blog. And whenever I see public figures (politicians, celebrities, etc) who have abysmal finances despite high incomes and/or public prominence, I think it goes a long way towards showing that personal finance is everybody’s problem to solve. I don’t care who you vote for, where you live (that includes what country you’re from), or even what your income level is, because high-income people can have huge debts/bad spending habits, while so-called low-income people can have high levels of savings/investments because they make better decisions about how to allocate their money. However, if you’d prefer not to read my analysis of a political figure’s publicly admitted high debt levels, I have lots of other great content you might like instead.
Let’s start with one simple truth: How much money you have is usually more reflective of how much money you spend, rather than how much money you earn.
I read Stacey Abrams’ report about why/how she got into such high debt with great interest. First of all, I think it’s awesome that she is being very honest and upfront about being in debt, and also sharing some of the reasons she got into that much debt. That’s great. Many if not most people are totally dishonest with themselves and with each other about money, and the fact she is willing to put it all out there is a great accomplishment and often the first big step towards making better decisions. (Plus I have to award general kudos to any politician who is honest about anything in public, but yet again, I digress.)
According to Abrams, she got into nearly $200,000 in debt for the following reasons. After each of her self-reported reasons, I give some analysis and advice on how to avoid falling into these kinds of debt traps. (And for those of you who are new to Cheap Yuppie Mom, I know whereof I speak. I was once in massive stupid debt of my own making, and managed to tunnel my way out.)
- Student loans. Abrams self-reports that she has just shy of $100K in student loan debt accrued by attending Spelman College, the University of Texas at Austin, and Yale Law School for undergrad, grad school, and law school. Those are all very prestigious institutions and kudos to Ms. Abrams for her academic achievements. But given that she is a year older than I am (she born in 1973, I was born in 1974) I would question why she still has this much student loan debt at her age. Did she attend grad school/law school later in life, or are these balances due to a loan deferment with compounded interest? In any case, that is waaaayyyy too much student loan debt to have at her age and stage of career. If I were Ms. Abrams, I would focus on paying this debt down ASAP to avoid incurring any more compounded interest on the principal, and taking advantage of student-loan tax deductions. (Student loans can balloon to far more than you ever borrowed for school due to deferments, which I suspect may be at hand in this case). Another big question to ask is, why did she go into this level of debt when she is a relatively low earner given her work as a part-time legislator and self-employed entrepreneur? (Both great things to be, by the way, but neither requires attending super-fancy/expensive schools to achieve). Before you go into debt for any form of education, you need to ask yourself what the return on investment will be. If you are primarily interested in either low-paying work (ie, in public service), high-risk career moves (eg, entrepreneurship), or a combination (like Ms. Abrams chose to do), you should look for ways to get educated as cheaply as possible—or better yet, free. Community colleges and smaller public universities can be free, or low-tuition bargains and frequently offer as good an education (or better, and not just because you can afford it!) than you get at “name-brand” institutions if your goal is self-employment or public service.
- Ms. Abrams owes almost $55,000 in back taxes to the IRS. She says that it is due in part to her not filing her quarterly self-employment payments with the IRS, because she chose to spend the money on other things. (And she can’t exactly claim ignorance of tax law, given that she is an attorney who attended Yale Law School, which is the best law school in the United States). I’m sorry, but there is just no excuse for this, especially when someone is running for public office. Granted, she says she used some of her unpaid tax dollars to help pay her father’s medical bills (a well-intentioned thing to do), but in doing so she not only put herself in debt, she may also have rendered her dad ineligible to receive either tax-subsidized care or to have his bills waived as charity care (both options are available at most nonprofit hospitals for low-income persons, which her father apparently is.) Ms. Abrams actually said (kudos for her honesty): “For a lot of folks who are doing quarterly taxes, there is a temptation — because it is cash that is sitting there — to spend it on the other insistent things in your life.” To which I say, if you want to avoid this type of legally and financially sticky situation, PAY. YOUR. DAMN. TAXES. WHEN. THEY. ARE. DUE. Like all forms of debt, tax debt costs you waaayyyyy more in the long run than it would have cost you to pay your taxes in cash when you were actually legally required to pay them. (did I mention this lady is a lawyer?) Ms. Abrams reports she has set up a payment plan with the IRS to settle the debt (good for her), but I hope she also retained the services of a tax attorney to help her get a better deal on the debt settlement and get some of the penalties and interest waived, because paying a tax attorney will help you save $$ in the long run. (Or better yet, just pay your taxes on time, it’s easier/cheaper/required by law). I am sorry to say that this tax issue may impede Ms. Abrams from winning the GA governorship, which would be unfortunate, because she is obviously a smart and talented woman.
- Very high level of credit card debt. Ms. Abrams reports that she currently owes $77,522 in credit card debt, spread over nine credit cards. That’s five times the national average household credit card balance of $15,432. Okay, this is not OK. It indicates a severe spending/financial management problem on Ms. Abrams’ part. I honestly don’t know how anyone accrues that level of debt on credit cards, especially when there is already significant other debt elsewhere. Again I commend Ms. Abrams for her honesty in disclosing this to the public, and I hope she is getting some financial counseling on how to prevent it from getting worse. But here’s one thing that stuck out to me in her interview—she basically said that she is providing financial support to her entire extended family: “‘My family is best classified as working poor, and one reality for those of us who are the first generation to really make a good income is that you then become the money for everybody,’ Abrams said.” THERE IS SO MUCH WRONG WITH THIS STATEMENT, I CAN’T EVEN BEGIN. <sigh> <bang head on desk> Bottom line, you are not required to subsidize the incomes/lifestyle of able-bodied, employed adults who are related to you just because you are quote-unquote successful—-especially if, like Ms. Abrams, you are up to your eyeballs in debt. Seriously, learn to say NO. Ms. Abrams’ first responsibility is to get herself out of debt and start building some savings, not to subsidize the lifestyles of other working people. (I would actually venture a guess and say that she has incurred massive amounts of debt because she has relatives who expect/demand she pay her bills for them, and she doesn’t have the strength of character to say NO.) Here’s the thing: charity begins at home. If you can’t even keep your own financial house in order, you don’t need to be paying for anybody else to live—especially if you’re incurring debt to do it. If and when Ms. Abrams erases her debt and builds up appropriate emergency/retirement savings, then and only then is it OK for her to subsidize the income of her relatives. It’s that simple.
- Good news: Ms. Abrams is expecting a $150,000 book advance from Henry Holt as a result of one of her side businesses, romance novel writing. THIS IS GREAT. If Ms. Abrams is smart (and she clearly is, she went to Yale Law School, Spelman and UTexas-Austin, all amazing schools!), she will use the entire amount of her book advance AFTER TAXES ARE PAID to erase 2/3 of her debt, and will refrain from incurring any more debt, while putting a substantial chunk of her income towards paying down the debt for good. She will also work on getting a sizable savings account and retirement income set up. And if she wins the governorship of Georgia (and I sincerely wish her good luck, and kudos for running!), that will be a great career move which a good income, government benefits, and likely further career cache down the road should she decide to return to the private sector. If she becomes governor, she could also consider selling her house (since she’d be living in the Governor’s Mansion) and her car (since she’d get a state secured motorcade).
- In summary, having a great (expensive) education, your own business, and prestigious, high-profile jobs does not guarantee good financial health. You have to live only on what you yourself earn, and it’s harder said than done in our spending-focused culture. Indeed, many high-profile people have the same financial problems that everyday Americans do, as Ms. Abrams is very public about admitting (again, great that she is so frank about it). All of us need to show discipline about our finances, and we all can do a better job. Here’s a tip: Earn more, spend less, and avoid debt at all costs. (Debt is modern slavery). Learn to do those things, and your finances will be better for it whether you’re a state governor or a waitress.
I remain your Cheap Yuppie Mom.