How to Avoid Debt & Set Yourself Up for Early Retirement

This article is an excerpt from the Shortform book guide to "Early Retirement Extreme" by Jacob Lund Fisker. Shortform has the world's best summaries and analyses of books you should be reading.

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Do you have a car loan, a mortgage, or student debt? How could your life be different if you were debt free?

According to early retiree Jacob Lund Fisker, most people can do without many things they think they “need.” When you lower your annual expenses, the time it takes to save for retirement drops rapidly. Debt implies significant expenditures, and it adds to your expenditures in the form of interest.

Keep reading to learn how to avoid debt and minimize your cost of living.

How to Avoid Debt

Lowering your expenses not only leaves you with more income to save—it also means you’ll be free of that expense every year you’re retired, so you don’t have to save as much before retiring. Minimizing your living expenses means refraining from taking on debt of any kind, including auto loans, mortgages, and student loans. Now, let’s discuss how to avoid debts of these kinds.

You Don’t Need Auto Loans

If you need to buy a car, Fisker recommends saving up and paying for it in cash to avoid taking on debt. That said, he says it’s better not to own a car at all, if possible, as it’s one of the biggest expenses the average person has. On top of the cost of the car itself, fuel, maintenance, and insurance costs can add up and significantly delay your retirement.

The best way to avoid owning a car is to plan ahead when choosing where to live. As long as you live close enough to walk, run, or cycle to your workplace and a grocery store, you can live without a car. Additionally, walking, running, or cycling every day is a great source of exercise, improving your overall health and helping avoid unnecessary health care costs.

Car Owners Should Live in Walkable Areas, Too

Arguably, Fisker’s advice to avoid owning a car isn’t feasible for everyone. For instance, if you need to frequently visit family and friends who live in different cities, you may deem car ownership a necessary expense.

However, some experts on frugal living agree with Fisker that living close to work and grocery stores saves large amounts of money, even if you own a car. This is because, for the most part, the expenses of car ownership add up per mile you drive, not evenly over time. Every mile you drive requires more fuel and wears out parts of your car, reducing the time before your next repair. The exception is car insurance, which you pay at a fixed rate no matter how much you drive, but you can minimize this fixed expense by driving a cheaper used car rather than a new one.

Additionally, the average American spends about an hour a day driving. If you lived closer to the places you needed to go and spent that hour engaging in cardiovascular exercise—walking, running, or cycling to get around town—you could significantly reduce your risk of heart disease, diabetes, and cancer. In short, even if you own a car, you benefit from driving as little as possible.

You Don’t Need a Mortgage

Many adults believe that the most responsible housing decision they can make is to invest in real estate by taking out a mortgage and purchasing a “starter home.” Fisker disagrees, arguing that, although you gain equity as you pay off your mortgage, this addition to your net worth is more or less counterbalanced by the interest you have to pay. For this reason, purchasing a home with a mortgage is no safer than investing the principal of any other loan. Although it’s possible to make money as your house appreciates in value, it’s always possible for the housing market to decline.

Because real estate is an uncertain investment, Fisker argues that renting a place to live can be more economical than buying a home. Sometimes, you can make more money by taking what you would spend on a mortgage and investing it elsewhere. Whether it’s more profitable to rent or buy depends on the strength of the real estate market relative to other investment markets. Instead of worrying about the value of your home as an investment, Fisker recommends viewing it as just another living expense.

If you do want to own a home, Fisker suggests saving up and paying for it in cash to avoid paying mortgage interest entirely. This is especially possible if you choose to buy a small home—Fisker argues that most people buy houses that are too large and expensive, which serve as mere status symbols and places to hold unneeded possessions. By living somewhere smaller, you can massively reduce your annual expenses, regardless of whether you rent or buy.

How a Housing Market Crash Could Impact Homeowners

Fisker warns that buying a house isn’t a surefire investment, as it’s not a foregone conclusion that the investment gains will cover the interest on your mortgage. However, if the housing market suffers a major recession or crash, the consequences of a poorly timed real estate investment could extend beyond the financial loss Fisker mentions—you could default on your mortgage and the bank could foreclose on your home. In the 2008 housing crisis, this happened to millions of households.

If the homeowners who lost their homes in 2008 had bought smaller houses within their means, as Fisker recommends, many of them might have been able to weather a recession while making their mortgage payments. Fisker might argue that these homeowners had foolishly bought a nice house because they wanted a status symbol to hold more status symbols. However, others argue that the idea of owning a nice house is a key component of the American Dream. In other words, these homeowners didn’t see their house as a status symbol—they saw it as proof that they were virtuous, hard-working citizens who embodied the ideal American.

While keeping your mortgage reasonably small is a relatively safe strategy, the most reliable way to protect yourself from a housing crash would be to buy a home in cash, as Fisker recommends. This would ensure that you have a place to live even if your income dried up entirely.

How a Crash Could Impact Renters

According to Fisker, the primary advantage of renting rather than owning your home is that you can invest your savings rather than putting them toward a down payment and mortgage interest. However, a severe enough real estate crash would likely have negative reverberations throughout the economy (as it did in 2008), jeopardizing your investments in other markets. Despite this, renting rather than owning a home could help you mitigate the downside of a potential market crash in other ways.

If you’re renting your home during a crisis-level crash, your landlord might default on their mortgage, and although legal protections would allow you to keep your home until the end of your lease, you could then be evicted by the bank. While this isn’t ideal, you’d likely be better off than if you were the one who defaulted on your mortgage, as you wouldn’t suffer major damage to your credit score. Healthy credit would give you a better chance to secure an affordable loan on a future home.

You Don’t Need Student Loans

Fisker acknowledges that college degrees have some value, but he claims that much of the time they’re not worth the investment. You need a college degree to gain access to a number of white-collar jobs; however, skill-based jobs like elevator mechanic or cable installer often pay just as well and allow you to start saving immediately rather than paying off debt.

(Shortform note: Increasing numbers of students nowadays share Fisker’s point of view, seeking employment in trades rather than higher education and white-collar opportunities. In 2022, mechanic and repair trade schools reported an 11.5% increase in enrollment from the previous year, while traditional four-year colleges reported a 3.4% decrease.)

In regard to the college education itself, Fisker argues that most college programs won’t add much value to your life. He claims that most students in higher education are looking for the credentials necessary for a white-collar job and nothing more. Colleges looking to attract students have changed to cater to these desires, offering increasingly easy, entertaining classes with little true educational value

(Shortform note: Although Fisker contends that colleges have eroded their value by watering down their curricula, statistics show that the average four-year degree still confers a 25% boost in wages. Even courses in less marketable subjects provide students with valuable skills—for instance, one study shows that graduates of the University of Central Florida’s gender studies program demonstrate proficiency in project management, a skill that researchers say increases students’ earning potential by 22%.)

How to Avoid Debt & Set Yourself Up for Early Retirement

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  • How the modern world lures us into giving away our freedom
  • How you can permanently retire in your 30s
  • Three tips for minimizing your cost of living

Elizabeth Whitworth

Elizabeth has a lifelong love of books. She devours nonfiction, especially in the areas of history, theology, science, and philosophy. A switch to audio books has kindled her enjoyment of well-narrated fiction, particularly Victorian and early 20th-century works. She appreciates idea-driven books—and a classic murder mystery now and then. Elizabeth has a blog and is writing a creative nonfiction book about the beginning and the end of suffering.

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