There’s a lot of talk about being or becoming debt free. It’s usually framed as an all or nothing decision and that you must do it, at all cost. It’s a good discussion to have. However, the discussion needs to focus on whether or not to be debt free, not immediately settled on the foregone conclusion that debt free is absolutely the right choice. Let me explain.
Yes, ultimately it would be great to never have any debt. Making that decision in a vacuum, who wouldn’t? But that is not the choice. The choice is really – what else could (or would) you be doing with that money? Like most decisions, the deciding should rest on the alternatives, not just that you’d rather not owe someone money. It’s a false choice to think that it’s either have debt or don’t. If that really was the choice, who wouldn’t choose debt free. But, in real life there are more considerations than that. For example, if you chose to save up to buy a house and not take out a loan, it could be a very long time before you are able to do that.
Debt Free Isn’t for Everyone
There are several main factors that should figure into your debt decision, including different types of debt (some virtually necessary to do some things like buy a house or pay for college), personal temperament and the straight, rational financial decision.
There are different types of debt and some are “better” than others, the main driver usually being the level of interest rate you are paying (higher = worse). Specifically, credit card debt (that gets rolled over each month) is almost always a bad idea. The interest rate you pay is obscenely high and the fact that purchases are building up your outstanding card balance likely means you didn’t have the money to pay for them to begin with.
Another factor is your personal temperament. For most people, there is a mental burden that comes along with having debt and this burden must be weighed against the straight mathematical decision of whether or not to pay something off. There is something to the feeling of owning your house outright (not that I’ve felt it – but I can imagine!).
Finally, there is the straight financial decision – what is the interest rate and can you reasonably afford to pay it back? Assuming you have already taken out some debt, in the simplest terms, if the interest rate you are paying is greater than the interest rate you could reasonably expect to receive on that money in an investment, then it seems it should be paid off (again, with credit cards, the interest rate by its design is almost always higher that you could ever reasonably expect to receive on an investment).
It’s a lot to think about. Each of these factors play a varying role in each person’s (or family’s) decision and each gets weighted differently based on the temperament and specific circumstances of the individual. It’s not necessarily a guaranteed good choice to restructure your financial life to solely focus on paying off debt. Take your time, think it through, determine why you are doing it, and weigh the various options and alternatives.
What do you think? Is debt free living for you?
Go Gingham related links:
Budgeting and how to track expenses – Part 1
Budgeting and how to track expenses – Part 2
Budgeting and how to track expenses – Part 3
Living a frugal life by choice: strategic frugality
How finances figure in frugality
The key to saving: frugal living is the key to saving
What does it mean to budget? Find out here!