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!
Go Gingham 
Well said! I was debt free when I got married–but purchasing a house required a mortgage, as we did not have the cash to buy our home outright–I doubt most people do. But when you consider that money spent on rent is getting you exactly nothing in the long run, a mortgage seems the wiser economical choice. I would ask myself, is my debt something I consciously chose (mortgage, credit card…) or something that was the unfortunate result of a bad situation (house flooding, major medical bills not covered by insurance). There are lots of reasons for debt and some are truly beyond our control–BUT, what I CAN control, I try to do thoughtfully.
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Kris –
Thanks for the comment. It is a tricky balance. There’s always something that needs to be paid for! We do use a credit card for most everything (for the float and airline miles) but pay it off each month so no interest is incurred. I like the idea of just being thoughtful.
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I also use a credit card for most of our purchases but we pay it off each month. I think the thing I hate about debt (well, two things!) is that 1) interest! and 2) being beholden to whomever is loaning the money.
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My husband and I strive to live debt free with the exception of a mortgage (we believe this is an acceptable debt). We want to be debt free because there are so many limitations on our lives when we do have debt.
We’ve worked very hard to pay off my husband’s car. At this point our only debts are student loans and the mortgage.
It takes hard work to avoid other debts, but the effort is well worth it for us.
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Shannon –
Thanks for commenting. Those darn student loans! With two kids in high school we are heading into those discussions right now. There is some freedom to avoiding debt. Sometimes considering the mental burden it may impose is enough to put off acquiring it in the first place.
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We managed to become debt free (except for our mortgage) For a few months in 2013. I was very disappointed when we had to finance my husband’s new (used) car toward the end of the year. I had hoped to save up enough cash to buy a car, but his quit before we could save that much.
For me, it’s all about cash flow. Our car loan is around 2.5%, so the interest hardly matters. But having a $225 per month car payment is tough, and I’d like more wiggle-room each month. There’s also the problem of what happens if there’s a job loss. Some debt can be deferred for a while, but some must be paid no matter what. When you’re working on saving an emergency fund, factoring in debt payments increases the amount you need to save.
I definitely prefer being debt-free, but I’m not super strict about it. Sometimes there really is no other choice, and sometimes it makes more sense to make payments than to exhaust savings.
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Jen –
Great comment. It really does end up being situational. Things crop up, but it helps if you (and your partner) have a consistent philosophy around it that guides your long term decisions.
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