The Debt Free Fallacy
The mainstream concept of debt creates unnecessary anxiety for people. Innocent consumers are made to believe that if they maintain a credit card balance then that’s somehow a terrible thing. They are encouraged to pay this off as their top financial priority.
But that’s a load of baloney. In reality there are often more important matters in life.
Let’s say an indebted consumer pays off a $2,000 credit card balance.
“What a relief!” he tells himself. “I’m finally debt free. It feels like a great weight has been lifted.”
But has it really?
I’m all for celebrating financial achievements but let’s put things into perspective.
That $2,000 of debt was only costing him maybe $30 per month in interest.
That’s less than 1% of most household budgets. It’s really just a drop in the bucket.
So yes he is “debt free.” But what did he give up to earn this privileged status? He gave up $2,000!
That money could have been used for a wonderful vacation to Maui instead of paying back the loan.
There’s a real opportunity cost here.
Set a higher bar
What’s so great about being debt free anyway? Even after you pay off $2,000 of consumer debt aren’t you still on the hook to pay for life?
It’s not like the other 99% of household spending magically goes away because you no longer have any more debt payments. Your day to day life wouldn’t change very much. In fact, having reasonable amounts of debt is actually advantageous because it would help build your credit history. 🙂
Obviously if you have nothing better to spend your money on, paying down debt probably wouldn’t hurt.
But don’t sacrifice personal experiences and not allow yourself to enjoy life because you want the feeling of being “debt free.” Living a full life is more valuable than chasing a particular financial state. I don’t understand why some consumers are in such a rush to be debt free.
What are we even suppose to say to people who become debt free? “Oh. You’ve finally gotten your net worth to zero! Congratulations!” 😂
Consider the alternatives
What does it say about your creativity when all you’re thinking about is reducing debt? Is there really nothing more important you can use your savings for?
You may be tempted to pay down your mortgage faster. But mortgage interest rates are below 3% today. Do you not have any desires or investment aspirations that can give you a higher return than 3% a year? My MBA friend did a detailed analysis on this dilemma; is it better to save and invest or to reduce debt? In the end she also concluded that investing leads to a better outcome than paying down the mortgage.
Lifecycle investing is a strategy where you borrow money to buy stocks when you’re young, and slowly deleverage over time. This has worked 100% of the time through history. And has outperformed traditional investing methods. You can look it up yourself. 🙂
Facing Reality
Nobody can live off of being debt free. So out of all the possible financial goals including earning more income, learning to invest, saving for retirement, becoming financially independent, etc., becoming debt free is probably the most unimaginative and unambitious goal out there.
Honestly, if you asked a working professional if he would rather be wealthy, make double his current income, or become debt free, almost no one would select the last option. It’s a terrible financial goal because having no debt is the baseline. Everyone starts life with $0 of personal debt. You can certainly strive for a higher standard than this.
I’m not saying being debt free is bad. But there are clearly better things you can do with your time and money than chase after the same financial status as babies, monks, and homeless people.
If all other factors are equal I would rather be debt free than owe someone else money. But if I have debt, it was for a purpose. Maybe I really wanted a pair of shoes but didn’t have the cash to pay for them right away.
There are legitimate reasons to use consumer debt if you gain more utility from the loan than the cost of borrowing. Booking a last minute flight on a credit card to attend a funeral because a relative unexpectedly died can be one example. The debt can be dealt with after, but the funeral is time sensitive.
Introspection
People who live in retirement homes often regret not spending more quality time with loved ones, not traveling more when they were young, and not letting themselves be happy. But no research has shown them express any regrets about going into too much debt, or not being debt free sooner.
I think it would be fair to say that using consumer debt in a controlled way can help give our lives more meaning, more fun, more experiences, and more memories. 🙂
Not all credit card is bad, and not all mortgage debt is good. I’ve borrowed money on a credit card for 1.9% interest rate and had mortgage debt at over 3.5%. I don’t want people to miss opportunities because they’re too focused on a single goal.
If being debt free is what you desire, then ask yourself why do you want that?
Ask yourself what will you do after you achieve debt freedom?
Whatever that is, are you sure it’s debt that’s preventing you from pursuing that thing right now?
Remember to look at the bigger picture. Your life doesn’t exist in a bubble, so neither should your finances.
Maybe it’s time to shed the stigma around having debt.
Make your money decisions intentionally so they align with what you truly belief. And develop a deep understanding of how to optimally position yourself within the interconnected web of the financial world.
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Random Useless Fact:
Americans spend $70 billion on lottery tickets each year. That’s more than they spend on sports tickets, books, and movie tickets combined.
Wow. What a coincidence. 😂
😀 I was reading that analysis this morning and thought of you. Leverage worked out well for you but others might not do the research needed to have the same results. Debt can be very dangerous if not properly managed.
That’s true. Proper research should always be done before doing something like using debt to invest. 🙂
Or before writing something as ridiculous as this post. Cite your sources, that is if you have any.
Debt free is my goal. It will help me sleep better at night and if I didn’t have debt ($22k on a Heloc) I could whether any financial storm because my expenses would then be very small. If I had no debt and lost my job I could maintain my current life style while working part time at Mcdonald’s.
I balance savings and debt payment. In January and February, when oil stocks were down, I did more investing and less debt repayment. This month most of the stocks I am interested in are riding too high and so I am paying more debt.
My debt is the remainder of the mortgage on my house, a car I financed and some work retraining I had to do to get myself in to a higher wage class. I have added to it to buy a great stock a few times in 2015 and early 2016 but I have stopped doing that because I need the debt to be gone so I don’t worry. It will be Christmas 2018 before I see the end of debt.
Good for you Beth. I follow a similar strategy where how much I invest vs paying down debt depends on how the markets are doing. It all depends on what we want to do with our money based on our needs and life goals. There’s a time to take on debt for education, transportation, or housing, but just as important, there’s also a time to pay back those debts. 🙂 Good luck with your 2018 goal.
Hi, just read your post, hopefully your debt free already! Christmas 2018 is just a mth. away
I would like to pay off my mortgage early because of the reduction it would mean to my fixed expenses. It will free up significant money that I can use to invest, or it will allow me to work part time and still cover all my expenses with income from my investments. I still invest significant amounts of money each month.
I understand your point, and I don’t think debt free should be the ultimate goal. Debt is an extremely useful tool. I think it needs to be in perspective. I know it’s not “cool” to pay down your mortgage when interest rates are >3%, but I would like to have a small mortgage if rates don’t stay this low in the future.
It’s nice to see that you understand the reasoning coming from both sides. That’s how we can make informed decisions that line up with our values. 🙂 Personal finance isn’t about lecturing other people on how to manage their money. It’s about accepting the fact that not everyone is in the same boat and we all have our own reasons for doing what we do.
Yeah, I gotta say I completely disagree with you. Consumer debt at 18% interest should be wiped out before you spend money investing, and it should absolutely be paid off before you spend money taking vacations. To be honest, when I read the line about them taking a Maui vacation instead of paying off the loan, I thought you were trolling all of us. But it sounds like you’re being serious. Even if the debt was only costing them $30 per month in interest, that’s still $360 a year that they’re losing for no reason at all. If they paid off the debt, that $360 could buy them a trip to Maui every 5.5 years just in saved interest. I can see the argument that paying off a mortgage early, when it has a very low interest rate, might not be the best idea. Investments might get a higher rate of return than the mortgage. (MIGHT. Not guaranteed.) But a credit card with 18% interest? You’d be very hard-pressed to beat that number investing. Cash on cash return with a low down payment rental property in a high-cash-flow area, maybe. But even that’s not smart if you have consumer debt… Read more »
I think in most cases you are right. I would not recommend anyone pay 18% interest for no reason at all either. But sometimes there are good reasons to put a $2,000 vacation bill on the credit card and go relax for a couple of weeks. 🙂 For example, after an intense grind to finish a major project at work it would be nice to take a much deserved vacation. Many companies even encourage it. As another commentator mentioned below, half of Canadians are living paycheque to paycheque. So not everyone will have the money to pay for a trip to Maui in cash. For many, a credit card is their only option. Once they take on this debt they can manage payments which they can afford, such as making $100 monthly payments to their credit card bill. Within about 2 years they would have their entire credit card paid off. During these 2 years they would have paid a total of $2,392. So the extra cost of borrowing $2,000 at 18% annual interest rate is only $392 in this case. For that extra cost the debtor was able to get some quality rest and destress. They are ready to… Read more »
I don’t know… I don’t think I’d be interested in taking 2 years to pay off one vacation. I’d rather get rid of the debt and have that vacation paid for before I go. That’s more relaxing to me. And because I’d be out of debt, I could actually have that money to take a last minute trip
You and I are similar in that leverage has had a huge effect on our financial success. 🙂
Yes. Thank goodness for leverage. My home wouldn’t be worth as much money as it does today if it weren’t for debt.
I would love to see your MBA friend who can show me an Investment that is greater than a 18% visa debt. Leverage can make you very rich or very poor. I can go borrow a 100g and dump it on number 7 at the casino and become rich but the risk to no winning is great.
In our consumer driven economy being in debt is tantamount to being a slave.
I paid off 100% of my debt including my house before I hit 35 and will probably end up saving over 50 grand this year to buy stocks.
I can’t explain in words how awesome it is to know I don’t owe any company anything.
Debt to me is like jail. Some people in jail might like it. Not I!
Congrats on being debt free. It’s great to find other people like yourself who have become millionaires in their 30s, wow! 🙂 I know many people who have retired early with the help of taking on debt. I also know some people, like a recent couple that was featured in the news, who stayed away from debt the whole time and managed to accumulate a $1 million investment portfolio in their 30s. Amazing stuff! The couple says they are anti-debt. Good for them. I think it shows that there are different paths people can take to reach the same destination. I’m probably misunderstanding something but if you claim that debt is like jail to you, and you don’t like being in jail, then I don’t quite follow why you held a credit card balance, borrowed to buy a vehicle, and had a line of credit and a mortgage in the past, especially when a mortgage is one of the largest type of debt out there. I’m happy for you that all of your debt is now paid off completely, 🙂 but I’m not sure why someone as financially responsible as you would go into debt in the first place. Would… Read more »
That is a terrible example. There is no investment vehicle that will earn you the same kind of interest rate as credit card risk-free. Paying off credit card debt is sound financial management. If you really need to borrow, there are alternatives. Paying only the interest only so that you can take a “much-needed” vacation is bad financial management. There are good debts and bad debts. Credit card debt is the worst debt.
I completely agree. From a financial perspective holding onto credit card debt is a really bad decision. That being said, there are other aspects of life that can compromise our logical decision making process. Sometimes the life experience we really want is worth the cost of going into debt. If a young waitress is invited to her best friend’s destination wedding, and didn’t adequately prepare or save enough money on her low income, then putting the $2,000 on her credit card at 18% interest rate may not be a bad idea. Let’s call this waitress Lucy. They are really close friends, so Lucy really doesn’t want to miss the big wedding. She doesn’t have the time to make plans to borrow at a cheaper cost so she charges $2,000 on her credit card and goes to see her BFF. After she comes back from her trip she can transfer the balance to a lower interest rate loan option such as a line of credit or possibly another credit card. But even in the worst case scenario where she can’t negotiate or get a better deal and is stuck with 18%, it’s still not that bad. Lucy can make very affordable… Read more »
Did I sleep to long and it is suddenly April Fool’s?!? As others have pointed out, unless you have an investment that that can return greater than 18%, you should pay down the debt. Most people have a lot more than $2000 at 18% of interest, btw. If you don’t leave within your means, the debt may be $2000 this month, but then $4000 next month. I admit that you have leveraged well, but you aren’t borrowing at 18%. I’m sorry you are way off today. Last year, we put a lot of $ on credit cards for some great life experiences. My income the year before had been higher so I didn’t expect to have a problem paying it off. Guess what? Sales didn’t end up being as high, debts could not be paid off right away. No we are working our way out of the hole. Memories are great, but they are much better when you find creative ways to fit them into your budget or put them off until you can save up for them. Then you will also enjoy them much more because you won’t be worrying about how you are going to pay for them… Read more »
I’m sorry to hear your income dropped this year. Good luck working your way out of debt. 🙂 I’m sure you have it under control now. Do you think it’s better to be in the position you’re in now, than to not have those great life experiences last year? I personally like to live in the moment, even if it will cost me more money in the future. For what it’s worth, I’ve never heard an elderly person regret spending too much money on life experiences or regret not paying down debt quickly enough. But many of them do regret that they didn’t allow themselves to have more life experiences where they were younger.
Yes, the memories are great, but the stress of the additional debt is not so great. Hindsight being 20/20, it would have been better to plan ahead or put it off until we at least had a chunk of the cost saved.
In an example above you mentioned taking 2-years to pay off the vacation. So what happens next year, when you really need a vacation, but you don’t have the $ again and you are still paying off last year’s trip? You can’t just keep charging things.
cd :O)
“$2,000 of credit card debt…So yes they are debt free. But they don’t realize that they had to give up $2,000 of hard earned money in order to pay for their “debt free” privilege.” Wow. Do you proof-read your material before putting it out on the internet? Do you understand how debt works? They already gave up that $2,000 when they put it on the credit card. By using a credit card all they did was pull future production (earnings) into the present. The cost of interest is the cost of that time shift. By repaying the debt they are re-establishing the production equilibrium. “That $2,000 of debt was only costing them $30 per month in interest. That’s less than 1% of most household budgets. It’s really just a drop in the bucket.” If I buy a TV for $2,000 with a credit card, the next month that same TV has now cost me $2,030. Finally taking…oh INFINITY years to pay for that TV (at $30/month) and costing well over $10,000 — or more than 500% than not paying off that credit card debt (or paying cash at time of purchase). Even if the payments were doubled, it would still… Read more »
Your time shift explanation is a good way to illustrate what interest actually is. Time is money, as they say, lol. Looking through the comments I think might have hit a nerve with some of my readers. But yes, look forward to my shiny new post on Monday. 🙂 By the way, your comment seems to be getting quite a few thumbs ups this time. Nice going.
Good argument Liquid as usual,
I used debts to accumulate assets, especially dividend stocks. But, I wouldn’t carry debts with 18% interest rate. I know you discussed the worst case, but many readers will disagree with that.
I have all types of types of debts including credit cards, mortgage, margin, line of credit, student loans and HELOC. The highest rate I pay is for my student load at 5.20% rate.
The highest interest debt I’m paying is a line of credit at 5% right now, similar in rate to your student loan. My goal is to pay down this debt over the next couple of years. I like the credit card leverage strategy you did before. Not many people would think to borrow money to buy stocks but it worked for you. I wouldn’t carry 18% interest debt for long either, but if I didn’t have any other option then I will consider using short term high interest loans in the conditions are right.
Careful, now, Freedom.
I only comment because I enjoy your posts and wish you longevity and success.
You must not break the cardinal rule of communicating: forgetting your audience.
Who reads your stuff? Is it entitled spenders or financial buffs who want to learn and better themselves?
Debt is not only a number. It is a mindset. When we spend to delay gratification through purchasing assets, we are taking care of our future. When we spend today because we want to take a trip because we feel we deserve it and are entitled, we are taking care of our present selves only.
Of course, you know this. You’ve made sacrifices to better your financial self. This post, however, seems like it was written by a guest blogger who just needs a break from all the investing stuff.
That’s really generous of you to say, Adam. Thanks for your concern. 🙂 I would certainly say most of my audience are financially curious people who want to improve their knowledge, like yourself I’m assuming. I like how you say debt is a mindset. And that was precisely what I wanted to address in this post. I was trying to break people away from the common mindset that consumer debt is always bad. From a purely financial point of view, I generally do not recommended going into credit card debt. But as human beings we tend to strive for a well rounded life full of meaning, purpose, love, and a sense of belonging. This means we might have to make financial sacrifices sometimes in order to satisfy our emotional or relationship needs. For example maybe a household plans to have some relatives come over to spend a few days with the family. The weather is expected to be great for BBQ. Since the dad works a seasonal job their income during the summer is pretty tight. But there happens to be a high quality BBQ grill on sale at Costco for $2,000, which is $400 cheaper than its regular price.… Read more »
You want to get people to think about money from different perspectives but you yourself fail to do so, especially with this article. Take your BBQ example. It’s terrible. Your example is a great example of what the easy availability of debt does — it kills inventiveness, ingenuity, and innovation. The family could very well have looked on craigslist or kijiji etc for a very inexpensive (i.e. less than the $400 in CC interest payments) used BBQ, or they could have borrowed a BBQ from a friend. But in your example, no one used their brain. Easy credit makes people stupid. Further more, in your example, the family “income during the summer is pretty tight”, so we’ll say perhaps 1/3 of the year money is tight. Buying the BBQ on credit and taking 2 years to pay it off will mean that for 8 months of that duration the family is now under even greater financial stress. Would YOU trade 8 months of increased stress (a known killer) for 1-2 weeks of dubious enjoyment? Sure the family could relive their rich BBQ experiences, but will those memories be happy enough to over-ride the rich experience of debt pain? Not only… Read more »
To be fair though, most people are in debt. Half of Canadians live pay cheque to pay cheque. I don’t even want to know the number that are in debt. So when you are debt free, it is to be celebrated. But then as you have said, there’s other mountains to climb. Other bigger goals to attain. (And the reality is to make money sometimes, you need to take on more debt and invest. Sometimes it works out. Sometimes not.)
That’s crazy how many people would be in financial difficulty if their paychecks were late. 🙁 I have mentioned in the post that I believe if someone has debt, then they should pay it off. But not unless they have something else more important to do with their extra money. I didn’t think I made this point clear enough, so it probably came off as I think all debt is good and people should carry around credit card balances without considering all the advantages and disadvantages of being in debt, lol.
I agree with a number of the current comments, Adam’s especially resonated with me. As a regular follower of your blog, this article didn’t feel like the same writer. Your comments in reply to feedback provide some better context as to what you were trying to construe and some of the supporting thinking but I think the current article is off. To be honest I would have to say I lost some respect for this blog with this post.
I just hope future readers read the comments and replies to get a more wholesome view and context.
Thanks for the feedback Mike. 🙂 I wasn’t sure which point I should explain in more detail. Was there any particular area in the article where you felt was hard to construe or needs more context? The next post I’m publishing will also be about debt. I’ll be careful to back up my statements with clear examples in that one, so readers can better understand where I’m coming from.
[…] things off with Liquid Independence, who wrote a so-called “rant” about how being debt free isn’t everything. While he picked a terrible example of somebody with credit card debt at 18% interest, the rest of […]
I’ve always looked at being debt free as one step of a much longer journey toward financial freedom. The two big things are to, one, understand this perspective and set goals accordingly, and two, make sure that when you do achieve debt freedom, that you make sure to have a plan to stay out of debt so you don’t get right back in the hole.
This article can serve a use. Peak Debt indication.
When personal finance bloggers start advocating that credit card debt is no big deal and to just “live in the moment” – we have hit peak debt, folks.
The level of insanity out there in regards to what is best for your finances is officially insane.
Invest accordingly.
We have worked for many years to be debt free. Lots of trials and struggles. With persistence we are totally debt free. Even our small farm is totally ours. Best decision we ever made. When in debt, we struggled to pay our monthly expenditures. We had to pay all through the month….and then couldn’t pay everything. Now, we pay everything on the first of the month……rest of the month’s income is put into savings, trips…..could even be Maui, etc. if major expenses come up, we have the finances. Best decision for us to be debt free! We have NO inclination to get in debt ever again.
Haha this is such a stupid article I kept waiting for it to be a joke. Spend money you dont have so you can do what you want when you want and have no regrets’ haha mut be written by amex this article
I work in a bank, and have seen first hand what over spending and debt can do to a person. I don’t believe your statement that there are no studies where people have had no regrets of having debt is true. I see where being free of debt DOES open peoples creativity and possibilities and doesn’t leave them “unimaginative”. Each year, I plan a big trip. I SAVE and plan all year for that trip, I put it on my credit card and pay it off immediately. It does not hinder my creativity and feeling of living. That is how it should be done. What is wrong with our society is that every one wants things now, and I believe the “excuse” they use is they want to live and enjoy life. When I save for a trip I can enjoy it more, knowing I’m not going to have to come home with a bill that will be hurting me down the road. Stop giving people bad advice, and start giving smart advice.
Why even put it on a CC if you’re saving for it?
I enjoyed your parody. Especially when you conveyed that you have no understanding of net worth. (FYI net worth = total assets – total liabilities. 100k assets with 100k in liabilities = 0 net worth. 0 assets with 0 liabilities is still 0 net worth.)
You’re crazy.
But you aren’t just paying down “debt” when you pay off your credit card. You’re paying for stuff your previously purchased, and you’re paying more for it because of interest. So $30 a month in interest doesn’t seem like a lot, but would you pay $30 extra for gas? Would you pay $30 extra for a pair of jeans? If the cashier at the grocery store said “I see you’re paying with credit, we charge an extra $30 for that” would you still want to pay using credit? Probably not. Being debt free simply means finally paying for everything you already have. Putting a vacation on a credit card just means you’ll be paying for it long after you’ve taken it. If you save the money then you don’t have to pay interest. And don’t say “not everyone can save up for a vacation” because if you can’t afford to save up for it, then you cant afford the credit card bill you’ll be paying after the trip. Debt is dumb.
Is this an Onion article ? 🤔
Most people can be out of debt (except for their home) in 2 to 3 years. Imagine what you can do with your money at THAT point. The whole “treat yourself with a vacation because you deserve it” concept, is ridiculous. Be an adult, put on your big girl/boy pants, and deal with it! Sorry, but I’m not buying the logic there at all. My hubby and I went on a honeymoon (because “that’s what people do”) and sadly put it on a credit card. We did not manage our finances well (along with most of the the US population) and it took us FOREVER to pay that sucker off. The years of stress with this debt made the one-week honeymoon tarnished. This is just my perspective, but if the majority of people DON’T pay their CC balance off each month AND have financial issues on top of that (living paycheck to paycheck, for example), then encouraging people to keep their CC with 18% interest on it is the worst advice I have ever read on the internet. Can’t even believe there are people who agree with this garbage!
There’s a reason this is written by “liquid independence”. Nobody should be proud of writing an article that encourages using debt. Let’s not forget the fact they they have no understanding up net worth. I came because the title seemed too satirical to be real money advice. I was not disappointed.
Your blog post has now become comedy gold on the Facebook group The Ramsey Baby Steps Community. 77k members and counting. Enjoy your credit card vacations you don’t deserve because you can’t afford them and interest on those credit card bills everyone! Don’t bother accounting for the risk of it all. Hope your life goes perfectly and Murphy doesn’t ever knock on your door.
This is a satirical artical, right??
You’re seriously a fucking idiot.
I get it, you make millions of dollars on the collective interest payments handed to you by people you convinced going into debt is a smart idea. The better idea is to shoot all the people like you who strive to put people into debt and convince them that remaining in debt is a GOOD thing.