Is Being Debt-Free a Terrible Goal?

A few days ago, a fellow blogger that I follow on Instagram shared a post she found from yet another writer, who goes by the pseudonym Liquid Independence and writes at Freedom Thirty-Five Blog.  The post was titled “Why Becoming Debt-Free Is A Terrible Goal,” which immediately piqued my curiosity, and not in a good way.  Normally, I’d read the post, roll my eyes, and move on with life, but the things Liquid wrote about are things that I’ve heard over and over again in the hundreds of discussions I’ve participated in over the past year or so.  Therefore, I’m going to use him as a punching bag for this post, but keep in mind that he’s not the first nor will he be the last to have these arguments.

Essentially, the overall idea that Liquid is trying to put forth is that debt is a tool that can be used to build great wealth, and that trying to get out of debt is not only a waste of time, but it’s a waste of money.  I’ll show you what he wrote, then respond to it one point at a time. Grab some popcorn.

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Conscience, Not Culture, Creates Debt Anxiety

The mainstream concept of debt creates unnecessary anxiety for people. Innocent consumers are made to believe that if they have $2,000 of credit card debt at 18% interest rate then that’s somehow a terrible thing and paying this off should be their first financial priority. But that’s a load of baloney, 😛 because we all know that paying for things like food is more important.

I don’t know anyone struggling with debt that lays awake at night because they worry about what other people think they should do with their money.  In my completely unscientific understanding of things (i.e., personal experience and talking with a handful of friends), the anxiety we feel about debt comes from the fact that we know we owe someone else money that we can’t immediately repay.  We understand that if the roles were reversed and we were the lender, we would expect the money to be repaid.  This isn’t because of some social construct, it’s because of how human relationships work.  Though money in itself is not inherently good or bad, there is a moral aspect to it, and how we handle money reflects who we are as people.  Maybe we should listen to our conscience telling us to do the right thing.

P.S., I don’t know of anyone that suggests debt payments should come before food.  That’s a little disingenuous to suggest that we’re out here telling people that they need to pay off American Express before they can buy groceries.

Debt Is Not An Asset

But let’s say they made some sacrifices to quickly pay off this $2,000 credit card balance. “What a big relief!” they tell themselves. “I’m finally debt free. It feels like a great weight has been lifted off my shoulders.”

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 them $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 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. That money could have been used for a wonderful vacation to Maui instead of paying back the loan. If they cut their internet or cell phone bills by $40 a month, then that would be more beneficial financially speaking than paying off their credit card balance.

Yep.  He really said that.  But remember, these ideas aren’t just something he came up with one night when he didn’t have much else to do.  This kind of thinking is proclaimed by several other voices in the PF sphere, and it’s probably most common in the subconscious mind of tons of Americans.  I know I would never have said those things out loud before I started this debt-free journey, but I certainly lived as if they were true.

So let’s look at his example: a credit card with a balance of $2,000 and an interest rate of 18%. We don’t know what the $2,000 on the card was spent on, but let’s pretend it’s a couple of new iPhones for the sake of argument.  They got some cases and headphones, too, and the total just happened to equal exactly two grand.  In Liquid Independence’s world, this fiscally responsible family thinks, “Well, we have the $2,000 to pay those phones off, but it’s only costing us $30/month in interest; why don’t we go to Maui to take some awesome pictures instead?”  Following Liquid’s line of reasoning that suggests debt is fine as long as it doesn’t impact your monthly finances, I ran the numbers to find the lowest possible payment (read: lowest monthly impact), that this card would take.  The result?  $31 every month for 231 months.  That’s over 19 years.  And the total amount paid including interest ends up being $7,161, and that’s if no new purchases are ever added to that card, which we know they will because “debt is a tool.”  Talk to me about affording this month’s bills all you want, but you’ll never convince me that paying 3.5x something’s value for an entire generation is a good idea.

P.S.,  “They don’t realize that they had to give up $2,000 of their hard earned money to pay for their ‘debt free’ privilege?”  They have to do that anyway, you ding-dong!!  They’re not paying $2,000 for a “debt-free privilege,” they’re paying $2,000 for whatever it was they bought that cost $2,000!

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Freedom From Debt is the Ultimate Liquidity

What’s so great about being debt free anyway? Even after they pay off their $2,000 consumer debt they’re still on the hook for everything else in life. It’s not like the other 99% of household spending magically goes away because they no longer have any more debt payments. There would be almost no difference in how they live now compared to when they still owed $2,000. In fact, having reasonable amounts of debt is actually advantageous because it would help build their credit history.

Obviously borrowers should pay down their debt when they have excess money that isn’t being used for anything else that’s more important. But making personal sacrifices and not allowing themselves to enjoy life because they want the feeling of being “debt free” will actually cost them more in valuable life experiences than the small amount of short term interest money they save. 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!” 

Ironically, a writer named Liquid Independence seems to have no concept of liquidity.  Liquidity, in case you’re doing that nod-and-smile thing, is defined by Investopedia as “a measure of their ability to pay off debts as they come due, that is, to have access to their money when they need it.”  When you hear of stores having “liquidation sales” when they’re going out of business, what they’re doing is selling their assets (remaining stock, fixtures, supplies, etc.) to sort of “free up” the money contained within those assets.  If they have a shelf they can sell for $50, that $50 is liquidated and can be used to help pay down some of what they owe before they close their doors for good.

If we were to follow Liquid’s advice, we’d be slowly freezing more and more of our income as it increasingly gets claimed by all of the creditors that are allowing us to “enjoy life.”  The more we borrow, the more we owe, and the less we can actually use our income to do what we want with it.  Debt is really just a reminder of things we’ve already done.  But if we’re debt-free, we have the full power of our paycheck to direct at whatever we want or need.  According to the New York Times, household debt reached $12.73 trillion in the first quarter of this year.  Super quick Google searches show that we’re at about a population of 326 million people.  That works out to just under $40,000 of debt for every single person in this country.  You don’t think your life would be any different if you got a $40,000 check in the mail and no longer had to pay student loans, a car payment, or credit card payments?

P.S., “What are we even suppose to say to people who become debt free? ‘Oh. You’ve finally gotten your net worth to zero! Congratulations!'”  That’s not how net worth works… just stick with “Congratulations!” and you’ll be fine.

Risk Is A Thing

And what does it say about their creativity when the most useful way they can think of to use their money is to reduce debt? Maybe they think they’re saving money by aggressively making extra payments on their mortgage. But mortgage interest rates are sub 3% today. If they find nothing else is more rewarding than reducing their mortgage balance, then that means they don’t have any new desires in life that’s worth more to them 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.

Nobody can live off of being debt free. So out of all the possible financial goals people can set for themselves 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.

Normally, I’d ask the question here, “If your home was paid for, would you take out a mortgage in order to invest in the stock market?”  And normally, most smart people would say, “No, that’s a silly idea.”  And they’d be right, because it’s a silly idea.  Mr. Liquid, however, would answer with an emphatic, “Yes!”  Which I think makes him silly.  Yes, theoretically, you can invest money into a market with a higher rate of return than the interest on your mortgage and come out ahead.  But we live in the real world with unpredictable risk, not the theoretical one that calculators and spreadsheets are made in.  If you were to make that trade in 2001 or 2008, you’d see why the idea is a bit silly.  If you were to offer me a choice between a guaranteed 3% return (and a paid-off house at the end) and a possibly, maybe 6% return, but oh, you might lose it, too?  I’m taking the 3% every time.  Saying it’s “creative” to take unnecessary risks motivated by greed is like saying that lighting your living room on fire to save on the winter gas bill is “being resourceful.”

P.S., Nobody can live off of being debt free?  Really?

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Alright, so Liquid Independence posted this in September of last year, and since then, he’s gotten spanked in the comments on his, erm… “creative” ways of approaching the subject, so I don’t want to roast him as a person too much.  I want to say again that even though he’s my punching bag for this post, there are so many people out there that live by his words, even if they wouldn’t say them out loud.  This post, and this site, exists to try and wake people out of the stupor that I was in not too many years ago: the dangerous idea that if you can afford this month’s bills, you’re doing fine.  That’s the normal thought pattern, and it’s killing our country’s families.  I want you to start thinking beyond this month, to next year, next decade, next generation.  If it were normal to avoid debt, to create wealth through slow and steady investments as we earn the money to do so, we wouldn’t be over 12 trillion dollars in debt.  Let’s change normal.  Let’s make it so that normal is actually owning the things that we have so we don’t live in fear of losing them when we hit hard times.  Liquid’s underlying argument throughout this whole post (as clarified over and over again in the comments section of the article) is that there’s more to life than money, and that we should enjoy that “more” by whatever means necessary, even if that means using debt to do so.  My response is that yes, there is indeed more to life than money.  So why spend so much of your time trying to reach for more, rather than properly managing what you’ve been given?

What do you think?  Is being debt-free a terrible goal?  Is it smart to go through a period of intense sacrifice in order to pay off debts, or is it better to leverage debt as a tool in order to increase your bank account as much as possible?

13 thoughts on “Is Being Debt-Free a Terrible Goal?

  1. I believe it depends on you and your risk tolerance. It also depends on the type of debt. It’s possible to beat some mortgages with risk free investing of similar terms. That creates risk free arbitradge. It’s also possible to get ahead using mortgage as leverage got risky investments. Historically the risky path made out ahead as well. But there is no guarantees. Are you ok with that and otherwise have the liquidity to cover that debt, then not going debt free is a valid choice. I personally balance the two. I do pay ahead on mortgage with new money equal to my bond allocation. But I’m not selling my existing stock holdings in taxable accounts to pay my debts. I’m also holding a car loan matched to an fdic insured cd and pocketing the difference. That’s my choice.

    1. Thanks for your input, FTF! I agree that one of the main undercurrents in this debate is that of risk tolerance. I just worry that maybe too many people overestimate their ability to handle risk, maybe by making one of these decisions during the calm before a storm in their life. Then when the rain begins to fall, they’re unable to protect themselves adequately.

  2. Thanks for sharing. I think some people can handle debt. Like, mentally. So for those people I think debt can be good, for leverage. If done correctly (and even when done correctly, leverage always introduces additional risk to the mix). So for the vast majority, not getting into debt seems like the best way to go about things. Especially consumption debt like CC debt. That’s just straight up foolish.

  3. That was an awesome dismemberment of a very common set of arguments being made, as you said, by a great many bloggers. Also I think it represents the mindset of many people in debt that never post. And it was kind of you to point out that you weren’t roasting this poster but the entire “group think” he was representing. One point he made that you didn’t counter was his idea that running a credit card balance helps build your credit score. I believe that is not correct. You credit score is built on things like the length of time you’ve kept accounts, the ratio to credit used vs. available and your payment history but it isn’t impacted by whether you choose to run a balance or pay in full each month. I say this because I haven’t ever run a balance on a credit card, buy cars with cash and haven’t had a mortgage in twenty years yet my credit score is 830. So zero debt of any kind for two decades and still a nearly perfect score because I never missed a payment on the credit card.

    1. Thanks for the clarification! Honestly, I sort of side-stepped the credit score argument because I still haven’t completely decided which side of the fence I come down on in that area. On one hand, I’d love to be able to live my life free of debt and free of worrying about a credit score. On the other, I know that the financial industry as a whole isn’t content to leave people like you, who don’t borrow, alone, and will eventually figure out a way to score the un-scored. If and when that happens, I do concede that it would be easier to already have a strong score instead of trying to build one from scratch. It’s good to know that you don’t have to go into debt to maintain a high score, though!

  4. Interesting post. I’ll take my chances with my goal of becoming debt free and continue on. Once I achieve this freedom, if I decide it isn’t for me, I’m sure I can easily find some more debt to take on. NOT!

    1. Haha, true! If after you’ve done the hard work of becoming debt-free, you feel like it’s holding you back from enjoying all of what life has to offer, you can certainly go back to any of the thousands of creditors who would be happy to take your money again.

  5. I don’t think being debt-free is a terrible goal, but it’s a diffucult one for sure. I’ve been trying to be debt-free for years now but my progress is slow. But I have no intention to giv e up. One day I will be debt-free 😊

  6. Thanks for your post. It’s surprise in to see that there is still quite a nonchalant attitude towards debt despite us all going through the global financial crisis. The bottom line is if we borrow money for investment we need to pay it back. The idea of borrowing money and sitting on the debt, paying interest only and waiting for “capital growth“ means that we are giving up control and handing it over to the government and central banks; meaning they have to create policies that will encourage capital growth. The idea of borrowing to invest then selling down investments In the future and reaping the capital gains is too much of a risk for me. I would prefer to own the assets out right then I am out of the “crossing my fingers and hoping and praying for capital growth” game.

    1. I agree! I think the ethical side of things gets swept under the rug as we focus on how to maximize earnings. Making good on your promise to repay a debtor is just as important as having a large bank account, and it’s got a great side effect of reducing risk at the same time! Thanks for your input, Daniel.

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