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.
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!
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?
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?