The Debt Free Fallacy
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.
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.
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!” 😆
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.
I’m not saying being debt free is bad. I just think there’s better things we can do with our time than chasing after the same financial status as babies and homeless people.😔
[Edit, Sept 11/16. Mike from the comments section observed that the original article is off, so here’s my attempt to elaborate my point.]
If all other factors are equal I would rather be debt free than owe someone else money. But there are many legitimate reasons for someone to use consumer debt because they would get 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.
It’s not right for me to tell someone to not attend the funeral to avoid the debt since they weren’t even close to the person who died. But it is just as wrong for me to persuade them to go. The person has to make the choice for him or herself. Similarly if someone thinks paying off the mortgage is more important than investing, or that no positive life experience or profit can be gained that’s worth more than carrying an 18% credit card balance then their actions should align with their honest goals and values.
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 it might be possible to use consumer debt in a controlled way to help give our lives more meaning, more fun, more experiences, and more memories. 🙂
I want to get people to think about money from different perspectives so it’s less likely they will fall into traps of narrow thinking like giving irrational labels to debts. Not all credit card is bad, and not all mortgage debt is good. I’ve borrowed 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 being debt free, and not look at the bigger picture.
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. 😂