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. 🙂
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.
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.
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. 😂