One thing that nearly everyone (except lenders and credit card companies) can agree on is the idea that debt is bad. I firmly believe debt is mostly bad, as in mostly dead (Princess Bride reference). It is for this reason that I have set one of my decade financial goals to be debt free, from everything, by age 30.
Different financial advisors will say there is good debt and bad debt. Credit cards, cars and personal loans are often referred to as “bad debt” and houses and college educations are often referred to as “good debt.” The question becomes, is any debt actually good?
Debt Really is a Bad Thing
If you’re in debt, plan to work until you’re 65. If you’re not in debt, congratulations! You are on your way to financial freedom. Debt is without doubt the number one barrier that stands between you and your financial independence. Let’s play this out, your school loan is set for 10 years of repayment, but you’re using income-based repayment options. News flash! The average time it takes to pay off student loans is 21 years. In addition, what you originally owed will double, if not be tripled depending on your interest rate. Your $40,000 student debt just became $120,000. Ouch! That really hurts.
Do not even get me started on credit card debt. With the average interest rate for credit cards being 14.9%, you will be in for a serious hurting if you can’t pay your bill. That medical bill, set of new tires, furniture, etc. will cost you significantly more than you think if you swipe that plastic. At the current average interest rate your original credit card balance will double every four years.
By now, you probably get the gist that debt is not your friend. We won’t even touch on cars, homes and personal loans today. Debt truly is a bad thing.
3 Ways to Defy Debt at All Costs
The top three ways to defy debt are as follows:
- Live Below Your Means. While it can be difficult to not buy the glass of wine at dinner or indulge in fine dining, your older self will thank you. When we start living above our means, we create an appetite for things we cannot afford. If you have never had dessert, how could you ever have a sweet tooth? Living below your means is the fundamental building block to defying debt.
- Have Cash Reserves. If you live below your means, you will be able to save strategically. As you save, you naturally build your cash reserves. With bountiful cash reserve, you can invest increasingly. One of the main reasons someone enters into doubt is due to the fact he or she does not have cash. When that unexpected moment arises, those who save and invest wisely have the cash reserves to combat the temptation of falling into debt.
- Get Rid of Debt. The broken window theory holds a stance that if a neighborhood has many broken windows, crime is bound to increase. This principle holds true in your financial life. Those that have already have debt are more likely to accumulate more debt. On the other hand, those with no debt are likely to avoid debt altogether. By getting rid of debt, you set yourself up for great success in avoiding future debt. Therefore, once of the best practices for defying debt is obliterating your current debt.
Is Debt Ever Necessary?
Some will argue that debt is absolutely necessary, others will say it is absolutely avoidable. While you can work your way through college while attending an in-state institute and graduate debt free. But that may not be the path you have chosen. In the same way, you don’t have to live in a home, you could rent, thus eliminating debt of a mortgage. When it comes to a car, you can save and not but the latest and greatest. With all of this said, no, debt is never necessary. However, for those who are exceptionally financially responsible, debt can be, in rare occasions, leveraged to be a financially sound decision. We will explore this later. In summary, defy debt at all costs.