Is it Possible To Live Without Debt?
| November 30, 2011 | Posted by Roshawn Watson under Uncategorized |
“Well, it is almost impossible to live without some debts and practically everyone has some debts in finance except maybe very rich people. We need to take it easy and watch them and try to control them as much as we can. This is the best way not to be buried under them and of course hard-work for sure.”
Of course, this comment begs the question: is it possible for people of average means to live without debt?
Renewing Your Mind to Be Debt- Free
Perhaps one of the biggest obstacles in living a debt-free lifestyle is overcoming the ingrained tendency to use debt to solve problems. There was a time when debt wasn’t so ubiquitous, and households of various income levels still lived and thrived. Just because debt is currently the most aggressively marketed financial product does not mean that it is impossible to live without it. In fact, the preponderance of debit cards, discount sites like Groupon and Living Social, and the return of layaways programs1 have made it easier to resist the urge to use credit now than perhaps even a decade ago. Remember, debit cards and layaway plans exist so that no debt is incurred in making purchases. Moreover, the same patience required to purchase a new flatscreen on layaway can be used in budgeting for the upgrading of a wardrobe, purchasing furniture, or even buying vehicles. The process may be more lengthy for bigger purchases, but one would be less likely to do financial damage by planning purchases in this manner than by incurring debt. One reason for this is that people who purchase items with cash tend to spend less overall. According to recent research, we spend between 12-50% more when we make purchases using credit versus paying cash (depending on the venue).
It’s no wonder a whopping 75% of the Forbes 400, the 400 richest Americans, said the best way to build wealth is to become and stay debt free. Notice that they didn’t say, “I got wealthy first and then lived a debt-free lifestyle.” No, they freely attributed a major part of their financial success to being debt-free, partly because it gave them control over their most powerful wealth-building tools: their incomes.
If you renew your mind to the facts that 1) it is feasible to live without debt even in our modern society, 2) using debt causes you to pay more, and 3) using debt obligates your future income, then you may be able to suppress the desire to purchase items before they can fit within your budget.
The Relationship Between of Liquidity and Debt
Since 2008, I have agreed with Suze Orman’s recommendation of having eight month’s worth of expenses as an EF is pretty reasonable, given some of the things going on in the world economy. As one continues to build wealth, he or she will hopefully continue to build liquidity.
Liquidity is your defense against debt.
What’s Your Debt-free Strategy?
Using the money that you already earn, you can take actions to reduce your costs and enhance the financial productivity of operating your household. It may seem counterintuitive, but despite having more means, most millionaires run economically productive households. The majority of millionaire households budget, and nearly two-thirds know how much they spend on groceries, housing, and clothing within a given year. Forty-nine percent regularly use coupons for grocery shopping versus 37% of all US households. (Interestingly, usage of coupons actually decreases with income.)
Perhaps coupon clipping is not your cup of tea. That’s fine because your debt-free strategy can be a simple or as elaborate as you want. Recently, I read where one blogger limited his Christmas spending to only money that he could earn within a week. Similarly, you could limit your blow money to a fraction of what you earn in either portfolio or passive income. When I did this, I became VERY motivated to increase my “non-earned” income.The point is to enhance your economic productivity (regardless of whether that means saving more money, increasing income, or allocating some of your income towards items that you would otherwise use debt to purchase).
Your debt-free strategy is another line of defense against our culture of debt.
Delayed Gratification To Be Debt-Free
You can have it all, but you can’t have it all it once.
I think there is always an underlying assumption when anyone rallies against the dangers of materialism and poor money habits, as we discussed last week in Broke People Afford Everything, that he or she is against people having nice things. That’s certainly not the case. The issue is how one pays for nice things rather than having nice things.
I know plenty of people with comfortable six-figure incomes who struggle to spend money on designer clothes, luxury vehicles, vacations, toys, and anything else most people would deem remotely fun. This isn’t because of their irresponsible money management either; it’s because they are all so careful to limit their lifestyle inflation and to remain on their budgets. I know others who have purchased Maserati’s but have to work two jobs in order to support their lifestyle. Sure they look nice on the few occasions they’re available to hang out. The truth is that the car could have happened a little later in their lives with much less of a financial impact. Instead, they have purchased the luxury vehicles now while in the middle of repaying student loans and mired in credit card debt. YUCK! Delayed gratification isn’t denial. It’s just timing purchases for when they make sense in your financial world.
If you master delayed gratification, you can own the best without compromising your financial foundation.
Closing Thoughts
Yes, it is possible to live debt free; in fact, I’m convinced when paired with consistent investing over time, living debt-free is part of a path to build significant wealth. Henry Ford commented that debt was the lazy’s man method of purchasing items. The translation is that there is work involved in becoming and remaining debt free. No one said it was easy, but if it was easy, everyone would do it. Nonetheless, if you’re willing to go against the cultural indoctrination encouraging us to worship at the altar of the almighty FICO, 1) you will have control over your income, 2) you will pay less than you credit-paying contemporaries, 3) you will be prepared for emergencies, and 4) you may just find yourself richer than your wildest dreams!
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1Layaway plans let you pay a deposit (and perhaps a nominal fee) to secure an item for a later purchase. The store will hold the item for you until you pay for it in full.
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.
Hey. I miss our financial chats. I have to disagree with one part of this. Just like with the debt of the federal government, personal debt is not automatically bad. And not necessarily good to live without all debt. Just bad debt. The government has reasons to go in debt to help the country–such as creating jobs. I am in debt as I own a mortgage. Assuming I can afford the mortgage (which I can) and have a good interest rate, that is good debt to own. Some will argue that in some areas, it is better to rent than own. But if nothing, paying a mortgage is not bad. I do have a loan on a car. Some will argue that you shouldn't have a loan in something that depreciates. I hear that but don't necessarily agree. But I agree to live without bad debt which we don't have. Credit cards are paid in full on time and we are careful with money
Thank you for comment!
If you want to keep debt that's fine. It's not for me. Once you factor in taxes and risks associated with carrying debt, the returns that one typically gets from investing pales in comparison to the return one would get for paying the debt off. That's the very reason why banks are looking to make good loans in the first place. It's simply good business.
You can make the distinction between "good debts" and "bad debts." People often label debts in this way. I make no such hierarchy because such distinctions are trivial IMHO. If there is a "good debt," then that's debt that make you money. Even then, its debatable how much "good" is coming from debt in most situations. As I always say, the typical American car payment invested over 40 years would make most people multimillionaires if properly invested.
It's your choice, but my path is clear.
I've been mostly debt free since 2002 and I LOVE it! I did take out a loan – actually a cash advance – in 2005 in order to jump start a savings account, but only because the loan terms were super cheap and the savings account had quite a high interest rate, so I made close to $300 on the deal. Also, I have taken out a subsidized student loan, but put money into savings while in school and immediately after so that by the time the loan payments came due, I had the cash to pay the whole thing off in one payment. I am still working on increasing my income and building my savings more, and one set back is that my plan to use my current car until it died a happy death then rely soley on public transportation went by the wayside when I moved to a rural area, but I still feel ahead of most of my peers at my income level because I am free, with no creditors hanging over my head. It's a good feeling!
Great article, Roshawn!
I think living without debt is possible but for many this would mean executing an extreme amount of patience. People don't want to wait for years until they have built up enough savings to pay cash for everything. I think living without debt is a great goal but it isn't easy. For us we are debt free with the exception of our mortgage. If we wanted to pay cash for a house we would still be living in an apartment and may never get out of it. For us we try to be prepared with having an ER fund, spend less than we earn, and save and invest.
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We will agree to disagree then I guess. 🙂 But there are tax advantages for interest on a mortgage. I was talking about the advantage of debt on the federal government but local governments would not work well without them. How would schools be built? Surprisingly, in October Raleigh voters decided to pass two referenda, for affordable housing and transportation. Not only did they agree that their city should go in debt, but were fine paying slightly higher taxes to achieve that. I agree in general about you should only but what you can pay for, but certain instances this rule does not apply.
Thanks so much my friend! Since debt decreases one's standard of life, it's certainly plausible that you are indeed ahead of your peers. Also, you are FREE. Congrats on the hard work, and I wish you well.
Thanks for the comment!
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You're right, it would require patience, and it is not easy. If it was though, everyone would be doing it.
BTW, Congrats on being free of consumer debt. We're right with you.
The mortgage is the only debt that I at least understand. Hopefully, my stance doesn't discount or undermine the amount of work that you and people like you have undoubtedly done regarding your finances. I applaud you and your efforts. Cheers!
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My wife have been married for over five years and the only debt we've ever had was student loan debt which is now paid off. We've done pretty much everything except rent a car using our debit card including having my wife travel internationally. The only reason we haven't rented a car is because we haven't needed to.
We do plan on getting a mortgage when it is time to buy a house though.
Hi Mike,
Phenomenal and inspirational example! You guys are just KILLING IT! I'm so happy for you.
Mortgage debt is definitely different. If that's someone's only debt, they are simply light years ahead of the general public. Typically, mortgages aren't the problem with the finances of most people. If one does get a mortgage, the rule of thumb is to not take out a monthly payment exceeding 25% of your take-home (net income) on a 15% fixed mortgage. That allows most people do invest adequately for retirement, invest for the education of their children, pay off the mortgage early, and build substantial wealth over time.
Again, Cheers for doing such a bangin' job!
Definitely possible Roshawn. Though I hate having a mortgage, I think if I had started planning early on in my career, I could've swung being totally debt-free.
It starts with a mindset.
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That's so true. It definitely starts with the mindset.
The mere fact that we're cognizant of these issues really makes a big difference in how we spend and invest our money. That in itself is progress. Cheers!
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I am definitely fine increasing sin taxes. And the tax code has many problems. I think that is something everyone agrees on. But how should that be changed? Does anyone have a good answer? Not Herman Cain. 🙂 There are too many legal loopholes for both businesses and individuals. And that's the legal ones. As much as I like the mortgage interest, it does not help society.
Yeah, I am happy we have found common ground. I think I will quit while we're ahead and not suggest anymore solutions. Work needs to be done on the tax code period.
I will say the argument of what helps society is a slippery one: just because someone is personally advantaged by a policy doesn't always suggest that society is harmed.
Anyway, thanks for the lively discussion.
Cheers!
You certainly can live without debt. But, you will also have to learn to exercise patience and know that you could possibly miss out on a lot of opportunities. I personally think a person should use debt, but only for things that will ultimately make them money.
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I agree with you 100% on consumer debt like credit cards, car loan, and personal loans.
I suspect rich people have more debt than we would think though. Almost every business needs loan to operate. I don't have any data, but I think rich people's debts are different than regular people's debts. They borrow to invest and make more money. So I think business loans are probably something to strive for. What do you think?
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I definitely agree that living without debt requires patience and you may miss "some" opportunities, particularly in the beginning. However, as one builds wealth this becomes less of any issue. For example, one of my friends lives in a beautiful ~12000 sq ft home, owns a Rolls Royce and Bentley (among other vehicles), and could stop work at any point she wanted to. She's debt free and has been for a long time. I don't know what opportunities she has missed, but she has done very well. I personally don't feel handicapped because I am free of consumer debt either; in fact, it has been quite liberating.
You are likely also speaking about investing and business opportunities. Personally, I would rather go slower. When you use your own cash you often will be more careful, have more time to do due diligence, start off smaller and prove concepts, etc. Although I know where you are possibly going with this comment, but I have ideological differences and plenty of real life examples of people who excelled because they were debt-free that cause me to respectfully disagree.
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Most millionaires that I know just pay for things that they want. They pay for cars outright. They pay for clothes outright. They are pretty normal people, relatively unassuming. Thus, I understand where you are coming from with respect to consumer debt.
In terms of debts for business and investments, my position is that it depends on your risk tolerance. I try to minimize risks (but not avoid them outright), so that leads me to eliminate the role of debt in such ventures. Most millionaires do tend to move slowly and be conservative. Thomas Stanley's research supports that. Will some borrow for the sake of earning more? Yes, some will. I do believe that they are not deceived though: they know the risks and will often limit their personal exposure. Unless you are a big corporation with substantial assets in the name of the corporation, the term "business debt" is a total misnomer. That debt is personally signed for, so it is personal debt. If one defaulted on such so called "business debt," he or she would be filing personal bankruptcy, just as if they were over extended with credit card bills, car notes, and medical debt. Again, it's personal debt.
Personally, I won't ever be striving for debt: business or otherwise. Since I've been debt-free for a while, I'm very comfortable operating on a cash-only basis. All of our future business and investment endeavors are centered on our philosophy. There's nothing that I want in business (or otherwise) that is enticing enough to make me go back.
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I despise debt. I don't care how much more I can 'make in the market', there are no guarantees when it comes to investing. I am not debt free because I still owe on my mortgage. However, if I was given a lump sum of money, I would pay it off tomorrow.
It is this fear of debt that holds me back from buying rental properties. I can afford a good down payment and such, but tying up my money and reducing my liquidity scares me too much. There are other alternatives out there for my money that I am more comfortable with. However, one dayI will be able to buy some property outright, and then I will consider it. I am not judging anyone or anything, it is just my own personal preference.
Oh, hopefully, I'm not coming across as self-righteous. What I really am is scarred by the experience of dealing with debt.
With regard to rental properties, my wife and I have discussed this backwards and forward. I can completely relate to where you are coming from. I love real estate and mean no disrespect to someone who has another strategy. Mine is pretty simple. We will not be incurring debt to make our plans come true. It's very refreshing to read your comment. Cheers!!!!
I think the key is to understand that debt is not your friend, Sometimes it is a necessary evil, for example buying a house or even a safer car in my opinion. If possible pay it off early. The real problem in our society is that people borrow for consumption goods – to take a vacation, buy better clothes, eat at fancy restaurants etc. Then they spend a long time paying for the goods. The key to me is to get interest rates and investment markets working for you rather than against you. Those in the habit of taking on debt frivously don't get this.
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I like to look at the consumer debt thing philosophically… taking on that debt is like signing up to be a slave; you've lost your freedom and have become subordinate to 'The Man'. I busted my tail in school and my work life in order to STICK IT TO 'The Man'. 🙂
(Oh, and a quick heads-up, man – you currently have a font size issue on this post)
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"Debt is NOT your friend"
That's a great point. If more people would fully embrace that sentiment, we would all be better off. I think there is a dearth of investment knowledge, so it is not surprising that people don't understand how to use investments to work for their benefit.
I do differ in opinion regarding the NEED for debt, but that's okay. the key is to be mindful of your important financial ratios, stay in control of your income, and to consistently work on building your net worth.
Thanks for your comment!
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I like your sentiment. There's no joy in being subordinated do to poor financial choices. Alas, if only this were emphasized more, we would all be better off!
Thanks for the FYI regarding the font. That's definitely pretty funky. I'll work it tonight!
Cheers!
My recent post Is it Possible To Live Without Debt?
my belief is that the average person must develop the personal discipline to delay gratification. Its hard to do. But, it is a must! If you can force yourself to wait for something and delay it for a later date by the time the later date approaches, you probably don't want it any more.
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Thanks Jody!
I agree. Delayed gratification is definitely a part of financial maturity. When it is practiced consistently, the results are very tangible.
My recent post Is it Possible To Live Without Debt?
Debt free is the way to be! Leverage is quick killer and of course always strikes at the worst time possible. The bottom line is that "credit" should 'generally' be used for liquidity and timing purposes and NOT for 'leverage'. Even when buying a house, I still think that if in order to buy a house you have to dip into negative-net-worth terrority then RENT…
Now, if it is an investment property and you have done your homework and the investment is properly capitalized AND you have strong reserves both for the property AND your personal finances, that a different story. That's a cash-flow positive investment and justifable.
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Roshawn, My inlaws have never had any debt! Ever. My parents have only had mortgage debt. Back before 1950-60, it was much more difficult to take on non mortgage debt.
@Neo,
You definitely have a lot of insight. I think people get locked into thinking that debt is the only leverage. How how I wish they would increase their financial IQ instead of taking on bondage.
With regards to investment property, there are so many different directions one could take. When I see the number of qualifications that you make in your due diligence step, I can tell that you would make sure that you are not in a very financially vulnerable position. That's very key but often missed in this discussion of extreme stances (no debt versus what's the problem with debt). Great comment. Thanks!
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Barb,
Its funny how our parents and grandparents had more wisdom in their fingers than many of the people trying to give you and I advice 🙂 Although we have numerous advances, sometimes I grieve for what we loss in the process. Thanks for sharing your family experience.
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Just a follow-up, there is no shame in renting… I think in the 90's and 00's many people literally believed that "poor people rent" or renting is for the lower class. NOT TRUE, renting vs. buying is a financial and business decision. Is a white picket fence worth "bondage" (using your term here)… I think not! Rent until buying makes fiscal sense, don't buy because you want to "feel wealthy" or even feel middle class… Get assets, income generating assets and net worth: "be wealthy", then buy whatever you want, you earned it.
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I hope I'll be able to avoid debt from credit cards and personal lines of credit, but I don't think going into debt for my education was a horrible decision. (I don't necessarily think it was the greatest option, either, but I was young and I trusted that my parents were making responsible financial decisions.) I finish grad school in May and should be able to pay off my loans from undergrad within five years. I've been able to avoid loans altogether in grad school.
I do expect to have a mortgage and a car loan at some point, though I'll try to save up enough to avoid the latter. I don't think debt is inherently a bad thing, but I agree that it's possible to live without it. It takes a lot more planning and patience, but the payoff is big. I'm just not sure that being 100% free of any debt is a high priority for me. I'm planning to double my minimum student loan payments to get rid of that faster, I'll be saving up for a new car as soon as I start work even though I hope to get another five years out of this one, and I'll try to pay down my mortgage as quickly as possible, but there are things that are higher priorities in my life than not ever having a mortgage or not ever having a car payment.
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I absolutely agree with respect to there being no shame in renting. If I just had to be ashamed of something, I would be ashamed of buying a house to the detriment of my finances.
Neo, I definitely appreciate your philosophy regarding the subject. Essentially, you are saying use delayed gratification even for some "rites of passage," increase your means, and live the life you were meant to live. I support that wholeheartedly. Cheers!!!
My recent post Is it Possible To Live Without Debt?
Hi Penny,
If you are able to eliminate the student loan quickly, then you can minimize the financial damage of student loan debt. This is what my wife and I did. It was painful, but we have been so fortunate as a result of this decision. So many people are educated and shackled to the debt. They are in bondage and don't realize how many choices they have limited because of the debt, such as where they live, where they work, when they get married, when they have kids, what they drive, etc. Both my wife and I were able to avoid debt in grad school too. We're in the sciences, so it is pretty standard for us. Was this the case for you?
Anyway, I respect your position. I know where you are coming from. I've been there too, making those very choices regarding what priority I will have on certain things. It's been an incredible journey so far, and I'm happy to be continuing too. You have a plan, so I look forward to see how things progress. Cheers!
My recent post Is it Possible To Live Without Debt?
A good friend just retired earlier this year. No mortgage, no debt of any kind, and able to purchase a motor home for cash. He recently did get a loan to purchase a large-ish piece of land, then promptly subdivided it into 5 and 10 acre lots, and selling them off one by one. I expect he'll clear a tidy profit. Yes, leverage can be used judiciously, and at the current low rates, why not?
I don't have a problem with leverage, but I am not a fan of debt leverage. That said I know some people use it earn significant profits. I don't think they are the norm, and I think there are safer ways to get there, but such people clearly exist.
Here's my real problem though. There's more than just know-how at stake because assuming the debt also results in increased risks (job loss, sickness, income change, drug abuse, divorce, and number of other life events that often prevent someone from being able to make a payment). A risk-adjusted rate of return would be lower than the raw numbers. I think such analyses should be standard when talking about such debt-based transactions.
Let me give you one caveat too: almost entirely the commenters, like yourself, are PF bloggers. Most of you are very astute financially. However, what about the masses? While I am not being equivocal, my point is that the masses would be better off following a cash-base system and that it is possible. I would never say there aren't exceptions. I hope this is a very treatment of the issue, but I love the comments too!
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Agreed. Some people possess a very high financial intelligence and can properly understand the ramifications and risks they are assuming. If someone chooses, while being fully aware of what's at stake, to assume risks, then that's their right, and I personally have no judgment for them (except if they ask me to bail them out). My issue is that most people aren't in this position and would be better off keeping their finances clean and moving slower IMHO. Cheers!
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Oh, my comment was not in response to any self righteousness on your part at all. I just have a psychological problem with hating debt and I was just going on about that.!
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I think it's almost impossible to live without debt. That's the sad reality of America's society. Other countries usually pay for their houses & cars in cash, or borrow very little money. I think people in the early ages always have some type of debt, with mortgages being the most common one. I think the trend is going towards people renting homes instead of purchasing.
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Roshawn, I am curious. Given your (our) take on personal debt, what's your view on being an investor at LendingClub.com and earning interest off of other people's personal debt?
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Got it. I'm clearly from the same camp. Debt = Yuck!
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Kevin,
Personally, I think it is about choices. I definitely am not suggesting it is easy, especially at the beginning. That said if one is comfortable being different, then there are rewards to taking the path less traveled too. People will do what they want, and ultimately, the only time I truly fuss is when, as Richard mentioned earlier, they asked that I subsidized their carelessness.
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I guess personally I don't see how it is any different than operating as a bank. I don't believe being a bank is inherently bad. Usury is though, so as long as someone isn't exploiting another individual, I can't complain too much. In fact, thinking more broadly, I guess I couldn't own any ETFs, index funds, or other mutual funds that invest in financial institutions if I was truly against financial entities loaning money. I just don't want to be, nor my friends to be, the borrowers.
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It tooke me forever, but I figured out how to adjust to font correctly. Thanks for letting me know!
This situation is really alarming, I think that is possible live without debts but is really difficult, in my case I have a big loan to pay my college thanks god I have a job to pay for my debt but sometimes I have difficult moments because the cost of life is very high, but I started to save a little of money per month my purpose is kill all my debts and enjoy my life without debts in a healthy way.
Best regards,
Guillermo
I couldn
[…] (except for my house) for 7 years now. I can honestly tell you beyond a shadow of a doubt that debt freedom is achievable, and that life is exponentially better without that bondage tying you […]