Every once in a while I’ll receive an email from a reader asking me “what’s the point of being debt free?“. Some argue that being debt free is dumb because you lose out on special tax deductions, others argue that you just can’t live in these “modern times” without assuming debt, and some folks even justify carrying debt because “everyone else does it“.
In response to the claims, arguments and myths about debt, I have assembled the following list of what I believe are the advantages of paying off ALL of your debt as quickly as possible.
No Interest Expenses: If you have a home mortgage or auto loan, you’re likely paying a significant amount of money each month in interest. In fact, most people pay more in mortgage interest each month than they pay towards the actual principle balance on their loans. If you don’t believe me, just look at your next mortgage statement next month and compare the “interest due” vs. the “principle due” (principle is the actual amount remaining on your loan’s balance).
Tax Deduction Myth: I’ve said it before and I’ll say it again! Never, never, never, never buy a home, boat, second home, vacation property or anything else that involves tax deductible interest payments solely based on the fact that you need a “tax write-off”. Think about it! Let’s say you have $10,000 of tax deductible interest you’ve paid the bank over the course of a year. If you’re in the 25% tax bracket, this means you’ll only save $2,500 in tax payments for the year. Even if you’re tax rate is 50% (current tax rates don’t even go this high) you’ll only “save” $5,000 in taxes (but remember you had to pay $10,000 in interest to save $5,000 in taxes). Tax deductions are a nice “bonus” if you must finance a new home or other interest tax deduction eligible purchase but they should never be your defining motivator for such purchases.
Less Personal/Family Risk: When you have no debt, you and your family’s lifestyle are at less risk in the event you get sick, injured, laid-off from work, fired, downsized, etc. This is especially true if you’ve built up a decent emergency fund of 3-6 months of living expenses.
More Opportunities: When you have no debt, you are in a better position to take advantage of various opportunities that may come your way. These opportunities can take many forms and include assuming a lower paying job that is more aligned with your values, beliefs and/or passions; a business or investment opportunity; allowing a parent to stay home with kids; going back to school for an advanced degree; or maybe an early retirement. Regardless of your interests, being debt free opens a substantial amount of opportunities that otherwise wouldn’t exist if you were in a perpetual state of debt.
Less Stress: When you have no debt, there are a lot less things to worry about. Relationship counselors cite money as the number one cause of fights among couples (beating out how to raise kids, where to live, in-law issues, etc.). Imagine waking up tomorrow and going to work knowing that everything dime you brought home in your paycheck was yours to do whatever you wanted (aside from paying the inevitable utility bills, insurance, taxes, etc.). In contrast, by the time “most” people get their paychecks, a large portion of it is already spoken for in the form of car payments, mortgage payments, student loans and credit card bills.
More Personal Satisfaction: When you have no debt, there is a greater sense of security and personal satisfaction when you actually OWN the material things in your life. Your car rides better, your house feels more “homey”, and when your expensive ski-boat sitting in your backyard during a cold winter, you don’t have the awful feeling of making a payment on something you’re not even able to use (at least until the following spring).
If you’re ready to jump aboard the debt free bandwagon with us but don’t know exactly where to start, check out some of some of my most popular personal finance articles:
Too Much Debt? Download our free Trees Full of Money Debt Snowball Calculator and see how quickly you can pay off your debt.