Is Debt Free Really Better?
70It’s a good question. A lot of families have lost their homes in foreclosure over the last year. It seems like we’ve been hearing more about living debt free since the financial crisis started. Before then, it was as if the only people that took the idea seriously were the ones prone to extremes. I mean, normal people have credit cards, school loans, and car payments, right? Of course. But, I guess we’re trying to figure out if debt-free is better; not whether it’s normal.
Just so that we’re all on the same page, the debt that we’re talking about in this hub doesn’t include your mortgage. I’ll save that for another time. Credit cards, student loans, big screen TV’s and appliances bought with financing, and car payments are all included, though.
Ever Get The Feeling You’ve Overpaid?
The average American family carries around $8,000 in credit card debt alone. If they made their minimum payments faithfully, they would end up paying it off in about 10.5 years (assuming they stop using it). That alone isn’t such a big deal to me. But paying the extra of $3,600 of interest hurts (at the 15.39% current national average). If you add the $3,600 of interest to the $8,000 of stuff you got, you end up paying 45% more for the same stuff.
Would you pay $14.50 for a book that sells for $10? Or, how about walking out of the store with a $900 laptop that cost you $1,305? Well, normal people do that all the time.
But, let’s assume that you’re OK with paying 45% more. When you combine all that stuff the talking heads call “consumer debt,” the normal American family pays $550 in just interest on their debt every month. Let’s just assume that it’s theoretically possible to pay cash for everything. That means you’d be able to put that money in, say, a mutual fund. The average mutual fund has gained 11% per year since they were first offered. In 10.5 years, you could have about $128,000. If you invested the same amount you give the banks from age 30 to 55, and only got 9% per year, you'd have over $621,000. You're not changing how much you earn or how much you spend. You're just changing when you make your purchases and what you do with the left over money
So, maybe it pays to be debt free. But, you’re not going to drive a bondo-buggy and dress in sackcloth until you save up enough to hopefully catch a sale at Wally World. Don’t worry, you don’t have to.
Can Normal People Live A Healthy, Happy, Fulfilled, Life Without Debt?
I promise there’s a sane way to buy a car, go to school, and buy that big screen without using going into debt. Apparently our grandparents managed to survive a life with very little debt. In a few hubs to come, I’d like to share some ways that our family has managed to live well without it.
Please check back or, if you’d like, join my club to get updates when a new hub is available. Thank you for taking the time to read it/them. Your comments are always appreciated.
A lot of credit goes to Dave Ramsey, David Bach, Thomas J. Stanley and William D. Danko. They’ve written books that inspired me to change the way I look at money. So, I would like to share them with you, as well.
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The Total Money Makeover: A Proven Plan for Financial Fitness
Price: $11.42
List Price: $24.99 |
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The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich
Price: $4.50
List Price: $14.00 |
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Fight For Your Money: How to Stop Getting Ripped Off and Save a Fortune
Price: $5.19
List Price: $26.00 |
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The Millionaire Next Door
Price: $4.90
List Price: $15.00 |
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Comments
nice article and I learned a lot from it...keep on writing, in finance which you do best......
Thanks for your hub on is living debt free is better. If I make no mistake, I read in the bible where it said to pay Cesar whats owed to Cesar and to owe no man. So if we could live a life style of being debt free,I think it would be a blessing for once in our life to not have to worry about who we owe or who we have to pay off. Thank you sharing your hub. creativeone59
Thank you Lissa, prettydarkhorse and creativeone59!
Creativeone, you're right. In fact, the Bible also says that "the borrower is slave (or "servant" in other translations) to the lender." From what I've read in the Bible so far, it seems that it overwhelmingly suggests to live your life as debt-free as possible. A lot of references to debt are made in the book of Proverbs which is widely believed to be written by King Solomon. Since there are both secular and biblical references to his wisdom and wealth, it seems quite logical to at least pay attention to his advice. Although I do have to admit that I'm not much of a biblical expert.
I have a huge chunk of student loans, thankfully that is the only debt I have right now. I personally want to have as little debt as possible. I think it is the people who control the debt that control things. I personally think what our country would be like if we didn't have interest rates. Islamic countries do not have a interest rate. Of course our financial system uses a fractional reserve banking system that requires interest rates to make more money, which in turn causes inflation. And in regards to mortgages and such, I would never take out a equity line of credit against a house I may own. Cause your effectively borrowing your own money. Just that the banks realize that the equity in your house is in a non liquid form so a 'line of credit' is their solution to make money off of your money! And the lenders will help you go into debt, just look at the subprime loans they got people into who couldn't afford to pay them after awhile. What the banks should have done with their $700 billion bailout should have gone to fix the housing market. All they would have had to do is re-asses any home that was 3 months past due on its mortgage, determine how much the owner was upside down, then write that excess loan amount off as a loss and voila - you have a happy owner who can continue to make a payment and the bank can keep receiving money for that loan. To me, a foreclosed house does a bank no good, so I don't understand why the banks didn't do something more to stop foreclosures.
Anytime I see the word 'credit', I replace it with 'debt'. A line of credit = a line of debt, credit card = debt card. I'm more inclined to think that our financial system purpose is take advantage of uneducated people.
Excellent hub. I hope this financial crisis leads more people to stop using credit and live on a cash basis. Keep up the good work!
Debt free is good, especially when you have another few years to retirement. By then, everything should be fully paid
Debt freedom is the way to go. Very good post
Thanks everyone, for the kind comments. Miss Belgravia, I hope some good things come from this crisis, too.
ForexCashBack, one reason banks are willing to foreclose is that our real estate market is at the extreme low in it's cycle. Imagine the bank's perspective; you can get a lot of real estate (by mass foreclosure) at the low and sell within the next couple of years making an instant profit. The new buyer will probably be a new loan customer. So, they make a higher interest rate and sell the house for a lot more than it was worth when they got it (by foreclosure). It's greedy. But, it does make business sense. Unfortunately, there is nothing more important to publicly owned companies than making the most profit possible. I'm not saying they're pure evil. It's just the natural result of the structure of business/investor relationship of public corporations.
Lissa Lynn says:
6 weeks ago
I really liked this hub, very helpful and informative.