Why is it Better to Have No Debt?

3 views on debt: it's always good, not all debt is equal, or it's best to have no debt

Let’s Consider All Views On Debt

Debt is quite the hot topic in the finance world; especially when someone says you should have no debt. There are two basic views of debt, and some people who fall in the middle:

  • Debt is bad.
  • Debt is a good tool.
  • Some debt is bad, but some debt can be used for good.

Today, we will briefly look at each viewpoint and I will explain why I think it’s better to have no debt. First, we will take a look at how debt can be used as a tool. Second, we’ll consider the middle ground that not all debt is equal. Third, and finally, we will discuss why it’s better to have no debt.

First View: Debt is a Good Tool

This is a popular one on the internet, but a view that you won’t find nearly as often in the real world. Although I disagree with this view, it does have some good points. This perspective says that debt protects your personal finances (like with identity theft, it’s the credit card company that takes the hit instead of you), gives you increased earning potential, and is advantageous for your taxes. Debt should be embraced as a means to have an easier and more successful life.

The Problem With Internet Experts Telling You to Use Debt

My least favorite thing about the pro-debt position is that you never hear its proponents talk about the negatives. There is always risk involved when you borrow, and some people just cannot handle the pressure of being largely in debt. Plus, this does not distinguish between a business loan and a car loan – one can make you money, the other guarantees a loss.

Bonus tip: You can run a debit card as a credit card and get the same protection as a credit card.

It’s true, certain debts can make you money, but be cautious of anyone telling you it’s always good to have debt. There are negatives in the real world.

Pros

  • More capital to work with for investing, real estate, etc.
  • Get the things you want more quickly.
  • Tax write-offs.
  • Benefit from the spread (e.g., paying 3% interest but investments make 10%).
Cons

  • Assumes no risk.
  • Does not take into account the psychological impact of borrowing.
  • The tax write-offs you get from borrowing often don’t make up for the loss you pay in interest.
  • Simply wrong about the protection offered to personal finances.

Second View: Not All Debt is Equal

That leads us into our next view: Some debt is bad, but some debt can be beneficial. This is a much better way to view debt. Now, instead of going into debt for every tv and coffee maker we buy, we’re considering risk-versus-reward. That’s a step in the right direction.

Consumer debt is largely terrible for you. This view accepts that reality. Let’s do some quick math as proof:

The average new car payment in America is $738/month for a vehicle worth, on average, $41,000. Loans often run for 7 years now. One last fact: New cars lose about 60% of value in 5 years.

$738 * 12 months = $8,856 per year. After 7 years, you’ve paid $61,992. Your car was worth $41,000 on the day of purchase, but 5 years into the loan it’s worth only $16,400.

This is a More Realistic View Than the First

This perspective freely acknowledges the pitfalls of consumer debt. That’s what makes it better than the first view. We’re now seeing the world more clearly. If this is the bad side of debt, then what’s the good?

This view would offer pretty much the same pros as the first one, but tempered with caution. From this perspective, we should use a credit card for all our expenses, BUT pay it off, in full, every month. That way you take advantage of those rewards. (Look it up for yourself, though – using credit cards makes you spend more.)

Things like student loans, business loans, and real estate loans (as in, more than your personal home) are all justified, calculated risks. Each of these does carry the potential for negative outcome, but they also have the potential to considerably increase your earning potential. Things like car loans and other consumer debt are not justified from this viewpoint.

Pros

  • More capital to work with for investing, real estate, etc.
  • Requires an honest risk-reward assessment.
  • Tax write-offs.
  • Benefit from the spread (e.g., paying 3% interest but investments make 10%).
  • Increased earning potential.
Cons

  • You must live in risk, even if it’s justified.
  • You still pay more than if you had saved and paid cash.
  • The tax write-offs you get from borrowing often don’t make up for the loss you pay in interest.
  • Doesn’t consider that the most common way to become a millionaire is to avoid all debt.

Third View: It’s Best to Have No Debt

Finally, we arrive at our final view: Just have no debt. This viewpoint doesn’t really need explained further. Pay cash for everything, when you can afford it. Simple. Why would you want to do this, though? Didn’t I just list a bunch of reasons why certain kinds of debt can be useful?

As I just referenced, having no debt is what actual millionaires say you should do to get that elite status. Debt is usually considered on paper, not in real life. Finances just aren’t as simple as your Excel sheet makes them look. That’s why more people make it to that million dollar net worth without debt than people who do use debt: life happens.

When something goes wrong and you have debt, things get messy very fast. Your business can be taken away at the whim of the bank. If you took the slower method (yes, the start is slower, but I believe it’s exponential going this route) and started with cash, then you already own the business. If things go poorly for a while, you have safety nets in place and no bank breathing down your neck.

It’s Not Only About Money

That brings me to our next big point: Finance isn’t all about math. A lot of people who are really into using debt as a tool forget that there is more to life than making money. Maybe debt will get you higher earnings faster (just maybe), but if you’re miserable and can’t ever rest because you have loans to pay, is it worth it?

You need peace in your life. You need security. That is, in my opinion, the best thing that the “Have no debt” position offers. Even if I truly could not hit a certain income level without debt (which is a whole other topic to get into), I would rather take less money and actually enjoy my life in perfect peace.

Pros

  • When you get something, you actually own it.
  • Helps you develop patience and perseverance.
  • Peace of mind.
  • Becomes exponential growth with a little time.
  • You never pay interest.
Cons

  • Takes more time to see the results of your investing, or your business.
  • Requires you to wait a bit longer for certain purchases.
  • Potentially limits your earning potential at extremely high levels.
  • Takes a lot of intentional work.

I Choose to Have no Debt – What do You Choose?

We’ve now considered 3 viewpoints on debt. You can decide that debt is a good tool, that not all debt is good (but some is), or that it’s better to simply have no debt. The choice is yours. Personally, I will work very hard to never be in debt because I want the freedom that brings. If you want to use debt as leverage, knock yourself out. I hope it works out great for you, and I know things will work out great for me.

3 views on debt: it's always good, not all debt is equal, or it's best to have no debt.

What path will you be choosing? Let us know in the comments!

If you want the help of a financial coach to figure out the best way to get out and stay out of debt, what are you waiting for? Book a consultation (totally risk-free) or buy a session today!

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Nutrition coach Stepi and financial coach Cameron - co-owners of Hi Focus Life

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