I always had a history of spending what I earned. When I was 14 years old, I had a job making pizzas at the local bar, and I used every dollar towards electronics and video games. In high school, money earned from lifeguarding went towards concerts, sports events, and random trips. I was never in credit card debt, but I also didn’t have much in savings, either. I finished college with $15k of student loans and $5k on my car loan. Fortunately, the timing couldn’t have been any better for discovering Dave Ramsey and his debt-free message.
My brother told me about Dave Ramsey during my last semester of college, and I became hooked on his podcast and debt-free strategy. I sat in my dorm room in Australia listening to Dave for hours at a time (don’t worry, I was social, too!). By the time I started my career in corporate finance, I already had a plan of paying off my debt. Eight months after starting the job, I made the final payment and was well on my way to a better future by being able to live debt-free.
The average US household consumer debt is outrageous. According to Nerd Wallet, the average household credit card debt is $15,422, average mortgage is $149,782, and average student loans are $34,703. This means the average household in the US has $199,907 in consumer debt! This is a massive amount of debt that could probably be avoided in many cases.
In a society where debt is a normal part of life, it’s important to discuss why debt is a horrible financial tool in most situations (buying a house can be one exception). The recent financial crisis was fueled by debt, so many people have started living more conservatively. However, memories are short and history has a tendency to repeat itself. Here are some reasons why a debt-free life is a better life.
Debt encourages indiscipline
Debt allows people to spend money they don’t currently have, but it assumes they will be able to pay it off over time with monthly payments plus interest. Emotionally, it’s not real money to the purchaser right now. It becomes real money when they make the payment each month. A $20,000 car purchase becomes $500 a month. The big screen tv goes from a total price $1,500 to monthly payments of $50. $50 a month seems to fit better into a budget than $1,500. This is the problem, however, when it gives the illusion of what is affordable. If you have to go into debt to purchase it, you probably can’t afford it.
On the other hand, buying purchases in cash requires discipline. You have the desire to buy a brand new car for $30,000 but have no patience to wait 5 years to save up for it? You can either keep your patience and save for five years or buy a car that you’ll be able to afford sooner (like a used, reliable car costing $10,000). This kind of thinking forces one to evaluate every purchase. Do you have the desire and patience to save for 5 years for this $30,000 car? If not, you probably don’t want it enough. If yes, more power to you (as long as you aren’t going in debt for it!).
Debt adds a level of unneeded risk in your life
Once you add up several debt payments and other monthly payments (cell phone, utilities, etc), there may not be too much wiggle room. All of your money is going to someone else’s bank account, not your own. What happens when your employer downsizes and you’re out of a job? Or if your business slows down and your sales drop by 40%?
You may not have enough in your savings to support your lifestyle, and you may not be able to change your lifestyle quick enough to adjust for the loss of income. More debt may be the only way out.
What if an unforeseen medical event occurs and another big payment is coming your way? Would you have the savings to pay? Or would more debt need to be taken? It really is a snowball effect. Once you get into a bunch of debt and an unexpected event occurs, the only way out seems to be more debt. Dave Ramsey likes to the refer to Murphy’s Law, which says that anything that can go wrong, will go wrong. It’s extremely stressful but can be avoided by staying away from debt and building up an emergency fund.
Being debt-free provides freedom and independence
Once out of debt, you see your savings account start to accumulate. You aren’t stressing about the “what-ifs”, because you have saved and planned for them. And most importantly, you feel the freedom to pursue your purpose in life. Those hours at the office don’t seem as bad because you don’t have to be there. You are in the position to make a move to a new job and even take a pay cut to work on an exciting project which provides personal fulfillment and a sense of purpose.
After all, what good is a life lived without purpose? With a few financial decisions and behavioral changes, you can have the freedom to pursue what you are meant to do in this world.