Is debt freedom really freedom?

The short answer is no, but let me explain.

Variations of Debt Freedom

There are a couple of variations to the debt-free movement.  Some consider eliminating all consumer debt to be ‘debt-free’, meaning they paid off all revolving debt and personal loans.  Others consider paying off everything to include consumer debt, student loans and the home mortgage as true debt freedom.

Excessive Debt Has Become an Issue

Since the inception of credit cards, Americans have amassed over tons of debt. In a recent study by Nerd Wallet, they estimated that Americans carry $423.8 billion in revolving credit card debt. Even the Federal Government carries a significant debt balance with a growing balance every year.  The plastic ‘blank check’ has exposed our weakness for having excess and instant gratification.  Consequently, people end up with more stuff and then money in the bank.

The Rise Debt Free Movement

Dave Ramsey, financial author and radio personality, popularized paying off all debt to create financial stability.  His motto was that ‘Debt is Dumb’ and Americans should redefine wealth from the BMW to a paid-off mortgage.  In other words, stopping looking rich, but focusing on being rich.

Families and individuals from all over the country went to extreme lengths to eliminate debt to one day scream “I Am Debt Free” on the Dave Ramsey show.

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Some of the stories are remarkable.  People have paid down massive amounts of student loan debt and hundreds of thousands to pay off their mortgage to one day “own it all”.  Some have even liquated investment accounts to pay it off.

But are they truly free?

There Are Benefits To Paying Down Debt

Since the rise of unsecured credit, the debt crisis has gotten out of control.  The industry has created a culture of living beyond your means to enjoy life now and pay later.  With the debt crisis rising, there are some benefits to getting a handle on your debt such as:

• Increase cash flow – Eliminating monthly payments allows additional discretionary cash for investing
• Increase credit score – Paying down debt reduces your debt utilization ratio (the percentage of how much you owe to your credit limit).
• Reduce anxiety – Money has been a cause for anxiety for a lot of people. By having a plan to reduce debt, individuals are free to focus on other areas of their life
• Sense of Pride in Ownership – Some people experience a sense of pride in owning something outright.

Debt Free Does Not Eliminate Monthly Expenses

Even when your debt is paid off, all your expenses are not eliminated.  Even if you own your home and car outright, guess who is still coming for their share? – the city to collect their taxes and the insurance company.  Unfortunately, you have probably heard the story (too many times) of the grandmother/father who had a paid-off home but couldn’t afford to pay the property taxes or keep up with the maintenance of the home.   Or you may have heard of a family member passing and no one had enough money to pay the taxes to keep the home, so they had to sell it.  These stories are too common and it is not discussed enough.

As long as you live, you will have expenses.

The bottom line is that while it is good to pay off debt, you still need to work, so technically it is not freedom.  If you choose to work because you like to work is fine, but if you NEED to work to live, that’s not freedom.

 

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Debt Freedom Does Not Equal Wealth

You may not owe anyone, but the better question is what do you own and how is it paying you?

Does debt freedom allow you to own your time?  Not quite… That’s why debt freedom is just a slice of the wealth equation.

Some experts will even disagree that you need to be completely debt-free to be wealthy.  What is more important is the type of debt you have and how it is serving you. The right kind of debt, used appropriately can help you create wealth.  (Check out: How I Owned 3 Rental Properties in Less Than a Year to see how I did it.)

While I agree paying down debt is a good goal to pursue, especially if it is used irresponsibly,  there seems to be an over-sensationalized view of paying all your debt first then creating wealth later.

Instead of the Debt Free Scream, How About the Financial Freedom Shout

Why is there not the same level of passion behind being financially free? Is it because debt is discussed the most and people can see the tangible benefits of watching the balance decrease every month.

Maybe it is because people can see their credit score directly improving after each payment or maybe people just want to scream, “I’m Debt Free”.  Or it could be a combination of the two.

People will cut their expenses, eat ‘beans and rice’, or get a part-time job to aggressively pay down debt, but rarely do we hear of this passion behind creating passive income (income without you working) to buy your time.

Why is there not an emphasis on expanding your means so that you can invest more to experience true freedom? Why isn’t there a rave to make more money to max out your Roth IRA, invest in the stock market, or purchase rental properties?

These activities will create wealth and should be focus areas during your wealth creation journey.

Wouldn’t it be nice to shout “I’m Financial Free” when you have enough investments to pay for your lifestyle and then some?  It’s a whole different swag when you know you don’t have to work.

It looks something like this…..

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Ok, maybe not quite like this, but you understand.  🙂

Now I get it, there are some situations when paying down debt is the next logical and responsible thing to do.  For example, if your expenses meet or exceed your income or your interest rates are in the double digits, then yes you need to pay your debt down to a manageable level.

Refer to this article, What Should I Do First – Pay Off Debt or Save to for guidance on how to create a structured approach to pay off debt.

There is Power in Focus but There is an Opportunity Cost

There is power in focusing on one goal at a time.  Aggressively going after a goal does produce results.  However, you must be honest and accept the opportunity cost of the choice.

Every decision has an opportunity cost.

Opportunity cost is defined as the loss of potential gain from other alternatives when one alternative is chosen.  In other words, if you make one decision, you are choosing not to do other things.

It’s important that you weigh those cost accordingly.

As you aggressively pay down debt, there is a real cost of not investing or purchasing assets.  The longer you remain outside the market, you lose the power of compounding, which allows your money to grow.

So, if your debt repayment plan requires you to be out of the market for several years, you should consider whether you should take a more balanced approach where you pay down debt and invest in the market as well.

Again, paying down debt is not a bad decision, it just comes at a cost; especially when you aggressively pay down a mortgage with a lower interest rate than you could earn in the stock market.

Also, consider what your ultimate goal is.  If your goal is financial independence and the ability to reclaim your time without working a 9-5, then consider how you can expand your income so it pays for itself.  Get on a debt repayment plan and investment growth plan to make your money work for you.

Final Thoughts

Ultimately, you must choose the strategy that works best for you, but don’t make debt freedom your end game. Debt freedom reduces your liabilities but does not grow the asset side of the equation.  In addition to paying down debt, seek ownership in other investments as well.  This is what creates wealth.

Because even when you pay off all your debt, at the end of the day, you still need food and shelter which has a cost.

Consider all your options then proceed accordingly.  That’s getting your FINANCES ON POINT.

Need Help? Check out these posts

How To Stop Living Paycheck to Paycheck to Create Wealth

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