Is It Actually Smart to Live Debt-Free?
Plus 5 Other Things to Know About How Much You Owe
Debt is just one of those words that sounds bad. Like mucus. Or beets.
But is it really such a bad thing? And is there really such a thing as good debt, like your parents used to tell you?
Besides giving our customers a way around auto debt, we at Fair are not general debt experts (a fact our lawyers want to make very clear), so you definitely shouldn’t feel compelled to take financial advice purely from us. But we did speak to some esteemed financial and debt experts about the topic and got back some surprising answers, which we present here purely for informational purposes.
Can you actually live debt-free?
Of course you can. In fact, a good many people live without any debt at all, according to financial planner Drew Feutz of Market Street Wealth Management Advisors. How?
“Because they prioritize financial freedom over materiality and insisting on going into debt over owning things such as expensive houses and cars,” Feutz says.
Basically, the premise is simple: don’t spend outside your means, save for the splurges you want, and stick to a plan.
Okay, but is it actually smart to live debt-free? What about building my credit?
Feutz also says it’s not always mathematically optimal for people to live without any debt whatsoever – but it’s not an inherently bad thing.
In fact, going about your days 100% debtless is definitely the most sure-fire way to ensure you won’t overextend yourself into a bad financial situation, Feutz says.
But living debt-free doesn’t mean you can’t make responsible use of a credit card, which is still the best way to establish and build your credit history and doesn’t actually spawn real, live compounding debt unless you fail to pay it off at the end of a cycle.
“All you need to build credit with a card is to show a balance, which you should then immediately pay in full,” says Chad Rixse, co-founder of Millennial Wealth, a fee-only, independently-owned financial planning firm in Seattle that caters specifically to young professionals in the tech industry.
Rixse says you should always know when your payment is due – usually 25 days after the billing cycle closes.
“Getting past the close of your billing cycle with a balance and paying in full by the due date shows responsible credit usage and will help boost your score,” Rixse says.
Won’t living debt-free make it hard to get a house, apartment or car?
Rixse insists that a consistent record of paying off your credit card is really all you need for a good credit score – assuming you don’t have any other debt-based financial snafus, of couse.
However, there may be some alternate options that apartment renters can use to build their credit as well.
“Some property management companies – like Greystar – are set up with alternative credit reporting agencies that will allow you to build credit by reporting your rent payments every month,” Rixse says, while noting that the process can be difficult to manage.
If you’re worried about credit card usage, Rixse recommends using it only for fixed expenses and predictable monthly payments like gym memberships, insurance payments and rent, and then using cash or a debit card for frivolous expenses like travel or gifts.
So if I’m going to carry debt, how much debt should I carry?
That ultimately depends on how much money you make.
“Knowing how much is coming in versus how much is going out each month is crucial in managing your debt,” explains Leslie Tayne, a debt resolution attorney and the Managing Director of Tayne Law Group P.C. “Having less than 20 percent of your income going towards debt is ideal.”
Tayne also recommends that you consider what type of debt you’re tangling with when determining how much you want to carry.
Tayne says debt such as mortgages and student loans are examples of debt that can help your credit score and show you as a responsible consumer – so long as you’re able to pay back your loan in full by the end of the term.
“All debt can be considered ‘good’ until it becomes unmanageable,” she says.
Is auto and debt helpful or hurtful?
That all depends. Feutz notes that having a reasonable car loan is an acceptable debt, particularly for those who really need it for work. But he does caution that we should think about how much we really need to own a car.
And these days, car subscription services let you access a car without taking out a long-term loan at all.
“Most of our cars sit 95% of the time,” he points out. “Is it really worth it to take out a loan on something that only does what it’s made to do 5% of the time?”
So if I’m going to carry some kind of debt for a period of time, what do I need to know?
When you take on debt, the most important thing to know is how much interest you’ll be paying.
“Interest, as a cost or expense, is a massive drain on your income,” says Bill Westrom, a debt management expert, former mortgage account executive, and the creator/co-founder of TruthinEquity.com.
It’s this very issue – high interest rates – that often makes credit card debt the most harmful form of debt, Feutz says.
“Credit card debt is usually the result of overspending on wants rather than needs and not having self-control measures in place such as a budget,” Feutz says.
Westrom points out that our country’s national interest on collective debt is costing us $52 billion per month.
“The faster you can eliminate your debt, the faster you get to keep the interest – your income – in your pocket,” he says.
The next thing you should do is focus on how the debt is structured and have a financial model that will help you wipe it out – fast.
“You want to ensure you have the ability to repay the debt on your terms versus the creditor’s terms,” Westrom notes, adding that this kind of planning doesn’t have to be to the detriment of your freedom. “If done correctly, you don’t have to live a life of sacrifice or alter your lifestyle to eliminate the debt.”