debt free

Hoa Lo (Hanoi Hilton) Cell


I can’t remember how many times I’ve seen the comment “I’m debt free except for the mortgage/student loan/last car note/etc.”.
It’s like saying you’re drug free except for the heroin habit. I’ve been guilty of this, too – I frequently say I have no debt but my mortgage. That mortgage was over $300K, so it wasn’t exactly a small debt, eh?

Now I’m debt free. My net worth is heavy on the plus side and…well, nil on the minus side. Everything is gravy. I have nothing but upside, right?

Wrong.

I wrote a long time ago that net worth was somewhat irrelevant. It is. I’ve got a solid net worth now but every month it is slowly inching downwards, because I can’t scrape together quite enough income to offset our frugal expenses. Funny how you can’t do that when you aren’t working and you haven’t managed to get your side businesses generating enough income. I’ve gotten close – we are teetering around the break-even point sometimes – but cash flow remains, for the most part, in the red.

Don’t think that being debt free is enough. And don’t think that high cash flow is enough, either. Making money and leveraging yourself in a sensible way to buy important things – homes, etc. – is critical. Saving some money and making sure you earn more than you spend makes life easier, too. Debt is ugly, and I won’t lie – I feel a tremendous freedom living without a mortgage or any other form of debt. But I’d feel better having some debt AND some cash flow, rather than no debt and no cash flow.

photo credit: Erik Charlton

15 comments

  • Hi Steve – I hope everything about your move is going well. After being completely debt free (no mortgage), with plenty of positive cash flow for a decade, I took out a loan to buy a new vehicle. I didn't need the loan, but it resulted in another $1K factory incentive from one of our bankrupt auto manufacturers. Debt is not inherently evil, but overleveraging is (go to wikipedia and look up “Casey Serin”).

  • “But I’d feel better having some debt AND some cash flow, rather than no debt and no cash flow.”

    That statement reminds me of when I just graduated from college. No debt, but no income either. A little on the scary side because you still got to find the money to eat some how.

    Now I have a mortgage and cash flow from my job. I guess I am the type of employee that the bosses like, enough debt to be reliable at work, but not too much debt to compromise my integrity.

    asithi

  • Kevin Press

    Great piece Steve. This has always interested me.

    I think a lot of us categorize our debt in two piles: 1) Acceptable Debt, which is the result of responsible purchases and investments; and 2)All The Rest of Our Debt. We're not proud of category two, but these debts are often small by comparison to our mortgage, student loan, etc.

    The challenge is to understand the difference between the two when deciding on the spend, and then to completely forget about the difference when managing the debt. Not as easy as it sounds.

  • Bleeding net might not be so bad if the net/annual expense is high enough.
    Obviously, from my perspective, that number is much more interesting than net.

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  • Good points made in this post.

    I am in favour of the one step at a time approach to things. So we will work towards our current goal of being debt-free (although I concede we don't include the mortgage in that) then rework the goals when we get closer.

  • I've been guilty of saying that I'm debt free, except my student loans…:) Perhaps the wiser thing to say would be that I'm credit card/car debt free.

    At any rate, the notion that net worth is somewhat irrelevant is one I have to agree with. As a lender, we look at things like net worth to give us an idea of monthly cash flow and then we look at someones DTI and NDI to determine if they qualify for a loan. But, what bugs me about this is that we're not always factoring in the little stuff that doesn't show up on a credit report. For instance, someones NDI might be $1200 a month, so adding a payment of $750 may seem like an alright thing to do. They've still got $450 a month to spend. But, the responsible lenders ask the questions, how much is your grocery bill, your electric and water bill, your personal expenses? Can you reasonably cover all of those with $450? I'm just throwing out general numbers here, but you can see why looking at someones networth doesn't really help a lender to make an adequate decision about a person's ability to repay a loan. As you've said, you've got a great networth but no income. Eventually the latter will deteriorate the former if you don't reach the middle ground. I always try to keep this in mind when considering a loan application.

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  • I don't put my students loans in the “not as bad debt” category because they're not tied to an asset. I'm not saying it was a mistake to get them –I wouldn't have my wonderful job– but I will rest a lot easier when my only debt is the mortgage and the car loan because I could always sell the house and car to get rid of that debt.

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  • Actually, I'd say that the equivalent is people who say they are “vegetarian” but who eat fish, or even those who eat milk and eggs. There are degrees of debt.

    In my opinion, savings are incredibly important, even if you do have debts. (Although I'd rather have some kind of “equity” in case of inflation.)

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  • gabriellecarsoncooling

    As you say, it is more important to continue being debt free. Having 2 credit cards and living on debit or cash can help in this regard. Cutting down on monthly expenses and starting a savings account can help

  • gabriellecarsoncooling

    As you say, it is more important to continue being debt free. Having 2 credit cards and living on debit or cash can help in this regard. Cutting down on monthly expenses and starting a savings account can help