how to have no debt

walk away


First of all, rent, because a mortgage is a big debt.
I don’t know if most people qualify renting a home as debt, but I’m going to say that renting is not debt. I can walk away from a rental home with no future obligation (except canceling the lease) and other than the obvious problem of needing a place to live it’s not necessary that I pay THAT rent next month. I have to admit that as we prepare for our move – having sold our house and having rented a house in Florida – I feel a tremendous sense of relief now that we have no debt.

Saying that I have no debt would not have been possible without these four other basic financial planning steps:

  1. Despite what Bubelah might say – because she detests the frugality mindset as the cheap mindset – we are frugal people.
  2. We do not incur debt for anything, worthwhile or not.
  3. We spend money when necessary.
  4. We watch our money.

Frugality

We don’t clip coupons. We don’t darn socks. We do air dry clothes, and we do buy store brand goods (i.e. store brand sugar versus name brand). We’ve never thought of ourselves as penny-pinching people, but we do reuse ziplocs and we do make careful use of bits and pieces around the house. It’s never been a conscious effort to squeeze every last penny out of our lives. We simply looked for good spending habits and stuck to them. We shopped at Marshall’s instead of Saks, and bought generic items instead of name brand.

Debt

A simple rule, which I know is hard for so many people: do not go into debt. Incur debt for nothing. Nothing. Nothing. I’d repeat it again but you’d quit reading. Not for a car, not for a college education (if you can afford a less expensive one, that is), not for home improvements – never. Don’t ever think that THIS time you can get away with a few dollars of debt. Other than a mortgage (and that’s debatable) if you avoid debt you’ll always be better off. There are a few times when it’s more understandable (for medical expenses, or for an education), but by and large you’ll seldom be sorry if you steer clear of debt.

Spending

If you need to spend money, spend. When we first married, cleaning our townhouse took forever. We were both working, and cleaning the house took what little free time we had on the weekends away from us. We paid to have someone clean the house, and it was worth it. It freed up time for us to do more productive activities, ranging from having more time to cook to having more time to interact with other people. We’ve also spent money here and there on other services and goods to free up time. You can generate more money; you can’t generate more time.

Budgeting

We watch our money. Early on in our marriage we turned money management over to Bubelah, who had never had budgeting responsibility for a household before. I had (although only as a bachelor), but we thought it was important for both of us to have a full picture of the inflow and outflow of cash. Since we’ve been married, both of us have had a good understanding of where our money is (brokerages, retirement accounts, checking, savings, etc.) and a good understanding of where it’s going (bills). I don’t think anyone can be on the road to riches if they don’t understand where the money’s coming from, and where it’s going to.

~~

How to have no debt? First of all, incur none. It’s easier said than done, I know, and many people don’t hear that advice until it’s too late. Some debt may be reasonable – for investing in real estate, for a college education, for purchasing a home. You can argue each, although I can just as quickly argue against each. But being debt free is one of the foundations of wealth, and if you can’t focus intently on that goal first, it may be a long time until you achieve financial freedom.

photo credit: TheTruthAbout…

31 comments

  • Kevin Geary

    Rent forever?

    I don't think that's good advice.

    • @Kevin: I'm not sure I'd say rent forever, but rent until you can afford to put a sizable down payment on a place to live (or pay for it outright). I'm not talking about a 10% down payment, either. If you rented until you had the money to put 50% down – or more – most people would be in far better financial shape. Your younger years, when you are earning more and spending less (before kids are in college, etc.) is the time to create wealth. Instead, many people plow their income into expensive mortgages, which are, at the end of the day, debt.

  • This would make for a very good essay. The structure is right and you present a profound statement supported by others. As for avoiding debt at all costs I couldn't agree more.

    Being a busy person myself and growing up with busy parents though I don't find it difficult to make the time to clean. Half of being clean is avoiding a mess in the first place. Just like half of wealth is avoiding debt in the first place.

  • Interesting argument you're making there. No debts at all? Ever? Not even for education that will provide a positive return in the long-run? I can see some points for what you're trying to say, but surely no blanket advice can cover all situations for all people?

    • @Dana: I've argued on this blog for almost two years that a blatantly false idea – you must incur debt for college – has been pushed on American families for two generations by private universities and colleges in general. Inexpensive education – community colleges, state schools – can put you ahead just as much as private schools. People are far too quick to claim they “need” to incur debt for education, and usually it's avoidable.

  • what u think

    You are right only 50%. Debt is bad that is given but i do not think all debts are bad…credit card debt is bad. But renting for not having to go under debt…that is not very good advice or financial planning. You get so many tax benefits with home loans …i think even if you can afford to buy house without loan you should bye with loan.

    Hey but what i know….i am a young guy just getting started in to a working world…..you are the wise one

    • @what u think: I have no stats to back this up, but I think far too many people – myself included – are roped in by the “tax benefits” of home loans. Interest is still money flushed down the drain, just like rent. You do get a tax deduction, but since everyone receives the same deduction the prices of homes are artificially inflated to represent that. I'm not sure EVERYONE should rent, and I doubt I will, long term – but I think that home ownership is too often offered as a “good for everyone” solution, when sometimes people would be better off renting, at least for a while.

      I'm certainly not the wise one, by the way! Just a guy with a forum to express my opinion πŸ™‚

    • I've heard that home loans aren't deductible in Canada, and therefore prices are lower. The tax system is an interesting game. You pay more than renters, but you get a tax deduction on the interest. But you also pay real estate taxes. But then you get a deduction on the taxes! Seems like it could be simpler.

  • We are self-employed and have some, but not enough, retirement savings. Recently we incurred a huge debt by renovating a fixer-upper in the neighbourhood, which we've set up as two rental suites. We're hoping to pay down this mortgage as quickly as possible by supplementing the rental payments, which are already a few hundred above the monthly mortgage cost. We've been fairly frugal over the years, but because of the volatile markets don't have much to show for it. We're getting closer to paying off our own mortgage, which will be one less worrisome payment during retirement. What is your long term plan for the years when you don't have as much earning potential? I don't know how folks will invest in the future without incurring some debt. I like the idea that there are two types of debt: Good debt, which you can write-off and bad debt, which you can't. Thanks for the discussions. =O)

  • Steve, you've given away the secret! Good advice, especially about the mortgage. I wish my twenty-something self had read this post. Our first mortgage was devastating to us financially, and set us back for years. We could have easily stayed in our small apartment for a few more years. The one good thing that I did was go to a community college. A good education can be had on the cheap. All you need is the desire to learn.

  • Interesting thesis, but I'd have to disagree.

    You're going to have to pay money to have a place to live. You might as well build equity with that money. In addition, using leverage to purchase a home multiplies any returns you get when selling the house. Now, I don't for a second consider my primary residence an investment, but when it does come time to move, my mortgage will allow me to walk away with quite a profit. If I'd been renting, the same amount of money would let me walk away from my rental house with… nothing.

    Also, there are many investment opportunities that generally aren't possible without debt. In real estate, the quicker you can go into massive debt, the quicker you can become massively wealthy.

  • Very interested in the argument towards renting always to stay debt free. The idea of taking on a huge debt to buy a home doesn't always seem worth it to me. Then again, I think one day when I have kids (if I have kids) I'll want to be able to settle down and not worry about the landlord kicking my family out on a whim when the real estate market is in the sellers court. So many people preach the concept of “good debt” it's hard to understand the whole situation clearly. The rest of this article makes perfect sense, but does renting always really add up to more savings? I don't know about your market, but rental prices around here are pretty steep.

    • @hereverycentscounts: Well, I certainly wouldn't claim to know what's best in every single market. Sometimes renting is better, sometimes home ownership is better. Landlords can kick you out on a whim, of course, but municipalities can increase your property taxes on a whim, too. I don't know that renting ALWAYS adds up to more savings, of course – but it does add up to less debt.

  • Plenty of good advice there. I don't know about the rent vs. buy debate though…that's one I've been back and forth on a lot.

    I could definitely see renting in the short term to avoid debt, but at some point you have to buy or you'll be making a rent payment forever.

    I have been tempted to sell my house, which would knock out just about all my debt…but I *like* that my house is mine.

    • @Eden: Thanks, glad you liked it! Here's what I'll say about rent vs. buy: first of all, about making a rent payment forever… you'll be making property tax payments forever, too, right? Taking care of homeowners insurance forever? Association fees, if that's the kind of place you live? Expenses go on forever, regardless of whether you rent or own. Nobody ever owns their house outright, free and clear.

      And to paraphrase Robert Kiyosaki, if you really think your house is “yours”, just quit paying property taxes for a few months and you'll see who REALLY owns your house.

      I'll say again, to emphasize (not just to your comment): I don't think renting is right all the time for all people. I just meant that if you really want to be debt free, you should rent rather than taking out a mortgage…

  • Chad @ Sentient Money

    Wow! The real estate industry has really done their job. Even after this real estate disaster, which is almost national, people are still parroting all the “approved” real estate talking points. There is no one hard and fast rule for renting or buying. It amazes me how people are willing to make the biggest purchase of their lives based on a few platitudes put forth by the very people who make money off of selling them a product. Run the real numbers and most of you would be surprised by how often renting is better financially.

  • Can you please talk some sense into Obama & the rest of the federal government?

    An additional 1 Trillion in debt (as a country) and it's only April.

    Or… is some debt not so bad?

    I'm not trying to spark a political discussion – just raising the point that sometimes, debt is not a bad thing. Sometimes it's necessary to avoid worse consequences.

    I think it's absurd to view debt or lack thereof as a black & white picture. In my opinion, every thing is shades of grey. One must examine the pros and cons of every situation and make a determination as to whether taking on debt is worthwhile.

    Example: Let's say someone weighs 400 pounds, and their doctor tells them to lose weight.

    They have a couple of choices:

    1. Eat healthier. Obvious choice – but, it costs more as healthy foods tend to cost more than unhealthy ones
    2. Exercise. Another obvious choice – there are actually different options here:
    2a. They can join a gym (which costs $x/month more than they were paying previously)
    2b. Buy some home exercise equipment (take on debt presuming that they don't have enough in the bank to pay for expensive equipment outright)
    2c. Find some way to exercise for free (perhaps go on the Biggest Loser?). Not a likely realistic option for someone who allowed themselves to get to 400 pounds to begin with.
    3. Do nothing and risk health problems and a potentially premature death.

    Now, I know, the obviously response is “but it's for his/her health!!! that's worth it”. So why wouldn't education be worth it? If you can double your income by taking on debt, isn't that worth it? If you can lower your total cost of living by buying a house, isn't that worth it? etc.

    My brother recently opened my eyes to a point of view, which drastically changed the way I view debt.

    Don't look at debt as the amount of money you owe, look at debt as the amount of money you owe MINUS the amount of money that debt is worth in real dollars.

    Another example:

    Mortgage for $100,000, but the house is worth $105,000 – you aren't in debt – you have $5000 in net worth.

    However, mortgage for $100,000 but the house is worth $95,000 – you are in net debt for $5000.

    And education. Let's say you make $50,000 a year, and if you take a course that costs $25,000, you can increase your annual income to $65,000 a year. Sure, you take on $25,000 in debt… but you'll more than make up for it in two years. Obviously you can't sell that student loan to someone… except your new employer when they offer you that fat raise you wanted.

    Same with other types of debt.

    As to the notion of renting … when my wife and I decided to buy our house, our “living payment” actually went DOWN. Our rent at our 1-bedroom apartment cost about $50 a month MORE than our monthly mortgage payment for a 3-bedroom house (including tax/pmi/interest/insurance). Utilities actually decreased too since we didn't pay into a water pool despite low usage and our house is very energy efficient… Who in their right mind would say that building equity and being more energy efficient all at the same time as lowering a monthly payment is a bad thing?

    All that being said, I agree that it's not a good idea to go into debt to buy the vast majority of things – a TV, for example. that 110″ HD projector would be sweet as hell to have in the game room – but is it really worth adding $5000 in debt to have? What are the real net dollars associated with having it? Do you have the sweet stereo system to power it? Got a bluray player and subscribe to HDTV movie channels or HD cable package?

    Final thought: Be mindful of your decisions to take on debt or not to take on debt. Some debt is worth it (most importantly education and health), other debt isn't. Always weigh the opportunity cost associated with an action AND inaction. Both are equally important. Your decision to NOT act could end up costing you far more than your decision TO act. πŸ˜€

  • Chad @ Sentient Money

    “Mortgage for $100,000, but the house is worth $105,000 – you aren't in debt – you have $5000 in net worth.”

    Quick calculations like this get us in trouble, as they aren't the true number. You would have to factor in property taxes, interest payments, interest tax deductions, potential tax on profits from the house (first timers need not worry), the cost of rent, ROI on difference in rent and mortgage payments (if any), real estate agents cut, cost of paperwork for sale, home improvement costs, etc., to get the real number.

    Most people don't account for all the variables, so they don't know the true cost of anything. Some times all these variables make buying a house or getting an education the right choice. Other times, not so much.

  • >>In real estate, the quicker you can go into massive debt, the quicker you can become massively wealthy.

    That is the attitude that created the economy we are in today. STOP IT! It is the BIG LIE! The quicker you go into massive debt, the more risk you take on. It's a crap shoot; a few came out well ahead, but today millions of families are either on the edge or have lost their home, and a relative few were due to job loss.

    Steve, I married the only MBA that is a worse budgeter than I. Still, I hate debt so much that I paid off a 15 year mortgage in under five years. I'm not rich (I do make a decent living), but it didn't involve sacrifice. I drive an 11 year old car because, well, it still starts all the time. I don't worry about status symbols. That's what it's all about, not competing with your neighbor, but satisfying yourself.

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  • Its hard to earn less when the bills are piling up one after another. It really is important that we learn how to budget and manage our finances.

  • “You can generate more money; you can’t generate more time.”

    Great! Perfect =)

  • Twenty years ago many objected to a thirty year fixed mortgage payment that was $100 more than rent for the equivilent home. In our area rent has increased over $1000 per month while the mortgage payment (including principal, interest, taxes & insurance) has decreased due to lower interest rates. In another 10 years the mortgage will be paid off while the renter continues to pay higher and higher rent. Today in our area home prices have fallen to a point where you can buy a home with a thirty-year fixed mortgage payment that is less than rent on an equivilent home. Why rent?
    The investors who bought twenty years ago are making out like bandits while their tenants are paying off their landlords' homes and providing great cash flow. Through the last two recessions rents have trended upward with only slight adjustments due to supply and demand while home prices have changed dramatically. Whenever mortgage payments and rents are in the same ballpark on equivilent homes, the prudent thing to do is to buy a home. Besides, it just feels good to own your own home and not have to move at the whim of your landlord.

    • @frugal1: I don't mean to be too dismissive, but the key phrase in your reply is “In our area”. In my area the opposite has been true. I am – again – not dismissing home ownership, which has its own rewards. I'm simply pointing out that as long as you have a mortgage, you cannot be debt-free. If your goal is to live debt-free, you are better off renting.

      And I will also add that of course investors who bought 20 years ago are making out like bandits – what about the investors who bought 3 years ago? 4?

      I agree that it's nice to own your home, and to feel free to paint the walls or replace the dishwasher and feel that it's an improvement to YOUR asset. But I'm trying to take a step back and ask if home ownership is ALWAYS the answer, which many people would have you believe. It is not – sometimes you are better off renting.

    • I agree that renting can sometimes be preferable to home ownership, and folks who buy too much home–with too much mortgage–can really get themselves in a bind. But all things being equal our financial and tax systems seem to give significant advantages to home ownership. For the large majority of people with adequate income and who make sound decisions about how much house they can afford, home ownership has created vast wealth over time.

      It's important not to overdo the debt thing either. Consumer debt for things we can't afford is incredibly expensive and dangerous, but prudent debt for a home mortgage, certain types of education, and the like, can be one of the best tools for wealth accumulation that there is. All debt is not created equal.

  • I agree that renting can sometimes be preferable to home ownership, and folks who buy too much home–with too much mortgage–can really get themselves in a bind. But all things being equal our financial and tax systems seem to give significant advantages to home ownership. For the large majority of people with adequate income and who make sound decisions about how much house they can afford, home ownership has created vast wealth over time.

    It's important not to overdo the debt thing either. Consumer debt for things we can't afford is incredibly expensive and dangerous, but prudent debt for a home mortgage, certain types of education, and the like, can be one of the best tools for wealth accumulation that there is. All debt is not created equal.

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