Debt has become a way of life for many of us. Our grandparents hardly knew what debt was, but today if you don’t have some sort of payments, then you’re considered a radical. No car payment? That’s weird. No house payment? Now that’s just plain insane! Why are we so used to debt today? Basically, we all want to live better than the generation before us, but we don’t always have the cash for it, so instead of saying “no”, we finance our future earnings and buy ourselves that nice stuff anyway.

My Financial Savvy

In 2008, I graduated with a Bachelor’s in Finance and therefore thought I knew everything there was to know about the topic of finance. In fact, one of my friends approached me one day and asked me if I had heard of Dave Ramsey. I replied, “Yeah, I agree with some of his stuff, but when it comes to debt he doesn’t know what he’s talking about.”

For the last four years I had been brainwashed by the university. “Debt is a tool for growth” was a well-known phrase that every student heard repeatedly. Without taking on debt, many businesses would not ever raise enough capital to get started, and they may even need more debt to maintain a proper cash flow each month. At times I agree, corporations need to use debt, but how did this translate into our personal finances? Was debt still a tool? I assumed yes, but I was dead wrong.

My Journey to Debt Freedom

Pencil shown erasing debtI was no stranger to debt as a young adult. I didn’t go crazy with bank notes, but I did have $12,000 in student loans, some credit card debt, and a $75,000 mortgage (I know that’s a small mortgage, but it’s still debt). When those student loans came due and I got that bill in the mail, I got an immediate pit in my stomach. I knew I didn’t have the money to pay it and I was going backwards with my finances. From that point on, I decided to do everything possible to get out of debt and steer clear of it forever.

After 14 months, I was able to pay off the credit card debt and student loans. Then, it took me just over a year to pay off my entire mortgage. At age 29, I was completely debt-free including my home. It. Was. Amazing.

5 Reasons For a No-Debt Life

I knew it would be awesome to be completely debt free, but I really didn’t know how my life would change once I got there. Now that I have been clear of all debts for four solid months, I can attest to five fantastic reasons why everyone should aspire to live a no-debt life.

1) Interest Savings

No debt and no payments means no interest! If you take out a 30 year mortgage, do you realize how little of your money actually goes toward the principle? If your payment is $1,000 a month, roughly $50 gets applied to your principle that first month. Instead of owing $200,000 to the bank, after that first month your balance goes down to $199,950….congratulations….

Even with a low interest rate of 3.0%, over the course of 30 years you would end up paying $323,000 on a $200,000 loan. That’s pretty terrible. Plus, if you think you’re winning because inflation is essentially devaluing your future money, and you’re sticking it to the bank by keeping your low interest rate for 30 years, think again.

In the above example, note how much money is going toward the principle and how much is going to the bank:

  • 5% toward your actual loan
  • 95% straight to the bank

The banks don’t have massive headquarters and towers by accident. They know exactly how to earn money from you, the consumer. They are getting their loan paid back very quickly, which means that your equity in the home is building up very slowly. If you sell your home after 15 years, you won’t have half of your home paid off, you’ll only have about $78,000 paid off¬†even though you made $152,000 in payments. Don’t try to play games with the bank. If you truly want to save money in interest, just live a no-debt life.

2) Cash Flow

Graphic representation of cash flowStop for a second and think about how much money is going toward payments this month. Your student loans, the credit cards, your car, and your house (and possibly others) – how much does that total each month? $1,000? $1,500? $2,000? More? What if you no longer had those payments and the money was yours to do whatever you wanted with it? It might sound impossible, but I’m living proof that it’s not.

For the past four months, my largest recurring expense was my grocery bill, which often costs me less than $200 a month. If I watch all my pennies, I could live on less than $500 for the entire 30 days. The rest of my earnings either gets saved, invested, or spent. This is one of the best results of living a no-debt life.

3) Learn Simplicity

Showing that less is more or life needs to be simplerWhen I was on my quest for debt freedom, I did almost everything I could think of to save money. I cancelled my cable, I rarely ran the air conditioner, and I even made a conscious effort to ride my bicycle to work instead of driving. In the midst of all of these seemingly crazy actions, I learned that there is really something to living a simple life.

With fewer possessions comes less worry (there’s absolutely no reason for someone to rob you), fewer struggles (since you own pretty much nothing that will cost you money in repairs), and a greater sense of satisfaction (mowing your yard manually becomes fun). By simplifying my life, I was again able to look around at the world and take in its beauty. I was no longer rushed or distracted and I could look up into the sky and slow down everything down. It is a beautiful thing, and I’m sure I would not have learned the greatness of simplicity had I not tackled my debt with such vigor.

4) Massive Retirement Savings

With an increased cash flow I can beef up my emergency fund, spend money on some sweet vacations, and perhaps most importantly, I can throw a ton of cash into my retirement investments. By investing thousands of dollars each month, how long do you think it would take for me to become financially independent? Between my fiance and I, we figure that we could amass over a million dollars in our retirement fund in just ten years. Living a no-debt life is the key to this rapid growth. Are you ready to live a no-debt life yet?

5) Peace of Mind

Finally, one of the absolute best results of a no-debt life is the peace of mind that it gives you. If you are currently making payments on your car or your house, then you don’t really own either of them. And, do you know what happens when you don’t own these things outright? They can be taken from you.

Let’s say you have a $2,000 emergency fund and between your house payment and your car payment, your expenses are $2,000 per month. If you lost your job tomorrow, how long could you make these payments? Well, assuming you didn’t need to eat, you would last exactly one month. And then what? Well, then you might try to last on credit cards or pull money out of your 401k (while paying taxes and penalties). Ultimately though, the bank would take away your car and your house. Any equity that you had in them will likely be gone and you will be financially ruined, likely thrown into bankruptcy.

This example is extreme, but it actually happens to thousands of people every year. What if, though, you owned a $2,500 car and a $100,000 house completely free of debt? If your emergency fund was $2,000, you could probably survive for three or four months if you lost your job. Beyond that, you could sell your house and live on the cash for a decade. Wouldn’t this just give you the greatest peace of mind? Your life could be more peaceful than you had every experienced before! Financial security makes work seem more fun, makes spending seem like a non-event, and it flat out improves your daily attitude.

Are you interested in living a no-debt life? I hope so!

Derek Sall
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