The Case Against a Life Without Debt
Getting out of debt is a great goal to have. Perpetual debt is like slavery. All the money you earn beyond your necessities for living is turned over to someone else in the form of debt service and interest, and in many cases even your basic needs are paid on credit. Creating and enacting a plan to break this cycle is admirable.
Every once in a while I hear about someone swearing off all forms of credit as evil or unnecessary. Here are some reasons from MSN Money why being debt-free can be costly.
1. With no credit history, you will find it difficult to get a mortgage with a decent interest rate or at all. Those completely against debt shouldn’t be looking for a mortgage in the first place, though. Living at home until building up enough of a savings account to pay for a house in cash might be a bit too much to ask for most people.
Not all debt is created equal… Some debt — mortgage debt being the classic example — is tax-deductible and gives individuals the opportunity to improve their quality of life and set themselves up for a comfortable retirement.
Lenders consider those with no debt only slightly less risky than those with bad credit.
2. The article gives the example of a couple who decided to live debt-free after graduating from college. They saved to pay for their home with cash.
The family stayed completely debt-free for nearly two decades. Then the couple decided to embrace a little debt in order to build the house of their dreams… To pay off their $150,000, 15-year mortgage faster, the couple has been prepaying it with any extra money that comes in. After just three years, the balance is down to $79,000.
Mathematically, if they didn’t pay down their mortgage faster, they could have invested their extra funds.
Mortgage and student-loan debt are generally fairly cheap and leave you with an appreciated asset. Plus, the interest you pay on these loans is deductible. Having this kind of debt can actually get you ahead if you invest extra cash rather than put it toward your loan principal.
This requires discipline, a trait that some people have, some people don’t, and most people think they have but don’t.
I’m not going to preach. I can’t tell you that a life without debt is the only way to live, or even the “best” way. Mathematics show that in some cases the user of credit pays off. The only people who believe mathematics contain the answers to all life’s problems are mathematicians.