Between student loans, medical bills, car payments, mortgages, and credit cards, most people in the United States are living with at least some amount of debt. There’s no question that large amounts of debt can increase stress, make it harder to save for long-term goals, and cost you more in the long run. That’s why it comes as no surprise that there’s been a growing trend to live completely debt-free. Though it sounds like a worthy goal, when done incorrectly, it can actually have a negative impact on your financial future. So, should you really live a debt-free lifestyle? Here’s the truth about this way of life.
If you’re looking for assistance in creating a personalized financial plan, speak with a CERTIFIED FINANCIAL PLANNER™ professional at Good Life Financial Advisors of NOVA today!
Advantages of A Debt Free Lifestyle
A debt-free lifestyle has the potential to provide quite a few advantages. Keep in mind that these advantages only apply if the funds that would go otherwise towards debt are used in financially responsible ways.
One of the biggest advantages of a debt-free lifestyle is that it has the potential to provide you with far more financial freedom. Since less of your take-home pay is going towards debt, you can have considerably more financial flexibility.
Saving for Long-Term Goals
Once you’ve paid off your debt, you can put more of your income towards other goals such as an emergency fund, a down payment for a home, and retirement. Putting money towards these goals can help you prepare for the future.
If you eliminate debt and use the money to save for long-term goals, you can drastically minimize the amount of stress in your life. With an emergency fund, you won’t slide back into debt when the first unexpected expense comes up. When you know you’re saving for retirement, you won’t have to worry as much about whether or not you’ll ever be able to retire.
Spend Less Overall
A debt-free lifestyle provides you with the ability to increase the overall amount of money you have in two different ways. First, since bad debt comes with high interest rates, you can pay far more than the price of the original purchase. Secondly, if you invest the same amount that you put towards debt, that money can grow.
Good vs Bad Debt
One of the issues with a debt-free lifestyle is that it doesn’t take into account the differentiation between “good” debt and “bad” debt, which are defined by their debt to income ratio.
“Good” debt will improve your overall financial situation. For example, a college degree can be quite expensive, but the increase in lifetime earnings (earning potential) often offsets the cost. “Bad” debt, such as credit card debt, does not improve your future income.
What makes matters more complicated is that debt can be considered good or bad depending on the situation. For one individual, a master’s degree may drastically increase future earnings potential and is well worth the debt. For someone in a different field, a master’s may offer little to no increase in earnings potential and is therefore bad debt.
Good and bad debt can also depend upon the spending habits of an individual. A credit card with a fantastic rewards program can lead one person to justify overspending and spiraling into far more debt than the rewards offer. Another person may use the same card, pay their bill off in full every month, and earn fantastic rewards.
The Issues with Debt Free Living
Those living a completely debt-free lifestyle will miss out on the opportunities that good debt provides. Good debt requires taking on debt in the present, but is beneficial in the long run.
For example, since credit card debt is one of the worst and easiest types of debt to rack up, it may seem like the best thing to do is to stop using credit cards. But, if at any point in the future you need to take out a loan, such as to purchase a home, your ability to get a loan and the interest rate you receive will be based on your credit score. Not having a credit card has a negative impact on your credit score.
To prevent this, you would ideally use a credit card but pay it off in full every month. This temporary debt can help boost your credit score, which can save you large amounts of money over your lifetime.
Should You Live a Debt Free Lifestyle?
A debt-free lifestyle comes with some advantages, but only if done correctly. Like most financial decisions, whether or not to live debt-free will depend on your unique financial situation. To learn more about if this is the right lifestyle for you, speak with a CERTIFIED FINANCIAL PLANNER™ professional at Good Life Financial Advisors of NOVA today.