There once was a time when we all had a piggy bank.  It came in the form of ceramic for kids, and in the form of a savings account for an adult.  You want something?  Save for it.  In more recent times, lending institutions have made it very easy to get something called “credit.”  “Don’t put off what you want.  Get it now, and pay for it in the future.”  Debt became a way to purchase a home or buy a business that otherwise would have been unattainable.  Still, being debt free was a common goal.  If you used credit to get started, you paid off the debt as quickly as possible. 

I remember how proud my parents were when they paid off their mortgage. It was a milestone of their life and cause for celebration.

Today, our culture accepts debt as an inevitable and perpetual companion for life.  No longer is the goal to be debt free, but to use debt to acquire more; more house, more cars, more vacations, and more things.

I often see people in their fifties who have refinanced their homes and now owe more on their house than the original purchase price!  Or they are “buying up”, a term used to define the practice of using one’s increased income to buy a more expensive home with debt.

As a financial planner, I rely on quantitative data for making decisions.  Faced with a choice, I run the numbers both ways and see which calculation produces the better result.  If you run the numbers on a fifteen-year vs. a thirty-year mortgage and compare these two options in terms of wealth accumulation, the thirty-year mortgage always wins - by a large margin.  The person who chooses to make the lower thirty-year mortgage payment versus the higher fifteen-year mortgage payment has as much as 75% more money in the long term.

This assumes, of course, that (a) the debtor has the discipline to save and wisely invest the difference between the two mortgage payments, and (b) the debtor keeps and pays for the home for thirty years.  Rarely do these two assumptions come to pass.

Another classic situation where debt wins is when you are at or near retirement and have most of your investments inside an IRA.   If you run the numbers, option A - taking the money out of the IRA, paying the resultant tax penalty for doing so, and paying off debt, versus option B - paying the debt off over the long term, the long term almost always wins.

This analysis assumes that the rules of investing stay the same as they have for the last seventy years.  While that is a pretty good bet, these are uncertain times.  Large trade deficits, federal budget deficits, record amounts of US government debt obligations owned by foreign governments, and the approaching end of the oil era, are all new realities never before addressed.

So…if longer-term debt, as in the samples above, can help to make you wealthy or wealthier, why should you reconsider your relationship with debt?  There are two primary and equally important reasons.  First, credit and debt have prompted the majority of Americans to live far beyond their means.  Second, debt is a commitment of one’s future labor and/or assets, and therefore takes its toll on one’s physical, emotional, and mental well-being.

Let’s look at the first one.  Lending institutions have become extremely lax on granting credit.  The result?  The level of credit card debt in America is epidemic and alarming.  Because credit is so easy to get, and keeping up with the Joneses is as fashionable as ever, I am seeing people in the fourth quarter of their life who have no hope of ever owning their home, and who are drowning in credit card debt.

I invite you to consider a simpler life. Do you really need the latest gadget?  Look at all the things in your basement, closets, attic, and garage that you never use.  If your life were free from the clutter of “stuff”, what would that freedom feel like?

The second reason to reconsider debt is that your future expenditure of energy is already committed.  That means that (a) if you lose your job, or have any kind of change in family circumstance, you can get into financial trouble very quickly, or (b) if the rules of investing as we know them change, your strategy has no fall back position.  Do you see how debt limits your choices and options, and compromises your freedom and security?  You cannot leave a job you have grown to dislike to start your own business, or take time off for family pleasures or necessities.  Because your monthly payments require your monthly attention, you are required to go to work every morning to pay for something you bought yesterday.  Your future no longer belongs to you; it belongs to your debt.

Being debt-free is one of the steps to true freedom.  What would it take for you to be debt free?  What possibilities does that freedom create for your life?  Take some time to think about it, develop a vision, then a plan of action.  Look in the mirror and watch how the ends of your mouth reach further into your cheeks when you think about the joy that a debt-free life will bring!