Debt free is NOT the answer.
As simple and doable and enticing as it sounds, it is not the answer.
It is just a piece of the total puzzle.
Yes, you want to be free of credit card, payday loan, and other high interest debts. They will suck the money right out of your wallet and give you nothing in return.
Auto loans are not “good debt”, but it can be a way to leverage yourself out of a very expensive, unreliable car that is costing you far more. So, we will consider this neutral.
But what about other forms of debt? Mortgage debt for your primary residence or a rental property? Student loans?They are generally what you could call “good debt”. The interest rates are low and the return can be very high as long as you are smart about it.
Basically, you want to avoid the bad debt and be strategic about the neutral or good debt.
A quick and easy way to tell where a debt falls is to divide the total amount owed by the minimum monthly payment. If the number is less than 10, it is good debt. If it is 10-20 it is neutral. 20-50 is bad. Anything greater than 50 is “omg, take drastic measures to get it paid off quickly”.
Think about it. If you want to be “debt free” you have to save the money to buy a house with cash. By the time you save that money, the price of houses has gone up exponentially and you never have enough.
What about a rental property? You have to take into consideration that the income from the tenants will be greater than the expenses (mortgage, insurance, taxes, maintenance). Is being debt free worth the money you are missing out on?
Almost everything today revolves around your credit score. Your interest rates, maybe even your job or the apartment you can rent.
Think about the extra deposits if you choose to use a debit card instead of a credit card.
Not to mention the free money you could be making with a rewards credit card.
The trick is you have to use your credit card like a debit card.
You would never go into a store to buy a $1,000 television if you only had $50 in your account. So treat your credit cards the same way.
We just spent two days discussing income allocation. If you do not have the money in the appropriate account, you simply do not make the purchase.
And, if you do make the purchase, transfer the funds from your account to pay off the credit card before the statement end date.
That way you get the free money from the rewards.
This is how we (my Mom, one of my sisters, my daughter, and me) spent a week in France without having to pay for airfare or hotels (including that gorgeous suite at the Marriott Port de Monaco on the top floor overlooking the port! ). With the money I saved I was able to get us all tickets for the dinner show at the Moulin Rouge. Talk about a dream vacation!
See the difference between debt free and leveraging debt to uplevel your life?