Is it Possible To Live Without Debt?
|November 30, 2011||Posted by Roshawn Watson under Uncategorized|
“Well, it is almost impossible to live without some debts and practically everyone has some debts in finance except maybe very rich people. We need to take it easy and watch them and try to control them as much as we can. This is the best way not to be buried under them and of course hard-work for sure.”
Of course, this comment begs the question: is it possible for people of average means to live without debt?
Renewing Your Mind to Be Debt- Free
Perhaps one of the biggest obstacles in living a debt-free lifestyle is overcoming the ingrained tendency to use debt to solve problems. There was a time when debt wasn’t so ubiquitous, and households of various income levels still lived and thrived. Just because debt is currently the most aggressively marketed financial product does not mean that it is impossible to live without it. In fact, the preponderance of debit cards, discount sites like Groupon and Living Social, and the return of layaways programs1 have made it easier to resist the urge to use credit now than perhaps even a decade ago. Remember, debit cards and layaway plans exist so that no debt is incurred in making purchases. Moreover, the same patience required to purchase a new flatscreen on layaway can be used in budgeting for the upgrading of a wardrobe, purchasing furniture, or even buying vehicles. The process may be more lengthy for bigger purchases, but one would be less likely to do financial damage by planning purchases in this manner than by incurring debt. One reason for this is that people who purchase items with cash tend to spend less overall. According to recent research, we spend between 12-50% more when we make purchases using credit versus paying cash (depending on the venue).
It’s no wonder a whopping 75% of the Forbes 400, the 400 richest Americans, said the best way to build wealth is to become and stay debt free. Notice that they didn’t say, “I got wealthy first and then lived a debt-free lifestyle.” No, they freely attributed a major part of their financial success to being debt-free, partly because it gave them control over their most powerful wealth-building tools: their incomes.
If you renew your mind to the facts that 1) it is feasible to live without debt even in our modern society, 2) using debt causes you to pay more, and 3) using debt obligates your future income, then you may be able to suppress the desire to purchase items before they can fit within your budget.
The Relationship Between of Liquidity and Debt
Since 2008, I have agreed with Suze Orman’s recommendation of having eight month’s worth of expenses as an EF is pretty reasonable, given some of the things going on in the world economy. As one continues to build wealth, he or she will hopefully continue to build liquidity.
Liquidity is your defense against debt.
What’s Your Debt-free Strategy?
Using the money that you already earn, you can take actions to reduce your costs and enhance the financial productivity of operating your household. It may seem counterintuitive, but despite having more means, most millionaires run economically productive households. The majority of millionaire households budget, and nearly two-thirds know how much they spend on groceries, housing, and clothing within a given year. Forty-nine percent regularly use coupons for grocery shopping versus 37% of all US households. (Interestingly, usage of coupons actually decreases with income.)
Perhaps coupon clipping is not your cup of tea. That’s fine because your debt-free strategy can be a simple or as elaborate as you want. Recently, I read where one blogger limited his Christmas spending to only money that he could earn within a week. Similarly, you could limit your blow money to a fraction of what you earn in either portfolio or passive income. When I did this, I became VERY motivated to increase my “non-earned” income.The point is to enhance your economic productivity (regardless of whether that means saving more money, increasing income, or allocating some of your income towards items that you would otherwise use debt to purchase).
Your debt-free strategy is another line of defense against our culture of debt.
Delayed Gratification To Be Debt-Free
You can have it all, but you can’t have it all it once.
I think there is always an underlying assumption when anyone rallies against the dangers of materialism and poor money habits, as we discussed last week in Broke People Afford Everything, that he or she is against people having nice things. That’s certainly not the case. The issue is how one pays for nice things rather than having nice things.
I know plenty of people with comfortable six-figure incomes who struggle to spend money on designer clothes, luxury vehicles, vacations, toys, and anything else most people would deem remotely fun. This isn’t because of their irresponsible money management either; it’s because they are all so careful to limit their lifestyle inflation and to remain on their budgets. I know others who have purchased Maserati’s but have to work two jobs in order to support their lifestyle. Sure they look nice on the few occasions they’re available to hang out. The truth is that the car could have happened a little later in their lives with much less of a financial impact. Instead, they have purchased the luxury vehicles now while in the middle of repaying student loans and mired in credit card debt. YUCK! Delayed gratification isn’t denial. It’s just timing purchases for when they make sense in your financial world.
If you master delayed gratification, you can own the best without compromising your financial foundation.
Yes, it is possible to live debt free; in fact, I’m convinced when paired with consistent investing over time, living debt-free is part of a path to build significant wealth. Henry Ford commented that debt was the lazy’s man method of purchasing items. The translation is that there is work involved in becoming and remaining debt free. No one said it was easy, but if it was easy, everyone would do it. Nonetheless, if you’re willing to go against the cultural indoctrination encouraging us to worship at the altar of the almighty FICO, 1) you will have control over your income, 2) you will pay less than you credit-paying contemporaries, 3) you will be prepared for emergencies, and 4) you may just find yourself richer than your wildest dreams!
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1Layaway plans let you pay a deposit (and perhaps a nominal fee) to secure an item for a later purchase. The store will hold the item for you until you pay for it in full.
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.