Most of us grew up thinking that studying and working hard was the secret to becoming wealthy. But these days, many have realized that it doesn't always work out that way. Inflation, the housing market crisis, recessions, and layoffs can take a toll on the finances of the regular folk, widening the gap between the rich and the poor.
Given this reality, any streak of financial health can feel like a luxury. For some, being rich means being able to afford certain experiences without stressing over money, as shown in the Charles Schwab Modern Wealth 2023 Survey. For 53% of respondents in survey from the digital personal finance company Achieve, being rich simply means living debt-free.
But is being debt-free the new rich in the U.S.? While paying off debt is key to a healthy financial life, there are a few myths surrounding this topic. Today, with the help of financial experts, we're debunking seven of the most common myths about debt.
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Living debt-free: 7 myths debunked
We asked personal finance experts for their opinions on some of the most common beliefs about debt that we found online—most of which are myths. Here’s what they had to say:
1. Being debt-free is the new rich
Being debt-free can definitely bring a lot of benefits, like less stress over money and more discretionary income to invest or spend. However, it doesn’t necessarily equate to being rich.
“I do not believe being debt-free, in and of itself, is the new rich,” says Melissa Mittelstaedt, money coach and Accredited Financial Counselor (AFC). “The important part is how the debt is handled.”
Shawn Plummer, financial planning expert and CEO of The Annuity Expert, agrees. “True wealth involves owning investments and assets,” Plummer says. “To achieve this, financial independence and strategic investments are key. For example, owning property and having a diversified portfolio often signify true financial health.”
2. Debt is always a big mistake
Sure, debt adds an extra financial responsibility, and if you don't manage to pay it on time, it can negatively impact your credit score. Avoiding debt is ideal, but if you need a loan or use your credit card for an emergency, don't be too hard on yourself.
Mittelstaedt compares the current attitude towards debt to how foods with fat were viewed in the 90s. “We were told to avoid foods with fat in them, even healthy fats, because it would make us fat—that advice dissipated,” she says. “I also think the picture of debt that's been painted isn't healthy.”
In certain situations, Plummer says, debt can be strategically used to achieve financial goals, as long as you're responsible about it. “Having no debt might mean missing out on opportunities for leveraging good debt, such as mortgages or business loans that can lead to wealth growth,” he says. “For instance, a low-interest mortgage can be more beneficial than using cash.”
3. To avoid debt, avoid credit cards
Credit cards can be risky, especially if you have multiple cards and poor money management skills. They have high interest rates and can easily get you into massive debt. However, “avoiding credit cards is not essential for a debt-free life,” Plummer says. “The key is disciplined spending and paying off balances monthly on time.”
In Mittelstaedt's experience, it's possible to have a healthy relationship with credit cards: “As someone who has overcome a credit card obsession, I can attest to the possibility of using credit cards responsibly.”
By doing so, you benefit in a few different ways. “Credit cards offer some great benefits that you don’t get with your general debit card, such as cashback offers, airline miles, and increased fraud protection,” she says. Besides, having at least one credit card account open can help you improve your credit score, since the length of your credit history is a factor taken into account by credit bureaus.
4. Loans are a must for big purchases
A common myth is that you must take on a loan for big purchases (e.g. car loans), but that's not always true. Especially if taking the loan could end up doing more harm than good to your finances.
“Loans aren't always necessary for significant purchases,” Plummer says. “Alternatives include saving in advance or leveraging investment accounts. The goal is to balance affordability and financial growth.”
If you know that you want to reach a huge milestone in x amount of years, you could start saving and investing now. “For example, a high-yield savings account can be a great tool for saving for a car or vacation—meaning you don’t have to incur debt to buy a desired item,” Plummer says.
5. You must give up on fun in order to live debt-free
For many, the idea of prioritizing saving money and being debt-free means living a boring life. No more dinner with friends, no new clothes, or tickets to a basketball game. But the idea that you shouldn't have any discretionary spending to be completely debt-free is a misconception.
“It's completely possible to be debt-free without sacrificing enjoyment,” Mittelstaedt says. “I like to approach spending with my values in mind. For example, if I have $200 to spare, I weigh my options: Would I get more joy from a new outfit or a nice dinner? This way, I'm spending in a way that aligns with who I am rather than using it aimlessly.”
Another effective tactic is to simply create a budget with a set amount for discretionary expenses each month. This helps you make smart decisions and avoid debt, while also treating yourself occasionally. The goal is spending money smartly, not becoming Scrooge McDuck.
6. You should pay all your debts at once
You don't need to pay all your debts at once. Actually, you shouldn't do it, especially if you're short on money. Instead, finance experts recommend that you should start tackling high-interest debt, such as credit cards, then personal and/or car loans, and finally mortgage or student loans, for example.
(Need more help with that? Read this next: How to Become Debt-Free: 7 Steps to Get There)
7. Being debt-free is overrated
Just because being debt-free doesn’t automatically make you rich doesn’t mean it’s overrated or that paying off your debts isn’t important. While some debts, like mortgages or business loans, can help you reach your financial goals, having too much debt can be a real burden. It can eat into your income and it can snowball thanks to interest charges.
FAQs
What are the pros and cons of being debt-free?
Some benefits of being debt-free include “an influx of cash flow available, fewer bills to pay each month, a sense of accomplishment, and reduced stress,” Mittelstaedt says. As for the cons, you may be too afraid of getting into debt again, to the point of not enjoying life or making poor financial decisions, such as closing all your credit card accounts, which is bad for your credit score.
“If you opt to close your credit cards, that can impact both your credit history length—15% of your score—and how much credit is available to you—30% of your score,” she says. “Additionally, your credit mix—10% of your score—will be impacted by any loans you complete.”
Are you rich if you are debt-free?
Generally, no. While getting rid of the burden of debt can improve your financial situation, being rich goes beyond that. Technically, wealth is determined by assets and investments minus your liabilities. According to the results of a GoBankingRates analysis published by CNBC, the average income of the top 5% of earners across U.S. states ranges from $329,620 to $656,438.
However, for many people, true wealth cannot be defined by money. If being debt-free is an important financial milestone for you and, in your specific situation, it represents a wealthy life, it's totally OK to consider yourself a rich person in this context.
Is it smart to be debt-free?
Generally, yes. Without debt, you have more spare money that you can put toward investments, retirement savings, or an emergency fund, for example. You're also likely to be less stressed about money when debt isn't eating into your income.
However, in some instances, having debt can also be smart, if you're able to manage it responsibly. “It enables consumers to invest in, among others, education, real estate, and business ventures that can yield long-term benefits,” Plummer says.
At what age should you be debt-free?
There's no standard or ideal age to be debt-free. Depending on income and personal goals, such as buying a house, a car, or opening a business, you might need to take out a loan and acquire debt at different moments of your life anyway. Instead of focusing on an ideal age to be debt-free, you should come up with a realistic debt repayment plan and time horizon to tackle it. Implementing strategies such as budgeting or finding ways to make extra cash can help.