Wednesday, July 2, 2008

Defining Debt Free

Shelby T recently asked in a comment:

Have you thought about how you would define "debt-free"? I have been asking everyone I am comfortable with, and have recieved some interesting theories and opinion...especially with married couples.

My thoughts on this would be too much for a comment response, but this is a great question so I thought it deserved a post all its own.

There is really only one "true" definition of being debt free. That is not owing anyone any money at all. Pretty simple. However, the definition of "debt free" is really not that simple. My definition of it is being at a point where you can begin to save or invest. Meaning, you have paid most of your debt down to a point where you are able to pay more than the minimums and still have room to save or invest for retirement.

There are still MORE definitions of that though. The Dave Ramsey definition would be having all debt paid except for your mortgage. At this point, according to his plan, you are debt free. I tend to agree here. A mortgage takes a while to pay off whether you are paying more than the minimum or not. And, at this point many people are able to pay more than just the minimum and still save or invest. So, for most people, this is a good definition of being debt free.

In my case, I will drop it down another notch. For me, debt free will be when I have paid off all of my debt except for my student loans. I have two reasons for this. First, my student loan debt is at 4% and I feel I could get better than 4% returns on my retirement savings. I recently stopped saving into retirement, but I will start up again when I have nothing left but student loans. The second reason for this is that I qualify to have $5000 of my loans paid back when I have been a teacher for 5 years (two and a half years away). I am not 100% sure I still qualify because my job title has changed but technically I am still a certified teacher. So, I will see when I get to that point, but no reason in me paying off all that money if I could simply have it forgiven.

When I get to that point, I will still be able to pay more than the minimum on my loans while investing in retirment. When the loans are finally paid off, then I will begin saving for 3-6 months worth of salary. My plan is a little backward from Ramsey's babysteps, but it is what I feel comfortable with.

So, a definition of being debt free is a very personal definition. Of course we have the literal definition, but few people truly follow that. It really depends on someone's personal situation. That is the reason there are so many answers to this question.

I will finish by saying this. I believe all debt is bad debt. You never know what is going to happen in life and the less you "owe" the better off you are. In my case I will still try to pay off my loans as quickly as I can and I believe those with mortgages should do the same. I know many people after Katrina who were making payments on slabs... so get that debt paid off. Then you can truly be debt free and no one can question your definition! :)


The Happy Rock said...

I am in the Dave Ramsey boat here.

Debt Free - means don't own anyone anything. I agree with you there.

Everything except a mortgage is debt free enough to move onto retirement and savings though. The mortgage will take a while.

I often write debt free to mean everything but the mortgage, but lately I have been qualifying and saying debt free(but the house).

-The Happy Rock

David said...

Really nice post!The terms used in the article are very genuine and informative.I appreciate the author for his great effort to teach the people what the term debt free means?.He defines the term from different angle as there shouldn't be any confusion for the people who are wondering here and there to be debt free.