Buying this new house has had me thinking a lot about the possibility of being debt free. It seems like everyone wants to be debt free. If you do a quick Google search on debt, you’ll find 45,400,000 web pages with advice on how to get out of debt. Still, I can’t help but ask myself, how important is it to be debt free? How much does it really matter in my day-to-day life?
[bctt tweet=”I can’t help but ask myself, how important is it to be debt free? #eatdrinkandsave”]
I know this is a crazy topic for a frugal living blogger. For the past 5 years Tom and I have worked hard to get out of debt. It all started because we didn’t want to waste money on a high interest rate for our education loans. Somewhere along the way we’ve got it in our minds that we need to be completely debt free.
We’ve certainly made a dent in our debt. In little over 5 years we’ve gone from a combined total of $180,000 in debt to ~$50,000 (half is mine and half is Tom’s). It’s crazy to think that we have paid $130,000 back.
Here’s where things get tricky. We sold our house and made ~$52,000. If we were to put that money towards our loans we would be 100% debt free. I have to let that sink in for a minute. Debt. Free. Wouldn’t that be amazing?
We aren’t going to do it though. Even though we have the opportunity to be debt free, we are choosing to go further into debt in order to buy our house.
Sounds like a bad idea for a frugal living blogger, right?
After lots of thought, and tons of conversations with people who have a much better understanding of money than I do, I’ve found that this new debt will be worth it. Here are three reasons why we aren’t aiming to be debt free (right now).
- Now is the time to buy since interest rates are so low. We are able to afford much more for a house since we won’t be paying a large interest rate. I’m lucky to have a banker/ realtor and a financial planner in the family to explain that to me.
- Renting would cost just as much, if not more.
- We will be able to build equity in a house and hopefully make money in the long run.
We are still going to continue to pay off our loans at a faster than required rate. There is no point in losing money to a high interest rate.
I’m not saying that we should all throw caution to the wind and get into loads of debt. Just because we are taking on another mortgage loan doesn’t mean we are going to max out our credit cards and buy a new car. However, I do want you to think about your needs and specific situation when you think about debt. Talk to a financial planner, a realtor, or someone else who understand finances and your situation, and figure out what works for you. In our case, this is the best financial situation we could make at this time.
Living debt free is still a long-term goal. I don’t want to take it off the table just yet.
It’s important to note that paying off our debt quickly has helped us immensely. Our debt to income ratio is pretty good right now only because we’ve worked hard to pay off our debt. Had we taken our time to pay down our education loans we would not have been able to afford a house in our area. We have also drastically reduced the amount of money we are throwing away in interest each year.
What do you think? Are you striving to be debt free? Or does it not bother you at all?
130k! Nice work, guys! I love this post bc we have been working very hard to try to become debt free also. We find that it has been more difficult since buying our home but we got a great deal and have gained a lot of equity from owning our home. We’ve also done a good job of saving for retirement in the past. So we like to keep our spirits up by focusing on our net worth instead of just our debt; the big picture! We wouldn’t change the home buying decisions we have made bc even though buying costs money we’ve been fortunate to make money on both, something we could never do with renting. Best wishes to you guys in your new home!
Keep your spirits up! It sounds like you’ve made a good investment.
Love your blog and came to it form The Frugal Girl (also love!) Just had to weigh in — how extraordinary to pay down 130K in such a short time and in the midst of growing your family! Kudos — no, double kudos!!
The debt on your new house — low interest, opportunity to grow equity — I think that is GOOD debt, as opposed to school loans, which you naturally wish to dispatch with all dispatch. And — let me diverge from the herd here — the school debt was, at the time, GOOD debt if it allowed you to achieve your goals. I can deal with debt if it allows me to grow my life without consuming —- you guys have certainly met that hurdle with aplomb!
Maybe debt is only BAD when it is ignored, added to, or incurred with no real intention or plan for paying it down. Well, anyway, congratulations to you and thank you for such a fun and interesting blog!
Thank you for stopping by! I love The Frugal Girl too. She is so inspiring
I can’t imagine ignoring debt. Just the thought of that is making me anxious!
Great points! We own 7 houses and are in 1.3 million dollars of debt and happy with our decision. We currently are working on buying 2 more houses putting us at an estimated 1.8 million dollars in debt. Some day our goal to is to become debt free. Right now at age 27 and 29 we are better off leveraging our debt to allow growth. This allows us to take advantage of the lower market and interest prices to grow our real estate empire. Once the market shifts (and it already has started) we will pay everything off.
We have found the key is to know what season of life you are in and your log term strategy.
Thanks! You are so right, it’s all about the season of life. I am positive that you will end up doing well with your investments!
I almost never WEIGH in on something i disagree with b/c i am very non confrontational! so, I hope this doesn’t sound too pushy/ negative. This was an interesting article I read on callable loans. http://budgeting.thenest.com/callable-loans-24130.html
You probably have already done this, but I think it’s wise to make sure none of your loans have call provisions – where the bank can immediately demand the money.
Also, the reason we wouldn’t personally choose the strategy of leveraging debt to build wealth is a matter of cost benefit/ risk analysis. If one of us died and the other spouse was stuck with the debts on a single income.
Then there’s the whole idea of “owe no one anything except to love one another.” I love that principle from the Bible, even for people who don’t believe the Bible. It sounds so freeing. To only owe love. I wrestle with the idea personally b/c we’re paying off student loan debt now and plan to save up a down payment when we’re out of student loan debt (we’ve only ever been renters b/c we’ve moved a lot). I can imagine being so torn about whether or not to take out a mortgage. I’m sure we will, so again, I’m not meaning to be negative/ critical.
It’s so so hard to be debt free in our culture. And I don’t think being debt free is worth idolizing. But there is a risk to taking on tons of debt and it’s good to know and analyze what you’re signing up for if it’s the strategy you’re going to use. (I.e. what is the worst case scenario and do we want this?)
Anyway, this was an interesting article on why you chose not to get completely out of debt. Good luck on paying the rest down and making financial progress! Glad I stumbled over.
oh my goodness – sorry that got so long!!! haha!
Oh my gosh, you are the sweetest person! You don’t sound too pushy or negative at all. You have great advice. I agree that it is very important to know the terms of your loan. My husband is very protective and doesn’t want me to end up in a bad financial situation if he dies, which is why we never consolidated our debts together.
The main reason we are doing this is because rent is on the rise here. We’ve been lucky to have cheap rent for the last two years, but it won’t always be that way. We are afraid that if we wait too long to buy then the interest rates will be back up and then we would be priced out of our town. We currently live in an expensive retirement town. I’m pushing my husband to look for a job elsewhere because I’m tired of living in a town this expensive.
Anyway, thanks for sharing your point of view! Don’t ever feel bad for sharing on my page. We are all on different financial journeys. I want to make sure people feel comfortable talking about money. You’re opinion is always welcome here!
That definitely sounds like the right choice! I really struggle with debt and sometimes the idea of ever owning a house seems impossible, if I had the chance I would totally jump on it! Good luck with your move!
Thanks! It’s not impossible. Debt is tough, but you can get through it!
You guys have made HUGE strides with your debt and you need a place to live! A house builds equity so I don’t think you’re making a bad decision. Congratulations on paying off all that debt though…$150k! So inspiring!
$50000 debt incurs only about $6000 a year. (haha I say “only” like 6K is no big deal!) That’s a big chunk of change to pay out with nothing to show for it, but a home is likely to appreciate well above that level and if you choose a home you can easily afford to maintain you’ll still have room in your budget to knock out debt. I think you’ve made a great, well-planned decision!
It’s crazy how large sums of money don’t seem like much when you compare it to the big picture!
Hannah: I love this post especially the graphic. I remember when we rented I always felt like I was burning money. Pinned :)
Right? Renting is only fun when it is cheaper than owning.
I want to be debt free so badly that I literally almost got chills when I read the words debt free in this post. I just got a new job and my goal is to be mostly out of debt in two years. It’s killing me! I hate having it loom over my head all the time! I get your situation, and I would buy the house too, but being debt free is seriously hard to pass up!
It is always looming over my head too! I know we will get there eventually, and you will too!
Wonderful article–great advice! Thanks for sharing at #OMHGWW
It’s so important to weigh all your options before you jump on the debt-free train. Thanks for posting. Hello from Share the Wealth Sunday.
Hi Hannah,
Some excellent points in this article. Thanks for sharing them with us.
Debt is a huge burden for many, and we’ve all seen the “financial gurus” cutting up credit cards. Great to see some balance added to the conversation – and an acknowledgement that debt can be a positive thing if used in the right way.
Keep it up!