We all hate debt, so why listen to the hype that there’s somehow “good debt” that we can benefit from? The truth is that most of us are better off debt-free, and most forms of debt that Americans carry is never helpful. Think about it: credit card and auto loan debt? Very expensive interest costs with no tax benefits. Mortgage debt at least offers a yearly tax deduction, but the interest over a 30-year loan often adds up to a six-figure expense.
Before you get excited to take on debt to finance a purchase, consider these benefits that are only available to those that are 100% debt-free.
No Monthly Payments
Making monthly payments towards your debt is likely a big drain on your budget. While there’s good news that the median mortgage payment is only around $600 for 2012, it’s the percentage of your income that really matters. For some, that payment might add up to 30%, and that’s not including other debt. If you’re buried in various debts, you’re likely paying more than this portion of your income.
If you’re able to become debt free, a huge chunk of your expenses is wiped away. Once that happens, you can hopefully apply more of your income to other areas that build for the future more than they pay for past decisions.
Expense of Carrying Debt
Interest and fees add up with debt with long-term debt. For a 30-year mortgage on a $200,000, you can expect to pay over $100,000 in interest over the life of the loan. But you’re benefiting from the home mortgage deduction, right? You may be surprised about the little value you’re actually getting. Even if you’re benefiting from the tax breaks related to mortgage debt, you’re still not breaking even on the cost of financing.
If you’re claiming the home mortgage deduction every year, you’re probably believing that you’re reaping some serious benefits from owning a home. But did you know that, according to Reason.com, the average savings thanks to the mortgage interest deduction is only $152 a year? That’s hardly an amount to get excited about. Even households making more than $200,000 a year only benefited to the tune of $1,862 on average. Sure, it’s nice to get something back, but the numbers don’t justify keeping debt on the books.
When you’re debt free, the only interest you have to think about is that that’s earned in your favor, and you won’t fall into the trap of believing you’re receiving some huge benefit on your taxes by owning a home.
Focus On Other Goals
If you’re in debt, it’s likely that you’re devoting a lot of your resources to paying down a balance. When you’re focused on debt, it can be difficult to make other goals a priority since you’re in more of a “triage” mindset instead of focusing on what might be important for the long-term.
Once you kick debt out of your life, you’re free to focus on other financial goals. One very important task is saving for retirement. While you’ll likely already be saving for retirement before you pay off your mortgage, you’ll free up much more money from when the monthly payments are gone and maybe if catch up if you’ve fallen behind.
Stress From Debt
Dealing with debt is a huge hassle itself. Remembering to pay bills every month along with actually sitting down and making the payments is drudgery that many people put off until do-dates come up. Aside from that, you’ll always feel you the pressure of having enough left in the bank to cover payments on your debt each month. If you’re struggling to pay your debt, you may have the added stress of dealing with debt collectors.
If you’re debt-free, you’ll likely feel some relief since you won’t have to deal with these bills that make up such a large portion of your income. And you’ll free yourself both in time and mental capacity from dealing with these tasks you dread each month.
If you’re in debt, you’re not fully in control of your financial future. A lot of it depends on your creditors, and you’re even more at their will if you fall behind on your payments. Just look at the home mortgage crisis where people that lost their income also ended up losing their house to the bank when they couldn’t pay.
Once you’re debt-free, you won’t have to worry about the place you live or the car you drive being taken away. Instead, you’ll be in control of your own life with little else to worry about.
Less Worrying About Your Credit Score
Although credit impacts many aspects of your life, the biggest influence is often on eligibility and interest rates of loans that you’re looking to obtain. It’s most important when you’re looking to take out a new loan.
But if you’re set with financing and don’t plan to do take out a loan in the near future, there’s less of a need to worry about handling your credit score. And if you’re at the age where you never intend to borrow money again, there’s almost no reason to devote much of your time to maintaining certain credit.